Item
1. BUSINESS
Corporate History and Structure Overview
Our Company is a Delaware corporation organized
on June 4, 2010 and was quoted on the OTCQB® Venture Market (“OTCQB”). We provide our customers life insurance
and property and casualty insurance intermediary and related services. We operate our Taiwan business primarily through Law Insurance
Broker Co., Ltd. (“Law Broker”) and our PRC business primarily through Law Anhou Insurance Agency Co., Ltd. (“Anhou”).
Law Broker
The history of our Company dates back to
1992, when Law Broker was established on October 9, 1992.
Law Enterprise Co., Ltd. (“Law Enterprise”),
a company limited by shares and incorporated under the laws of Taiwan, holds 100% interest in Law Broker, a company limited by
shares and incorporated under the laws of Taiwan on October 9, 1992. Law Enterprise used to operate another two subsidiaries during
the past three fiscal years, namely Law Risk Management & Consultant Co., Ltd. (“Law Management”), a company limited
by shares and incorporated under the laws of Taiwan on December 5, 1987, and Law Insurance Agent Co., Ltd., a company limited by
shares and incorporated under the laws of Taiwan on June 3, 2000 (“Law Agent”, collectively with “Law Enterprise”,
“Law Broker” and “Law Management”, the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”).
As Law Management and Law Agent are not in active operation, they were dissolved on April 20, 2016 and April 12, 2016, respectively.
Acquisition of AHFL
Action Holdings Financial Limited (“AHFL”)
was incorporated in British Virgin Islands with limited liability on April 30, 2012. AHFL holds 65.95% interest in Law Enterprise
and certain of our other subsidiaries as more fully described below.
On August 24, 2012, an acquisition agreement
(the “AHFL Acquisition Agreement”) was entered into by and among our Company and the selling shareholders of AHFL named
therein. Pursuant to the AHFL Acquisition Agreement, our Company acquired 100% interest in AHFL and its subsidiaries in Taiwan
and our Company agreed to pay NT$15.0 million ($500,815) on or prior to March 31, 2013 and NT$7.5 million ($250,095) subsequent
to March 31, 2013 in cash in two installments. In addition, our Company agreed to (i) issue 8,000,000 shares of common stock of
our Company to the shareholders of AHFL; (ii) issue 2,000,000 shares of common stock of our Company to certain employees of Law
Broker; and (iii) create an employee stock option pool, consisting of available options, exercisable for up to 2,000,000 shares
of common stock of our Company. Upon closing of the transaction, we acquired 100% interest in AHFL and its subsidiaries in Taiwan.
On March 14, 2013, an Amendment to the
AHFL Acquisition Agreement (the “First Amendment to AHFL Acquisition Agreement”) was entered into by and among our
Company and the selling shareholders of AHFL named therein. Pursuant to the First Amendment to AHFL Acquisition Agreement, (i)
the deadline for cash payment under the AHFL Acquisition Agreement was extended to March 31, 2015; and (ii) in lieu of the 2,000,000
employee stock option pool, our Company agreed to create an employee stock pool consisting of up to 4,000,000 shares of the common
stock of our Company, among which 2,000,000 shares shall be solely granted to employees of Law Broker, and the remaining 2,000,000
shares shall be granted to employees of affiliated entities of our Company (including Law Broker employees).
On March 13, 2015, a second Amendment to
the AHFL Acquisition Agreement (the “Second Amendment to AHFL Acquisition Agreement”) was entered into by and among
our Company and the selling shareholders of AHFL named therein. Pursuant to the Second Amendment to AHFL Acquisition Agreement,
the deadline for cash payment under the AHFL Acquisition Agreement was further extended to March 31, 2016.
On February 17, 2016, a third Amendment
to the AHFL Acquisition Agreement (the “Third Amendment to AHFL Acquisition Agreement”) was entered into by and among
our Company and the selling shareholders of AHFL named therein. Pursuant to the Third Amendment to AHFL Acquisition Agreement,
on or prior to June 30, 2016, (i) our Company committed to complete the listing of our Company’s shares in a major capital
market, where the net proceeds raised through such public offering financing shall be at least $10.0 million; (ii) our Company
committed to distribute the cash payment in the amount of NT$22.5 million, on a pro rata basis, to the selling shareholders of
AHFL and issue 5,000,000 common shares to its selected employees pursuant to its employee stock/option plan, and (iii) failure
to timely complete either of the above-mentioned criteria shall be deemed as a material breach of our Company under Article 8 of
the Acquisition Agreement, whereby the non-breaching party shall be entitled to terminate the Acquisition Agreement and unwind
the Acquisition of AHFL by us and restore the status quo of our Company and the selling shareholders of AHFL as if the said acquisition
had never happened.
On August 8, 2016, a fourth Amendment to
the AHFL Acquisition Agreement (the “Fourth Amendment to AHFL Acquisition Agreement”) was entered into by and among
our Company and the selling shareholders of AHFL named therein. Pursuant to the Fourth Amendment to AHFL Acquisition Agreement,
(i) the Third Amendment to AHFL Acquisition Agreement was terminated with immediate effect on August 8, 2016, and (ii) our Company
agreed to pay to the selling shareholders of AHFL NT$15.0 million on or prior to March 31, 2017 and NT$4.8 million on July 21,
2016. On July 21, 2016, our Company arranged for the payment of NT$4.8 million to the selling shareholders of AHFL.
On March 12, 2017, a fifth Amendment to
the Acquisition Agreement (the “Fifth Amendment to AHFL Acquisition Agreement”) was entered into by and among our Company
and the selling shareholders of AHFL named therein. Pursuant to the Fifth Amendment to AHFL Acquisition Agreement, our Company
agreed to distribute the cash payment in the amount of NT$15 million to the selling shareholders of AHFL named therein on or prior
to March 31, 2019.
Acquisition of GHFL
Genius Holdings Financial Limited (“GHFL”)
is a wholly owned subsidiary of AHFL. On February 13, 2015, our Company, AHFL and Mr. Chwan Hau Li, being the selling shareholder
of GHFL, entered into an acquisition agreement (the “GHFL Acquisition Agreement”). Pursuant to the GHFL Acquisition
Agreement, our Company agreed to issue 352,166 fully paid and non-assessable shares of AHFL common stock (the “AHFL Shares”)
together with a granted put option for 352,166 shares of common stock of our Company (the “Put Option”), in exchange
for 704,333 shares of common stock of GHFL, being all of the issued and outstanding capital stock of GHFL. The Put Option may be
exercised within six months of the closing date of the acquisition and the selling shareholder of GHFL would exchange the AHFL
Shares as consideration for the exercise of the Put Option. Subsequent to the acquisition, GHFL became a wholly-owned subsidiary
of our Company. GHFL holds 100% issued and outstanding shares of Genius Investment Consultant Co., Ltd. (“Taiwan Genius”),
a company limited by shares and incorporated under the laws of Taiwan, which in turn holds approximately 15.64% issued and outstanding
shares of Genius Insurance Broker Co., Ltd. (“Genius Broker”), a company limited by shares and incorporated under the
laws of Taiwan. Both GHFL and Taiwan Genius have no substantive business operation other than the holding of shares of its subsidiary.
Genius Broker is primarily engaged in broker business across Taiwan. Mr. Chwan Hau Li was the sole shareholder of GHFL and he is
a director and shareholder of our Company. On March 31, 2015, Mr. Chwan Hau Li exercised the Put Option, pursuant to which, 352,166
shares of AHFL held by Mr. Chwan Hau Li were transferred back to our Company as the consideration for 352,166 shares of common
stock of our Company, which were issued to Mr. Chwan Hau Li on April 29, 2015.
On February 17, 2016, our Company, AHFL
and Mr. Chwan Hau Li entered into an Amendment 2 to the GHFL Acquisition Agreement (the “Second Amendment to GHFL Acquisition
Agreement”), pursuant to which our Company agreed to complete the listing of our Company in a major capital market on or
prior to February 28, 2016 where the net proceeds raised through such public offering financing shall be at least $10.0 million.
On August 8, 2016, our Company, AHFL and
Mr. Chwan Hau Li entered into an Amendment 3 to the GHFL Acquisition Agreement (the “Third Amendment to GHFL Acquisition
Agreement”), pursuant to which, the Second Amendment to GHFL Acquisition Agreement was terminated.
Anhou
On July 12, 2010, ZLI Holdings Limited
(“CU Hong Kong”), a wholly owned subsidiary of our Company, was established in Hong Kong. On October 20, 2010, Zhengzhou
Zhonglian Hengfu Consulting Co., Ltd., a wholly foreign owned enterprise (“CU WFOE”), a wholly owned subsidiary of
CU Hong Kong, was established in Henan province of the PRC. On January 16, 2011, our Company issued 20,000,000 shares of common
stock to several non-U.S. persons for their investment of $300,000 in CU WFOE. The issuance was made pursuant to an exemption from
registration contained in Regulation S under the Securities Act of 1933, as amended.
Zhengzhou Anhou Insurance Agency Co., Ltd.,
the predecessor entity of Anhou, was founded in Henan province of the PRC on October 9, 2003. Due to PRC legal restrictions on
foreign ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well
as capital requirements of the investors. Able Capital Holding Co., Ltd., a company established with limited liability in Hong
Kong, delegated four PRC individuals, namely Yanyan Wang, Zhaohui Chen, Weizhe Hou and Yong Zhang, to invest in Anhou on its behalf.
On September 26, 2013, Yanyan Wang, Zhaohui
Chen, Jing Yue, Weizhe Hou, Yong Zhang, Li Chen (“Anhou New Investors”) and Shuqin Zhu, Qun Wei, Qunlei Fang and Yanxia
Chen (“Anhou Original Shareholders”) agreed to increase the registered capital of Anhou to RMB50 million, among which,
(i) Yanyan Wang agreed to invest RMB10 million, accounting for 20% of registered capital in Anhou, (ii) Zhaohui Chen agreed to
invest RMB10 million, accounting for 20% of registered capital in Anhou, (iii) Jing Yue agreed to invest RMB7.5 million, accounting
for 15% of registered capital in Anhou, (iv) Weizhe Hou agreed to invest RMB5 million, accounting for 10% of registered capital
in Anhou, (v) Yong Zhang agreed to invest RMB4.5 million, accounting for 9% of registered capital in Anhou, and (vi) Li Chen agreed
to invest RMB3 million, accounting for 6% of registered capital in Anhou, respectively.
The registered capital increase of Anhou
was in response to the promulgations of certain regulations by the China Insurance Regulatory Commission (“CIRC”).
On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance
Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC mandated any insurance agency
established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50
million. On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary
Market (the “2013 Notice”), pursuant to which, professional insurance agencies established prior to the issuance of
the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million, can continue operation of their
existing business within the provinces where they have the registered office or branch office, but shall not set up any new branches
in any province where they do not have the registered office or any branch office. To better implement the expansion strategies
of our Company, Anhou increased its registered capital to RMB50 million to meet the requirement of CIRC so that it is able set
up new branches in any province beyond its current operations in the PRC.
On October 24, 2013, Anhou Original Shareholders
transferred their interests in Anhou to Changrong Hu, a PRC citizen (“Mr. Hu,” together with Anhou New Investors, “Anhou
Existing Shareholders”), for an aggregate consideration of RMB10 million. Mr. Hu is currently the legal representative, General
Manager and the sole director of Anhou.
On November 17, 2016, Li Chen transferred
his interests in Anhou to Chunyan Lu for an aggregate consideration of RMB3 million.
Sichuan Kangzhuang Insurance Agency Co.,
Ltd. (“Sichuan Kangzhuang”), a wholly owned subsidiary of Anhou, was established with limited liability on September
4, 2006 in Sichuan province of the PRC. On September 6, 2010, shareholders of Sichuan Kangzhuang transferred their interest in
Sichuan Kangzhuang to Anhou for an aggregate consideration of RMB532,622. For the purpose of procuring certain economic benefits
and enabling a centralized control over the business operations in Sichuan province, the Company commenced the dissolution process
of Sichuan Kangzhuang, a wholly owned subsidiary of Anhou and set up a branch office of Anhou in Sichuan province. Accordingly,
Sichuan Kangzhuang had filed a dissolution application to the local Bureau of Administration and Commerce and made a public announcement
published in local newspaper in October 2017. On June 22, 2017, the Sichuan Branch of Anhou obtained its business license to conduct
insurance agency business. As of this date, Sichuan Kangzhuang is undergoing tax closure procedure, which involves multiple rounds
of communication with the relevant tax authorities before obtaining the official approval for tax deregistration. Mr. Wen Yuan
Hsu, the general manger of Sichuan Kangzhuang is the general manager of the Sichuan branch office of Anhou.
Jiangsu Law Insurance Brokers Co., Ltd.
(“Jiangsu Law”), a wholly owned subsidiary of Anhou, was established with limited liability on September 19, 2005 in
Jiangsu province of the PRC. Jiangsu Law is licensed to provide insurance brokerage services. On September 28, 2010, Anhou and
the shareholders of Jiangsu Law entered into an equity transfer agreements. Pursuant to Provisions on the Supervision and Administration
of Insurance Brokerage Institution, effective on October 1, 2009, if an insurance brokerage entity fails to bring its registered
capital to no less than RMB10,000,000 on or prior to October 1, 2012, the CIRC or its local counterpart, as applicable, may determine
not to extend the insurance brokerage license. To meet such minimum registered capital requirement, on February 11, 2011, Anhou
invested RMB4.82 million in Jiangsu Law to increase the registered capital to RMB10 million.
Our Consolidated Affiliated
Entities
Due to PRC legal restrictions on foreign
ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital
requirement of the investors, we operate our PRC business primarily through Anhou, Sichuan Kangzhuang and Jiangsu Law (collectively,
the “Consolidated Affiliated Entities”, each a “Consolidated Affiliated Entity”). We do not hold equity
interests in our Consolidated Affiliated Entities. However, through the VIE Agreements (defined as below), we effectively control,
and are able to derive substantial economic benefits from, these Consolidated Affiliated Entities. On January 19, 2015, the Ministry
of Commerce of China (“MOFCOM”) published a draft version of a proposed Foreign Investment Law (the “Draft Foreign
Investment Law”) with an explanatory note. MOFCOM has requested comments from the public on the Draft Foreign Investment
Law by February 17, 2015, which, once promulgated, will replace and integrate the three existing laws over foreign investment,
however, how these changes will affect entities currently operating in China, particularly foreign controlled variable interest
entities, is not entirely clear. See “Risks Related to Our Corporate Structure in the PRC”.
Our Consolidated Affiliated Entities in
China are variable interest entities through which all of our insurance services in China are operated. These VIE Agreements that
give us effective control over our Consolidated Affiliated Entities in China and allow us to consolidate the financial results
of our Consolidated Affiliated Entities in our financial statements.
On January 17, 2011, CU WFOE, Anhou and
Anhou Original Shareholders entered into a series of agreements (the “Old VIE Agreements”) pursuant to which CU WFOE
exercises effective control over Anhou. As a result of the capital increase and the share transfer described above, on October
24, 2013, CU WFOE, Anhou and Anhou Existing Shareholders entered into a series of agreements (the “VIE Agreements”),
including Power of Attorneys, Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements,
other than the change of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among
CU WFOE, Anhou and Anhou Original Shareholders on the same date, except that the Exclusive Business Cooperation Agreement executed
by and between CU WFOE and Anhou on January 17, 2011 remains in full effect. The VIE Agreements now in effect include:
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1.
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An exclusive Business Cooperation Agreement, pursuant to which CU WFOE is appointed as the exclusive
services provider to Anhou of complete technical support, business support and related consulting services in exchange for 90%
of the net profits of Anhou. The Exclusive Business Cooperation Agreement was effective on January 17, 2011 with a term of ten
years subject to extension at the discretion of CU WFOE. CU WFOE may terminate the agreement at any time with 30 days’ written
notice but Anhou may only terminate the agreement if CU WFOE commits gross negligence or a fraudulent act against Anhou;
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2.
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a Power of Attorney, pursuant to which the shareholders of Anhou have vested their collective voting
control in Anhou to CU WFOE;
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3.
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an Option Agreement, pursuant to which the shareholders of Anhou granted to CU WFOE the irrevocable
right and option to acquire all of their equity interests in Anhou. The Option Agreement was effective on October 24, 2013 with
a term of ten years subject to renewal at CU WFOE’s election; and
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4.
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a Share Pledge Agreement, pursuant to which the shareholders of Anhou have pledged all of their
equity interests in Anhou to CU WFOE to guarantee Anhou’s performance of its obligations under the Exclusive Business Cooperation
Agreement.
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Please refer to “Item 13. Certain
Relationships and Related Transactions, and Director Independence” for further information on the VIE Agreements.
PFAL
Prime Financial Asia Ltd. (“PFAL”)
is a re-insurance broker company incorporated in Hong Kong. On April 23, 2014, AHFL and Chun Kwok Wong (“Mr. Wong”)
entered into a Capital Increase Agreement, pursuant to which Mr. Wong agreed to increase PFAL’s registered capital from HK$500,000
to HK$1,470,000 and AHFL agreed to contribute HK$1,530,000 to PFAL’s registered capital. Upon the completion of capital increase
on April 30, 2014, Mr. Wong and AHFL own 49% and 51% of PFAL’s equity interest, respectively.
On August 7, 2015, Max Key Investment Ltd.
(“MKI”) was incorporated with limited liability in the British Virgin Islands. On August 15, 2015, Prime Management
Consulting (Nanjing) Co., Ltd. (“PTC Nanjing”) was incorporated with limited liability in Nanjing province of the PRC.
On September 3, 2015, Prime Asia Corporation Limited. (“PTC Taiwan”), a company limited by shares, was incorporated
in Taiwan. Each of MKI, PTC Nanjing and PTC Taiwan is a wholly owned subsidiary of PFAL.
As a holding company with no business other
than holding equity interest of our operating subsidiary, CU WFOE in China and Law Broker in Taiwan, we rely principally on dividends
to be paid by CU WFOE in China and Law Broker in Taiwan. CU WFOE, being the exclusive service provider to Anhou, relies on the
service fees to which it is entitled from Anhou. Pursuant to the Exclusive Cooperation Agreement (the “Cooperation Agreement”)
between CU WFOE and Anhou, CU WFOE has the right to collect 90% of the net profits of Anhou. Anhou has been paying service fees
according to the Cooperation Agreement, but has not paid any dividend to CU WFOE to date. As of December 31, 2017, Anhou was operating
at a profit, but since Anhou remains a growing company that requires financial resources to support further expansion, the dividend
payment will be decided later on depending on the financial circumstances. Our capability to receive dividends from CU WFOE, convert
them into USD and make the repatriation out of China is subject to the applicable PRC restrictions on the payment of dividends
by PRC companies, laws and regulations on foreign exchange and restrictions on foreign investment. For the year ended December
31, 2015, 88.45%, 10.71% and 0.84% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries,
Consolidated Affiliated Entities and PFAL, respectively. For the year ended December 31, 2016, 87.52%, 12.10% and 0.38% of our
revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and
PFAL, respectively. For the year ended December 31, 2017, 85.31%, 14.37% and 0.32% of our revenues in our consolidated financial
statements were derived from our Taiwan Subsidiaries, Consolidated Affiliated Entities and PFAL, respectively. Revenues in our
consolidated financial statements are composed of commissions earned from insurance companies according to the terms of each insurance
company service agreement, as well as revenues earned in association with the Strategic Alliance Agreement with AIATW.
Reclassification of Shares
On January 28, 2011, our Company increased
the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common stock and 10,000,000 shares
of preferred stock. On July 2, 2012, our board of directors and stockholders approved, in connection with a reclassification of
1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share held
by Mr. Yi Hsiao Mao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001 per
share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance
of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr.
Mao pursuant to the Reclassification. All of the 1,000,000 shares of Series A Preferred Stock are reclassified from the 1,000,000
common stock held by Mr. Mao and no additional consideration has been paid by Mr. Mao in connection with the Reclassification.
Each holder of common stock shall be entitled to one vote for each share of common stock held of record by such holder as of the
applicable record date on any matter that is submitted to a vote of the stockholders of our Company; while each holder of Series
A Preferred Stock shall be entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of
the applicable record date on any matter that is submitted to a vote of the stockholders of our Company.
2017 Long Term Incentive Plan
On May 12, 2017, the Company’s 2017
Long Term Incentive Plan (the “2017 Plan”) was approved by the shareholders at the 2017 Annual Meeting of Stockholders
of China United Insurance Service, Inc. Up to 10,000,000 shares of our Common Stock may be granted under the 2017 Plan (the “Share
Pool”), provided that 2,000,000 shares of the Share Pool is reserved for issuance to eligible participants providing services
to Action Holdings Financial Limited and its subsidiaries. Eligibility to participate is open to officers, directors and employees
of, and other individuals (including sales agents who are exclusive agents of the Company or its subsidiaries or derive more than
50% of their income from those entities) who provide bona fide services to or for, us or any of our subsidiaries. Given that metrics
for evaluating performance goals are rather complex and exhaustive, and that the Company’s management and Board of Directors
are still working to develop a series of reward policies that specify various performance target levels and the size of the award
or payout of performance shares with respect to each different target level attained, no awards were granted under the 2017 Plan
as of December 31, 2017.
The following flow chart illustrates our
Company’s organizational structure as of March 14, 2018:
Products and Services
Law Broker and Anhou market and sell to
customers two broad categories of insurance products: life insurance products and property and casualty insurance products, both
focused on meeting the particular insurance needs of individuals. The insurance products that Law Broker and Anhou sell are underwritten
by some of the leading insurance companies in Taiwan and China, respectively.
Through Anhou’s wholly-owned insurance
brokerage firm Jiangsu Law, it also closely interacts with insurance companies and actively locates and introduces the right customers
in Anhou’s database matching the insurance products offered by such insurance companies to them.
Law Broker and Anhou are compensated primarily
by commissions and fees paid by insurance companies, typically based on a percentage of the premium paid by the insured or a percentage
of the amount recovered from insurance companies. Commission and fee rates generally depend on the type of insurance products,
the particular insurance company.
Life Insurance Products
Law Broker
The life insurance products Law Broker
distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies,
some of the insurance products Law Broker distributes combine features of one or more of the categories listed below. Total net
revenues from life insurance products distributed by Law Broker in the 2017 fiscal year was approximately $55.96 million, accounted
for approximately 93.43% of Law Broker’s total net revenues and approximately 76.81% of our total net revenues for the fiscal
year ended December 31, 2017, respectively.
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Individual Whole Life Insurance.
The individual whole life insurance products Law Broker
distributes provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums
over a pre-determined period, generally ranging from six to 20 years, or until the insured reaches a certain age. The face amount
of the policy or, for some policies, the face amount plus accumulated interest is paid upon the death of the insured.
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Individual Term Life Insurance.
The individual term life insurance products Law Broker distributes
provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for the periodic
payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years. Term life insurance policies generally
expire without value if the insured survives the coverage period.
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Individual Health Insurance.
The individual health insurance products Law Broker distributes
pay the insured amount of reasonable hospitalization cost, or certain death benefit in case of the death of the insured, due to
illness, accident or childbirth. Individual health insurance policies expire when the premium is not paid or a certain age is attained.
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Accidental Injury Insurance.
The accidental injury insurance products Law Broker distributes
provide benefits when the insured is dead or disabled because of accidental injury, which is unforeseen by the injured or against
his will.
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Investment-Oriented Insurance.
The investment-oriented insurance products Law Broker distributes
are market linked insurance plans which also provide life coverage, combining advantages of investment and protection. The premium
amount (after deduction of certain charges) is invested into different funds. The performance of the fund will depend on the market
conditions. A growing upward trend in market will increase the fund value. Every investment-oriented insurance policy has market
risk exposure depending on the fund invested and such investment risk is solely borne by the policyholder. Depending on the death
benefit, investment-oriented insurance policies are categorized into two broad categories: (1) the death benefit is equal to the
higher of insured amount or fund value; (2) the death benefit is equal to the insured amount plus fund value.
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Foreign Currency Insurance Commodities.
The foreign currency insurance commodities Law Broker
distributes are life insurance policies in which policy benefits are paid in foreign currencies. The foreign currency policy provides
insurance for the insured person’s life in exchange for the periodic payment of fixed premiums over a pre-determined period,
generally ranging from six to 20 years, or until the insured reaches a certain age. The face amount of the policy or, for some
policies, the face amount plus accumulated interest, is paid upon the death of the insured.
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Travel Accident Insurance.
The travel accident insurance products Law Broker distributes
provide accident coverage for accidental death and dismemberment and other travel injuries. The premium is based on the number
of travel days and the insured amount.
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The life insurance products Law Broker
distributed in the fiscal year ending December 31, 2017 were primarily underwritten by, in alphabetical order, AIA International
Limited Taiwan Branch, Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., Shin Kong Life Insurance Co., Ltd., Taiwan
Life Insurance Co., Ltd. and TransGlobe Life Insurance Inc. Among them, Farglory Life Insurance Co., Ltd., Taiwan Life Insurance
Co., Ltd., and TransGlobe Life Insurance Inc. accounted for approximately 25.41%, 12.45%, and 11.18% of our total net revenues
in the fiscal year ending December 31, 2017, respectively.
Anhou
The life insurance products Anhou distributes
can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies, some
of the insurance products Anhou distributes combine features of one or more of the categories listed below. Total net revenues
from life insurance products in the 2017 fiscal year was approximately 9.67 million, accounted for approximately 92.33% of Anhou’s
total net revenues and approximately 13.27% of our total net revenues for the fiscal year ending December 31, 2017, respectively.
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Individual Whole Life Insurance.
The individual whole life insurance products Anhou distributes
provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums over a pre-determined
period, generally ranging from five to 20 years, or until the insured reaches a certain age. The face amount of the policy or,
for some policies, the face amount plus accumulated interest is paid upon the death of the insured.
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Individual Term Life Insurance
. The individual term life insurance products Anhou distributes
provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for the periodic
payment of fixed premiums over a pre-determined period, generally ranging from five to 20 years. Term life insurance policies generally
expire without value if the insured survives the coverage period.
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Individual Endowment Life Insurance
. The individual endowment products Anhou distributes
generally provide maturity benefits if the insured reaches a specified age, and provide to a beneficiary designated by the insured
guaranteed benefits upon the death of the insured within the coverage period. In return, the insured makes periodic payment of
premiums over a pre-determined period, generally ranging from five to 25 years.
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Individual Annuity Insurance
. The individual annuity insurance products Anhou distributes
provide annual benefit payments after the insured attains a certain age, or for a fixed time period, and provide a lump payment
at the end of the coverage period. In addition, the beneficiary designated in the annuity contract will receive guaranteed benefits
upon the death of the insured during the coverage period. In return, the purchaser of the annuity products makes periodic payment
of premiums during a pre-determined accumulation period.
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Individual Health Insurance.
The individual health insurance products Anhou distributes
primarily consist of critical illness insurance products, which provide guaranteed benefits for specified critical illnesses during
the coverage period. In return, the insured makes periodic payment of premiums over a pre-determined period.
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The life insurance products Anhou distributed
in the fiscal year ending December 31, 2017 were primarily underwritten by, in alphabetical order, Aegon THTF Life Insurance Co.,
Ltd., AVIVA Life Insurance Co., Ltd., Funde Sino Life Insurance Co., Ltd., Huaxia Insurance Co., Ltd., and Taikang Life Insurance
Company. None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December
31, 2017.
In addition to the periodic premium payment
schedules described above, most of the individual life insurance products we distribute also allow the insured to choose to make
a single, lump-sum premium payment at the beginning of the policy term. If a periodic payment schedule is adopted by the insured,
a life insurance policy can generate periodic payment of fixed premiums to the insurance company for a specified period of time.
This means that once Anhou or Law Broker sells a life insurance policy with a periodic premium payment schedule, they will be able
to derive commission and fee income from that policy for an extended period of time, sometimes up to 25 years. Because of this
feature and the expected sustainable growth of life insurance sales in China and Taiwan, we have focused significant resources
ever since the inception of Anhou and Law Broker on developing our capability to distribute individual life insurance products
with periodic payment schedules. We expect that sales of life insurance products will continue to be our primary source of revenue
in the next several years.
Property and Casualty Insurance
Products
Law Broker
Law Broker’s main property and casualty
insurance products are automobile insurance, casualty insurance, and liability insurance. Law Broker commenced sale of automobile
insurance, casualty insurance and liability insurance business in August 2003. Total net revenues from property and casualty insurance
products in the 2017 fiscal year was approximately $3.93 million, accounted for approximately 6.57% of Law Broker’s total
net revenues and approximately 5.40% of our total net revenues in the fiscal year ending December 31, 2017, respectively.
The property and casualty insurance products
Law Broker distributes can be further classified into the following categories:
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Automobile Insurance. Law Broker distributes both standard automobile insurance policies and supplemental
policies, which we refer to as riders. The standard automobile insurance policies Law Broker sells generally have a term of one
year and cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire,
explosion and natural disasters. Law Broker also sells standard third party liability insurance policies, which cover bodily injury
and property damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Law Broker
distributes cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass
and vehicle body scratches.
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Casualty Insurance.
The casualty insurance Law Broker distributes are primarily designed
to insure any losses or damages to properties caused by direct accidents. The policy period is usually one year and the premium
is generally calculated based on the insured amount.
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Liability Insurance.
The liability insurance Law Broker distributes are primarily designed
to protect an individual or business from the risk that they may be sued and held legally liable for something such as malpractice,
injury or negligence. The policy period is usually one year and the premium is generally calculated based on the insured amount.
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The property and casualty insurance products
Law Broker distributed in the fiscal year ending December 31, 2017 were primarily underwritten by, in alphabetical order, Fubon
Insurance Co., Ltd., Hotai Insurance Co., Ltd., Shinkong Insurance Co., Ltd., TLG Insurance Co., Ltd. and Union Insurance Company.
None of these insurance company partners accounted for more than 10% of our total net revenues for the year ended December 31,
2017.
Anhou
Anhou’s main property and casualty
insurance products are automobile insurance and commercial property insurance. Anhou commenced its sale of commercial property
insurance in 2009 and had developed its automobile insurance business since 2010. Total net revenues from property and casualty
insurance products distributed by Anhou in the 2017 fiscal year was approximately $0.8 million, accounted for approximately 7.67%
of Anhou’s total net revenues and approximately 1.10% of our total net revenues for the fiscal year ending December 31, 2017.
The property and casualty insurance products
Anhou distributes can be further classified into the following categories:
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Automobile Insurance. Automobile insurance is the largest segment of property and casualty insurance
in the PRC in terms of gross written premiums. Anhou distributes both standard automobile insurance policies and supplemental policies,
which we refer to as riders. The standard automobile insurance policies Anhou sells generally have a term of one year and cover
damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion and
natural disasters. Anhou also sells standard third party liability insurance policies, which cover bodily injury and property damage
caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Anhou distributes cover additional
losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches.
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Commercial Property Insurance. The commercial property insurance products Anhou distributes include
basic, comprehensive and all risk policies. Basic commercial property insurance policies generally cover damage to the insured
property caused by fire, explosion and thunder and lightning. Comprehensive commercial property insurance policies generally cover
damage to the insured property caused by fire, explosion and certain natural disasters. All risk commercial property insurance
policies cover all causes of damage to the insured property not specifically excluded from the policies.
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The property and casualty insurance products
Anhou distributed in the fiscal year ending December 31, 2017 were primarily underwritten by, in alphabetical order, China Life
Property and Casualty Insurance Co., Ltd., China Pacific (Group) Co., Ltd., Huatai P&C Insurance Co., Ltd., PICC Property and
Casualty Co., Ltd., and Tianan Property Insurance Co., Ltd. None of these insurance company partners accounted for more than 10%
of our total net revenues for the year ended December 31, 2017.
Strategic Alliance with 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 the in Taiwan by insurance agency companies or
insurance 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 was required to pay AHFL an execution fee of $8,326,700 (NT$
250,000,000) to be recorded as revenue upon fulfilling sales target over the next five years. As of September 23, 2013, AHFL had
received $8,326,700 (NT$250,000,000) from AIATW under the Alliance Agreement. Pursuant to the Alliance Agreement, AHFL was entitled
to the payment of the execution fee, subject to certain terms and conditions therein, including the satisfaction of the performance
targets and the threshold 13-month persistency ratio. 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
an Amendment to Strategic Alliance Agreement (the “First Amendment to Alliance Agreement”) with AIATW. Pursuant to
the First Amendment to Alliance Agreement, the expiration date of the Alliance Agreement was extended from May 31, 2018 to December
31, 2020. In addition, both AHFL and AIATW agreed to adjust certain terms and conditions set forth in the Strategic Alliance Agreement,
including the downward adjustment of the performance targets as well as the mechanism and formula calculating the execution fee
to be refunded, if any.
On January 6, 2016, AHFL entered into an
Amendment 2 to Strategic Alliance Agreement (the “Second Amendment to Alliance Agreement”) with AIATW to further revise
certain provisions in the Alliance Agreement and the previous amendment entered into by and between AHFL and AIATW.
Pursuant to the Second Amendment to Alliance
Agreement, the expiration date of the 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
agree to adjust certain terms and conditions set forth in the Alliance Agreement, among which: (i) expand 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) remove certain provisions related to
performance milestones and refund of execution fees. On March 15, 2016, AHFL unilaterally issued a confirmation letter to AIATW
(the “2016 Letter”), where it emphasized its commitment to achieve certain sales targets within a specific time frame
and covenanted to refund a certain portion of execution fees calculated based on the formula therein upon failure to achieve such
sales target, as applicable.
On June 14, 2017, AHFL entered into an
Amendment 3 (the “Third Amendment”) to the Alliance Agreement with AIATW to further revise certain provisions in the
Alliance Agreement and the previous amendments to the Alliance Agreement entered into by and between AHFL and AIATW.
Pursuant to the Third Amendment, except
for the first contract year (April 15, 2013 to September 30, 2014), the sales targets for the remaining contract term under the
Alliance Agreement shall be changed by reference to (i) the amount of the value of new business (“VONB”) and (ii) the
13-month persistency ratio as set forth therein, provided that to the extent any underlying insurance contract is revoked, invalid
or terminated and premiums is refunded to such policyholder, the amount of the related VONB shall be correspondingly reduced. Both
AHFL and AIATW agreed to calculate the business promotion fees (equivalent to the “execution fee” referred above) to
be returned in case of failure to achieve the sales targets or the fees to be increased in case of exceeding the sales targets,
as the case may be, based on two formulas specified in the Third Amendment. The primary factor under formula one focuses on the
annual and/or accumulated achievement rate(s), while the primary factor under formula two focuses on the 13-month persistency ratio(s),
subject to terms and conditions therein. The expanded scope of services to be provided by AHFL to AIATW as set forth in Section
4 of New Second Amendment is removed under the Third Amendment as well.
On June 14, 2017, with AIATW's consent,
the 2016 Letter was revoked in order to conform to the latest terms and conditions regarding the cooperation between AHFL and AIATW
as set forth in the Third Amendment.
Online Business
In recent years, the online insurance business
has experienced rapid growth. Many insurance companies, portal websites and professional insurance intermediaries have begun launching
its e-commerce platforms, providing real-time information to consumers and allowing consumers to directly complete transactions
online. Law Broker began developing its online platform in 2016, and became the first brokerage company to receive formal approval
from the Financial Supervisory Commission of Taiwan (“FSC”) to commence online business on May 9, 2016. The platform,
SARAcares (website: https://www.saracares.com.tw), was launched on January 26, 2017. It offers a broad range of insurance products
underwritten by multiple insurance companies, policy comparison features, and post-sale services that are backed by our online
service staffs and nationwide sales network. As required by the relevant laws and regulations regarding e-commerce provided by
the FSC, Law Broker obtained the ISO 27001 certification of Information Security Management System (ISMS) and BS 10012 certification
of Personal Information Management System on June 20, 2017. Our online business in Taiwan is still at a nascent stage with the
majority of the sales still being completed by off-line agents.
Unified Operating Platform
Law Broker has self-constructed a Unified
Operating Platform, an information technology infrastructure that serves to enhance operational, sales processes, and administrative
efficiency. Since Law Broker’s establishment in 1992, it has successfully implemented the following components of its operating
platform across its branch offices in Taiwan through a hub center located in Taipei:
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A centralized client and insurance policy management and analysis system, which encompasses our
life insurance unit and property and casualty insurance unit, that will better support business operations and facilitate risk
control;
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A centralized client relations management system, that manages and analyzes client interactions
to drive sales growth;
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An integrated administrative and information system, that increases the management efficiency among
the subsidiaries, branches and sales departments;
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A centralized and computerized accounting and financial management system, that improves the efficiency
of commission distribution and enforcement;
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A human resources management and performance tracking system; and
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An e-training system to provide online trainings to sales professionals.
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The Unified Operating Platform has proved
to be an efficient and streamlined operating system which has contribute to the successful expansion and growth of Law Broker into
one of the leading insurance brokerage companies in Taiwan, with 30 sales and service outlets (including the headquarters) across
Taiwan and 2,609 employees and insurance sales professionals as of December 31, 2017.
In accordance with our growth strategy
in China, Anhou has made significant effort to adapt the Unified Operating Platform utilized by Law Broker to better meet the operational
need in China. Since September 2010, Anhou has successfully implemented the tailored operating platform across the PRC subsidiaries
through a hub center located in Nantong, Jiangsu province. We expect that this tailored operating platform will make selling easier
for sales agents in China, facilitate standardized business and financial management, enhance risk control and increase operational
efficiency for the PRC subsidiaries.
Anhou has tailored and refined the platform
on the basis of Law Broker’s well-developed operating platform in Taiwan and believes that it is difficult for our competitors
in China, particularly new market entrants, to reproduce a similar platform without substantial financial resources, time and operating
experience.
Because the various systems, policies and
procedures under both of operating platforms utilized by Law Broker and Anhou can be rolled out quickly as we enter new regions
or make acquisitions, we believe we can expand our distribution network rapidly and efficiently while maintaining the quality of
our services.
Distribution and Service Network and
Marketing
Since Law Broker’s establishment
in 1992, it has devoted substantial resources to building up its distribution and service network. Law Broker currently has 30
sales and service outlets spread across Taiwan (including the headquarters), among which, 10 are located in the northern region,
13 are located in the central region, 5 are located in the southern region and 2 are located in the eastern region. As of December
31, 2017, Law Broker had 2,414 sales professionals and 195 administrative staff members.
The following table sets forth some additional
information of Law Broker’s distribution and service network by region as of December 31, 2017:
Region
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Number of Sales and
Service Outlets
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Number of Sales
Professionals
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Northern region (including the headquarter)
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10
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703
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Southern region
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5
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507
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Central region
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13
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1,162
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Eastern region
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2
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42
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Total
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30
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2414
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Law Broker markets and sells life insurance
products, property and casualty insurance products directly to the targeted customers through the sales professionals, who are
independent contractors, not its employees.
Since Anhou’s establishment in 2003,
it has devoted substantial resources in building up its distribution and service network. Anhou has targeted its distribution and
service network in provinces with most population in China, such as Henan, Jiangsu, Sichuan, Fujian, Guangdong, Yunnan. As of December
31, 2017, Anhou had two insurance agencies and one insurance brokerage firm, with 2,715 sales professionals and 116 administrative
staff members operating across 43 cities within these six provinces.
The following table sets forth some additional
information of Anhou’s distribution and service network by province as of December 31, 2017:
Province
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Number of Sales and Service
Outlets
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Number of Sales Agents
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Henan
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30
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1,536
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Sichuan
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7
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572
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Jiangsu
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3
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392
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Fujian
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1
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203
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Guangdong
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1
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12
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Yunnan
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1
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-
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Total
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43
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2,715
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Anhou markets and sells life insurance
products, property and casualty insurance products directly to the targeted customers through the sales agents, who are independent
contractors, not its employees.
Customers
As of December 31, 2017, Law Broker had
approximately 545,292 customers, among which approximately 81.6% purchased life insurance products and approximately 18.4% purchased
property and casualty insurance products from Law Broker.
Due to its extensive line of insurance
products underwritten by the insurance companies in Taiwan, Law Broker managed to offer a variety of insurance products to customers
of different ages or professions. However, as an aging population in Taiwan has gradually become a more recognized social issue,
despite relatively healthy government-sponsored retirement and medical programs, more and more Taiwanese, especially those with
stable financial means and aiming for high-end retirement and medical treatment, have been focusing on endowment and medical type
of commercial insurance products, while the investment type of insurance products have been playing a less significant role since
the economic downturn.
In addition, from time to time, Law Broker
has been, either voluntarily or upon request of insurance companies, advising insurance companies or providing feedback on particular
types of insurance products before they are put on the market. This interaction with insurance companies has not only enhanced
the close cooperation between Law Broker and the insurance companies, but also gives it an edge in understanding the in-depth features
of such insurance products for marketing and distribution purposes.
Law Broker sells automobile insurance and
casualty insurance primarily to individual customers. Law Broker sells liability insurance to institutional customers.
As of December 31, 2017, Anhou had 47,257
customers, among which 99% purchased life insurance products and 1% purchased property and casualty insurance products from Anhou.
Anhou sells automobile insurance and individual
accident insurance primarily to individual customers. Anhou sells commercial property insurance to institutional customers.
The revenues of Anhou are primarily generated
from the sale of life insurance products and we expect the continuous growth in this regard, as more and more customers in China
realized the insufficiency of the mandatory social insurance coverage and the necessity to supplement it with commercial insurance.
Insurance Company Partners
We are selective in terms of choosing insurance
companies as our partners. We take into consideration a variety of factors, such as the reputation and integrity of the insurance
company, the quality and competitiveness of insurance products offered, the prudence and health of the financial standing of the
insurance company as well as the complexity and efficiency of claim adjustment and settlement. During years of operation, both
Law Broker and Anhou have formed strategic relationships with numerous insurance companies in Taiwan and China, respectively, as
of December 31, 2017, Law Broker had established business relationships with 23 insurance companies in Taiwan and Anhou had established
business relationships with 34 insurance companies in China.
In the fiscal year ended December 31, 2017,
Law Broker’s major insurance company partners, after aggregating the business conducted between Law Broker and the various
local branches of the insurance companies were AIATW, Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., Shin Kong
Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd., and TransGlobe Life Insurance Inc., arranged in alphabetical order.
Among them, Farglory Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd. and TransGlobe Life Insurance Inc., accounted for
approximately 25.41%, 12.45% and 11.18% of the Company’s total net revenues for the year ended December 31, 2017, respectively.
In the fiscal year ended December 31, 2017,
Anhou’s major insurance company partners, after aggregating the business conducted between Anhou and the various local branches
of the insurance companies were Aegon THTF Life Insurance Co., Ltd., AVIVA Life Insurance Co., Ltd., Funde Sino Life Insurance
Co., Ltd., Huaxia Insurance Co., Ltd., and Taikang Life Insurance Co., Ltd., arranged in alphabetical order. None of these insurance
company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
Competition
A number of industry players are involved
in the distribution of insurance products in Taiwan and PRC. We compete for customers on the basis of product offerings, customer
services and reputation. Because we primarily distribute individual insurance products, our principal competitors include:
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Professional insurance intermediaries. Life insurance is our core business and has a strong regional
feature. Through years of business development, we believe that we can compete effectively with other insurance intermediary companies
as we have a longer operational history and over the years have assembled a strong and stable team of managers and sales professionals.
With the implementation of our unified operating platform, we believe that we could strengthen our lead in our developed local
regions and expand our operation to our newly selected areas. However, with increasing consolidation expected in the insurance
intermediary sector in the coming years, we expect competition within this sector to intensify.
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Insurance companies. The distribution of individual life insurance products in Taiwan and China
historically has been dominated by insurance companies, which usually use both in-house sales force and exclusive sales agents
to distribute their own products. We believe that we can compete effectively with insurance companies because we focus only on
distribution and offer our customers a broad range of insurance products underwritten by multiple insurance companies.
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Other business entities. In recent years, business entities that distribute insurance products
as an ancillary business, primarily commercial banks and postal offices have been playing an increasingly important role in the
distribution of insurance products, especially life insurance products. However, the insurance products distributed by these entities
are usually confined to those related to their main lines of business, such as investment-related life insurance products. We believe
that we can compete effectively with these business entities because we offer our customers a broader variety of products.
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Law Broker is one of the leading insurance
brokerage firms in Taiwan. During the past two decades, Law Broker has expanded its business across Taiwan, with 30 sales and service
outlets (including the headquarters) and 2,414 sales professionals and 195 administrative staff members spread over the four regions
of Taiwan as of December 31, 2017. Other than insurance companies and commercial banks, Law Broker’s primary competitors
are Taiwan insurance brokerage companies of relatively large size, such as Everpro Insurance Brokers Co., Ltd.
Awards and Recognitions
Through years of operation, Law Broker
has been recognized by various organizations and government entities for its best practices in the industry. Especially noteworthy
is the “Taiwan Insurance Excellence Award”, the highest acclaim in the Taiwan insurance industry, co-sponsored by the
Taiwan Insurance Institute, FSC and Taiwan Consumer Protection Committee.
Year of Award
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Award/Recognition
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2017
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Seventh Taiwan Insurance Excellence Award Excellence in Talent Training Award–Gold Medal Excellence in Corporate Social Responsibility Award–Silver Medal Excellence in Digital Application Award–Silver Medal Excellence in Customer Service–Silver Medal
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2015
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Sixth Taiwan Insurance Excellence Award Excellence in Talent Training Award–Silver Medal Excellence in Customer Service–Silver Medal
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2013
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Fifth Taiwan Insurance Excellence Award Excellence in Digital Application Award–Gold Medal Excellence in Talent Training Award–Silver Medal Excellence in Customer Service–Silver Medal
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2011
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Fourth Taiwan Insurance Excellence Award Excellence in Talent Training Award Excellence in Customer Service
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2009
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Third Taiwan Insurance Excellence Award Excellence in Talent Training Award Excellence in E-Commerce Excellence in Customer Service–Nomination
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2007
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Second Taiwan Insurance Excellence Award Excellence in Talent Training Award Excellence in Corporate Social Responsibility–Merit Award
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2005
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First Taiwan Insurance Excellence Award Talent Training Excellence Award
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During the past 14 years, Anhou has expanded
its business across 43 cities within Henan, Sichuan, Jiangsu, Fujian, Guangdong and Yunnan provinces with 2,715 sales professionals
and 116 administrative staff members. Based on the insurance products Anhou is offering and the geographic areas of its branch
offices, Anhou’s primary competitors are small-sized and middle-sized insurance agency companies. Anhou is relatively larger
in terms of the number of salesmen as well as the sales revenue comparing to those competing insurance agency companies. On April
20, 2012, Anhou obtained the nationwide license from CIRC, pursuant to which Anhou may set up its branch office across the PRC
to carry out the insurance agency business with no further approval requirement from CIRC other than filing with the local CIRC
at the provincial level.
On March 26, 2012, CIRC issued the Notice
on Suspension of Market Entry Approval of Regional Insurance Agencies and Certain Part-time Insurance Agencies (“2012 Notice”).
Pursuant to the 2012 Notice, CIRC and its local counterparts will suspend granting any new license to full-time insurance agencies
operating on a regional basis (“Regional Insurance Agencies”) as well as to branch offices of existing Regional Insurance
Agencies. In addition, no new license for part-time insurance agency businesses will be granted unless such applicant is a financial
institution or a China Post office. However, CIRC emphasized in the 2012 Notice that its local counterparts shall continue to support
the establishment of insurance intermediary groups and full-time insurance agencies operating on a nationwide basis, as well as
continue to support their respective branch offices.
As indicated in the 2012 Notice, it appears
that CIRC is aiming to increase the entry thresholds of Regional Insurance Agencies and part-time insurance agencies with a view
to reducing the number, as well as, enhancing the quality of insurance agencies in the market. CIRC has also indicated in the 2012
Notice that it intends to further amend related rules and regulations to improve the market entry and exit mechanism for insurance
agencies, and promote the professionalism as well as enhance the quality of insurance agencies in the market.
On April 27, 2013, CIRC issued the Decision
on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising
the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision
on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million.
On May 16, 2013, CIRC issued the 2013 Notice,
pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions,
with registered capital less than RMB50 million, can continuously operate their existing business within the provinces where they
have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered
office or any branch office.
With the promulgation and implementation
of the above-mentioned regulations, we expect a better regulated insurance agency market in China with orderly competition and
pursuit for professional excellence, which will accentuate our competitive advantage due to our continuous commitment to quality
service. On October 24, 2013, Anhou increased its registered capital to RMB50 million. We believe that we will be in a better position
to obtain the full support expressly provided in the 2013 Notice from the local CIRC on our expansion strategy nationwide.
Intellectual Property
To protect our intellectual property, we
rely on a combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our employees, sales
agents, contractors and others.
Law Enterprise and Law Broker jointly own
the following registered trademarks in Taiwan:
the Service Mark of Law Insurance
Broker Co., Ltd. under the registration number 01462327, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law Insurance Broker
Co., Ltd. under the registration number 01604254, with a 10-year validity from October 16, 2013 to October 15, 2023;
the logo of Blue Magpie (
藍鵲
),
under the registration number 01462329, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law (
錠嵂
)
under the registration number 01462328, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law (
錠嵂
)
under the registration number 01611772, with a 10-year validity from December 1, 2013 to November 30, 2023;
the logo of Bao Xian Tong and
INS under the registration number 01580261, with a 10-year validity from May 16, 2013 to May 15, 2023; and
the logo of Magpie Baby under
the registration number 01518573, with a 10-year validity from May 16, 2012 to May 15, 2022.
the logo of Magpie Baby 2.0 under
the registration number 01763557, with a 10 year validity from April 1, 2016 to March 31, 2026; and
the logo of SARACARES under the
registration number 01876419, with a 10 year validity from October 16, 2017 to October 15, 2027
Law Broker has the following
registered trademarks in Taiwan. All of the trademarks will be renewed for another 10-year before their respective expiry:
the logo of Blue Magpie Cycling
Team Fleet, under the registration number 01340567, with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Law Insurance Broker
under the registration 01340565, with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Law Blue Magpie under
the registration number 01340566, with a 10-year validity from December 1, 2008 to November 30, 2018;
the logo of Symbiosis, Co-cultivation
Co-Prosperity and Law Blue Magpie Picture under the registration number 01317020, with a 10-year validity from July 1, 2008 to
June 30, 2018;
the logo of Education Training
Blue Magpie under the registration number 01313467, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Cartoon Blue Magpie
under the registration number 01313464, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Little Blue Magpie
under the registration number 01313468, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Triumph Blue Magpie
under the registration number 01313465, with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Blue Magpie Fleet
Picture under the registration number 01310350, with a 10-year validity from May 1, 2008 to April 30, 2018; and
the logo of Fighting Blue Magpie
under the registration number 01313466, with a 10-year validity from June 1, 2008 to May 31, 2018.
Jiangsu Law has one registered
trademark in China, the logo of Jiangsu Law:
Segments
The Company currently operates as three
reporting segments. Revenues, net income and total assets can be found in Item 8 of Part II, “Financial Statements and Supplementary
Data” of this Annual Report on Form 10-K.
Employees
As of December 31, 2017, Law Broker has
a total of 195 full-time employees and Anhou has 116 full-time employees. Our employees are not represented by any collective bargaining
agreement. We believe that we have good relations with our employees and we have never experienced a work stoppage.
Regulation
Taiwan Regulations of the Insurance
Industry
The insurance industry in Taiwan is highly
regulated. The FSC, is the regulatory authority responsible for the supervision of the insurance industry in Taiwan. Insurance
activities undertaken within Taiwan are primarily governed by the Insurance Law and the related rules and regulations.
Insurance Law
The current principal regulation governing
insurance in Taiwan is the Insurance Law, most recently amended on January 31, 2018 by Legislative Yuan, which provided the basic
framework for regulating the insurance industry.
The Insurance Law defines several participants
in the insurance industry, such as insurer, insurance agency, insurance brokerage and insurance adjustor. It established requirements
for form of organization, and qualifications and procedures to establish an insurance organization as well as separation of property
insurance businesses and life insurance businesses. The Insurance Law distinguishes insurance between fire disaster, marine, land
and air, liability, surety, and other casualty and property insurance businesses on the one hand, and life insurance, health insurance,
casualty insurance and annuity businesses on the other. Unless permitted by the FSC, insurance companies are not allowed to engage
in both types of insurance businesses.
The insurers, insurance agencies, insurance
brokerages and insurance adjustors must join the related industry associations, or they are prohibited from conducting business
operation.
FSC
The FSC is in charge of the financial market
and financial service industries, among the insurance industry and has the power to control the following items:
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Financial system and supervision policy.
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The preparation, amendment and abolishment of financial laws and regulations.
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3.
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Supervision and management of the financial institutions, include its establishment, revocation,
abolishment, change, merger, dissolution, and business scope.
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Development, supervision and management of financial market.
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Inspection of financial institution.
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Inspection on public listing company related to their securities market-related matters.
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Foreign financial matters.
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8.
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Protection of financial customers.
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9.
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Dealing and penalizing the violation of related laws and regulations of finance.
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10.
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Collection of and analysis on relevant statistic data related to financial supervision, management
and inspection.
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11.
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Other matters related to financial supervision, management and inspection.
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Regulation of Insurance Brokers and Brokerage Companies
The current principal regulation governing
insurance brokers and brokerage companies is the Regulations Governing Insurance Brokers last amended on June 27, 2017 by Insurance
Bureau of FSC (the “Broker Rule”). An insurance broker stipulated under the Insurance Law refers to a person who negotiates
to conclude an insurance contract on behalf of the insured and charges fees from the insured. Depending on their focused insurance
areas, i.e. property or life insurance, insurance brokers can be divided into property insurance brokers and life insurance brokers.
No matter what insurance industry an insurance broker is engaged in, it must have one of the following qualifications: (1) have
passed the insurance brokerage examination for professional and technical staff; (2) have passed the insurance brokerage qualification
test; or (3) have obtained the insurance brokerage practitioner certificate and practiced the same business.
Those who have brokerage qualifications
required by the Broker Rule may conduct business after they obtain the practitioner certificates under their own name or the company
they work for. A brokerage company must hire more than one broker to act as signatory(ies), and registered with the administrative
authority, the number of whom can be adjusted appropriately in accordance with the scale of business. If necessary, the administrative
authority may, in its discretion, require the company to add signatories. An insurance broker may only work for one insurance brokerage
company as signatory at one time.
There are special requirements for brokerage
companies, such as the name of an brokerage company must contain the words “insurance broker”; when an brokerage company
applies to operate brokerage business, the minimum registered capital must be at least NT$5 million ($157,953) fully paid
up in cash, according to which, insurance brokerage companies with business license obtained prior to the implementation of this
latest Broker Rule shall adjust their registered capital within five years upon the its implementation.
The Practitioner Certificate
The insurance broker practitioner certificate
has a validation duration of five years, and must be renewed before expiration. In case a broker has the qualifications for both
property insurance and life insurance, he may obtain both insurance brokerage practitioner certificates.
Education and Training
There are two types of education and training
for an insurance broker, pre-vocational and on-the-job education and training. An insurance broker must attend pre-vocational education
and training for at least 32 hours during the one year before applying for practicing insurance broker business and on-the-job
education and training for at least 16 hours with law courses for no less than 8 hours per year, commencing after one year from
the issuance of this latest Broker Rule.
Management of Insurance Brokerages
The rules describing how to conduct brokerage
business concentrate on the concept that the brokerages must take care of customers' matters in good faith. To ensure that this
concept is properly carried out, the rules require insurance brokerage companies must have legal compliance officers who have one
of the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual signatories; (2)
have five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3) have graduated from
college and university departments related to insurance or law with more than three years working experience in insurance industry,
insurance agency or insurance brokerage.
Regulation of Insurance Salespersons
The current principal regulation governing
individual insurance salespersons is the Rules on the Administration of Insurance Salespersons latest amended on April 6, 2017
by Insurance Bureau of FSC (the “Salesperson Rule”). An insurance salesperson falling under the Insurance Law refers
to a person who is engaged in attracting insurance business for insurance companies, insurance brokerage companies and insurance
agency companies. A salesperson is not allowed to attract business for the company he belongs to unless he has completed the registration
in accordance with the Salesperson Rules and has obtained the registration certificate. In order to obtain the registration certificate,
an insurance salesperson must be at least 20 years old and has at least graduated from a senior high school or a senior vocational
school or have an equivalent educational background. In addition, the salesperson must meet one of the following requirements:
(1) passed the salesperson qualification examination held by relevant associations; or (2) have a valid the registration certificate.
Once the salespersons passed the qualification examination, the relevant association will notify the company where the salesperson
works, then the company will issue a registration certificate for the salesperson and file such registration certificate with the
relevant authorities. The registration certificate is valid for five years and must be renewed before expiration. The salesperson
must present the registration certificate before they start attracting insurance business. Unless approved by the company, the
salesperson may not work for any other insurance company, insurance brokerage company or insurance agency company. The company
supervises the work of the salesperson and is joint and severally liable for any damage caused by its salesperson.
Education and Training
Salespersons must attend in education and
training held by their companies every year, or the companies shall revoke the registration certificates of those who fail to attend
such education and training.
The Salesperson Rule also stipulates the
proper ways and manners to be followed by the salespersons in conducting their businesses and specifies the penalties in case of
their violation of the Salesperson Rule.
Taiwan Regulations on Foreign
Exchange
Foreign exchange regulation in Taiwan is
primarily governed by the Ordinance of Foreign Exchange Administration, latest amended on April 29, 2009 (the “Foreign Exchange
Ordinance”). Under the Foreign Exchange Ordinance, foreign exchange refers to foreign currency, bills and marketable securities.
The authority managing the administration of foreign exchange is Ministry of Finance of Republic of China, while the authority
managing the practical operation of foreign exchange business is Central Bank of Republic of China. The Foreign Exchange Ordinance
also specifies the allocated power of Ministry of Finance and Central Bank, respectively. To the extent that any foreign exchange
receipts, payments or transactions reach the threshold of NT$500,000 ($16,653) or equivalent in foreign currency, it must be reported
to the Central Bank or its designated authorities. Upon incurrence of any of the following events, the State Council of Republic
of China may determine and announce that for a period of time, to close the foreign exchange market, suspend or restrict all or
partial foreign exchange payment, order a mandatory sale or deposit of all or partial foreign exchange into a designed bank, or
dispose in any other manner as it deems necessary:
|
·
|
the disorder in domestic or international economy to the detriment of the stability of Taiwan’s
economy; or
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|
·
|
Taiwan suffers serious trade deficit.
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Taiwan Regulation on Foreign
Investment
The current principal regulation governing
foreign investment is Statute For Investment By Foreign Nationals latest amended on November 19, 1997 (the “Investment Statute”).
Under the Investment Statute, investment refers to any activities involving (1) holding share capital of a company incorporated
in Taiwan; (2) establishing branches, wholly-owned or partnership enterprises in Taiwan; or (3) providing more than one-year term
loan to the above-mentioned investee enterprises. The authority in charge of foreign investment is Ministry of Economic Affairs
of Republic of China. The industries in Taiwan are categorized into permitted, restricted and prohibited foreign investment areas.
Investors may apply for settlement of exchange in accordance with the annual yield of their investment or the allocation of surplus.
Eminent Domain
When the investment made by an investor
constitutes less than 45% of the total amount of capital of the investee enterprise, and the investee enterprise has been expropriated
or acquired by the government for the purpose of national defense, reasonable government compensation shall be paid to the investors.
However, if the capital contribution made by the investor constitutes at least 45% of the total amount of capital of the investee
enterprise and continues remaining above 45% for two decades since its establishment, then the government may not exercise its
eminent domain power over such investee enterprise.
Taiwan Regulations on Tax
The current principal regulations governing
tax in Taiwan include the following:
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·
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Income Tax Law, latest amended on February 7, 2018;
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|
·
|
The Implementation Rules of Income Tax Law, latest amended on September 30, 2014;
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|
·
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Value-Added and Non-Value-Added Business Tax Law, latest amended on June 14, 2017; and
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|
·
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The Enforcement Rules of Value-Added And Non-Value-Added Business Tax Law, latest amended on May
1, 2017.
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Under the Income Tax Law, there are two
kinds of income tax, comprehensive income tax for individuals and income tax for enterprises operating for profit, respectively.
Individuals who have income with a source
within Taiwan must pay comprehensive income tax on their income sourced within Taiwan; while non-resident individuals having income
with a source within Taiwan, except otherwise provided in the Income Tax Law, shall pay tax based on the amount attributable to
the sources of their income.
The enterprise with head office located
in Taiwan shall pay profit-seeking income tax on its global income both within and outside Taiwan; while the enterprises with head
office outside Taiwan shall only pay profit-seeking income tax on its business income sourced from within Taiwan.
Rate of Income Tax
The individual comprehensive income tax
exemption threshold is NT$60,000 per person per year. Any income beyond such exemption threshold is subject to a progressive tax
rate ranging from 5% to 40%.
With respect to enterprises operating for
profit, the exemption threshold is NT$120,000. Any income beyond such exemption threshold is subject to 20% tax rate on its taxable
income.
Sale of goods or service, import of goods
in Taiwan are subject to a Value-Added or Non-Value-Added Business Tax. The Rate of business tax, except as otherwise stipulated
in the relevant tax law, ranges from 5% to 10% as determined by the State Council of Taiwan.
PRC Regulations of the Insurance
Industry
The insurance industry in the PRC is highly
regulated. CIRC is the regulatory authority responsible for the supervision of the Chinese insurance industry. Insurance activities
undertaken within the PRC are primarily governed by the Insurance Law and the related rules and regulations.
Initial Development of Regulatory Framework
The Chinese Insurance Law was enacted in
1995. This original insurance law, which we refer to as the 1995 Insurance Law, provided the initial framework for regulating the
domestic insurance industry. Among the steps taken under the 1995 Insurance Law were the following:
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(a)
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Licensing of insurance companies and insurance intermediaries, such as agencies and brokerages.
The 1995 Insurance Law established requirements for minimum registered capital levels, form of organization, qualification of senior
management and adequacy of the information systems for insurance companies, insurance agencies and brokerages.
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(b)
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Separation of property and casualty insurance and life insurance businesses. The 1995 Insurance
Law distinguished insurance between property, casualty, liability and credit insurance businesses, on the one hand, and life, accident
and health insurance businesses on the other, and prohibited insurance companies from engaging in both types of businesses.
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(c)
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Regulation of market conduct by participants. The 1995 Insurance Law prohibited fraudulent and
other unlawful conduct by insurance companies, agencies and brokerages.
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(d)
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Substantive regulation of insurance products. The 1995 Insurance Law gave insurance regulators
the authority to approve the policy terms and premium rates for certain insurance products.
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(e)
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Financial condition and performance of insurance companies. The 1995 Insurance Law established
reserve and solvency standards for insurance companies, imposed restrictions on investment powers and established mandatory reinsurance
requirements, and put in place a reporting regime to facilitate monitoring by insurance regulators.
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(f)
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Supervisory and enforcement powers of the principal regulatory authority. The principal regulatory
authority, then the People’s Bank of China, was given broad powers under the 1995 Insurance Law to regulate the insurance
industry.
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Establishment of the CIRC and 2002 Amendments to the
Insurance Law
China’s insurance regulatory regime
was further strengthened with the establishment of the CIRC in 1998. The CIRC was given the mandate to implement reform in the
insurance industry, minimize insolvency risk for Chinese insurers and promote the development of the insurance market.
The 1995 Insurance Law was amended in 2002
and the amended insurance law, which we refer to as the 2002 Insurance Law, became effective on January 1, 2003. The major amendments
to the 1995 Insurance Law include:
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(a)
|
Authorizing the CIRC to be the insurance supervisory and regulatory body nationwide. The 2002 Insurance
Law expressly grants the CIRC the authority to supervise and administer the insurance industry nationwide.
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(b)
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Expanding the permitted scope of business of property and casualty insurers. Under the 2002 Insurance
Law, property and casualty insurance companies may engage in the short-term health insurance and accident insurance businesses
upon the CIRC’s approval.
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|
(c)
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Providing additional guidelines for the relationship between insurance companies and insurance
agents. The 2002 Insurance Law requires an insurance company to enter into an agent agreement with each insurance agent that will
act as an agent for such insurance company. The agent agreement sets forth the rights and obligations of the parties to the agreement
as well as other matters pursuant to law. An insurance company is responsible for the acts of its agents when the acts are within
the scope authorized by the insurance company.
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(d)
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Relaxing restrictions on the use of funds by insurance companies. Under the 2002 Insurance Law,
an insurance company may use its funds to make equity investments in insurance-related enterprises, such as asset management companies.
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(e)
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Allowing greater freedom for insurance companies to develop insurance products. The 2002 Insurance
Law allowed insurance companies to set their own policy terms and premium rates, subject to the approval of, or a filing with,
the CIRC.
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2009 Amendments to the Insurance Law
The 2002 Insurance Law was amended again
in 2009 and the amended insurance law, which we refer to as the 2009 Insurance Law, became effective on October 1, 2009. The major
amendments to the 2002 Insurance Law include:
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(a)
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Strengthening protection of the insured’s interests. The 2009 Insurance Law added a variety
of clauses such as incontestable clause, abstained and estoppel clause, common disaster clause and amending immunity clause, claims-settlement
prescription clause, reasons for claims rejection and contract modification clause.
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(b)
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Strengthening supervision on the qualification of the shareholders of the insurance companies and
setting forth specific qualification requirements for the major shareholders, directors, supervisors and senior managers of insurance
companies.
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(c)
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Expanding the business scope of insurers and further relaxing restriction on the use of fund by
insurers.
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(d)
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Strengthening supervision on solvency of insurers with stricter measures.
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(e)
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Tightening regulations governing the administration of insurance intermediary companies, especially
those relating to behaviors of insurance agents.
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According to the 2009 Insurance Law, the
minimum registered capital required to establish an insurance agency or insurance brokerage as a company must comply with the PRC
Company Law. The registered capital or the capital contribution of insurance agencies or insurance brokerages must be paid-up capital
in cash. The 2009 Insurance Law also sets forth some specific qualification requirements for insurance agency and brokerage practitioners.
The senior managers of insurance agencies or insurance brokerages must meet specific qualification requirements, and their appointments
are subject to approval of the CIRC. Personnel of an insurance agency or insurance brokerage engaging in the sales of insurance
products must meet the qualification requirements set by the CIRC and obtain a qualification certificate issued by the CIRC. Under
the 2009 Insurance Law, the parties to an insurance transaction may engage insurance adjusting firms or other independent appraisal
firms that are established in accordance with applicable laws, or persons who possess the requisite professional expertise, to
conduct assessment and adjustment of the insured subject matters. Additionally, the 2009 Insurance Law specifies additional legal
obligations for insurance agencies and brokerages.
The 2009 Insurance Law was revised again
on April 24, 2015, the 2015 Insurance Law, with an aim to further eliminate various administrative approvals as well as grant more
market discretion to participants, among which, (i) the requirement of prior approval by CIRC to establish an insurance agency
or an insurance brokerage; (ii) the requirement on personnel or senior managers of an insurance agency or an insurance brokerage
to obtain certain relevant qualification certificate; or (iii) the requirement of prior approval for split, merger or change of
organizational form of an insurance agency company or an insurance brokerage company.
On October 14, 2015, Legislative Affairs
Office of the State Council circulated the Provisions on Amendment to Insurance Law (Draft) (the “2015 Draft Insurance Law”)for
public opinion until November 14, 2015, with an aim to further grant market discretion to participants while strengthen supervision
afterwards, among which, (i) allows insured funds to be invested in equity, insurance assets management products as well as financial
derivative products for the purposes of risk management, (ii) allows pension insurance products to be provided, (iii) eliminate
the limit on self-reserved insurance premiums of property insurance company, (iv) perfect the relevant rules and regulations, especially
those on insurance solvency supervision, (v) strengthen the crackdown of illegal insurance activities, including substantially
increased penalty fines, and (vi) impose certain measures for the protection of the insured, including a mandatory requirement
of at least 20-day hesitation period for any life insurance with a term over one year and prohibition of any illegal disclosure,
sale or otherwise provision of the insured’s personal information by insurance companies and intermediaries.
The CIRC
The CIRC has extensive authority to supervise
insurance companies and insurance intermediaries operating in the PRC, including the power to:
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(a)
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promulgate regulations applicable to the Chinese insurance industry;
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|
(b)
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investigate insurance companies and insurance intermediaries;
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|
(c)
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establish investment regulations;
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|
(d)
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approve policy terms and premium rates for certain insurance products;
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(e)
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set the standards for measuring the financial soundness of insurance companies and insurance intermediaries;
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|
(f)
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require insurance companies and insurance intermediaries to submit reports concerning their business
operations and condition of assets; order the suspension of all or part of an insurance company or an insurance intermediary’s
business;
|
|
(g)
|
approve the establishment, change and dissolution of an insurance company, an insurance intermediary
or their branches;
|
|
(h)
|
review and approve the appointment of senior managers of an insurance company, an insurance intermediary
or their branches; and
|
|
(i)
|
punish improper behaviors or misconducts of an insurance company or an insurance intermediary.
|
Regulation of Insurance Agencies
The principal regulation governing insurance
agencies is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency Provisions”)
promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration
of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. According to the Agency Provisions,
the establishment of an insurance agency is subject to minimum registered capital requirement and other requirements and the approval
of the CIRC. The term “insurance agency” refers to an entity that engages in insurance agency business within the authorization
of, and collects commissions from, insurance companies, including the professional insurance agency companies and their branches.
The insurance agency shall meet the qualification requirements specified by the CIRC, obtain the license to conduct an insurance
agency business with the approval of the CIRC. An insurance agency may take any of the following forms: (i) a limited liability
company; or (ii) a joint stock limited company. An insurance agency must have a registered capital of at least RMB2 million ($313,332).
Where it is established as a nationwide company, its registered capital must be at least RMB10 million ($1,566,661). The registered
capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions (the “2013
Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on
Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million). On October 19,
2015, CIRC issued the Decision on Revising Eight Regulations including Provisions on Insurance Companies Setting up Offshore Insurance
Organizations, which made certain revisions to the 2013 Agency Provisions (the “2015 Agency Provisions”), among which,
(i) eliminate the requirement of prior approval by CIRC to establish an insurance agency; (ii) eliminate the requirement on personnel
or senior managers of an insurance agency to obtain certain relevant qualification certificate; or (iii) eliminate the requirement
of prior approval by CIRC on split, merger or change of organizational form of an insurance agency company.
On May 16, 2013, CIRC issued the 2013 Notice,
pursuant to which, professional insurance agency established prior to the issuance of the Decision on Revising the Agency Provisions,
with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces where
they have the registered office or branch office, but shall not set up any new branches in any province where they do not have
the registered office or any branch office.
On September 17, 2015, CIRC issued Opinions
on Deepening the Reformation of Insurance Intermediary Market (the “Reformation Opinions”), pursuant to which, CIRC
will take further actions to simplify unnecessary administrative procedures, among which, the elimination of 8 administrative approvals,
including the cancellation of previously required qualification certificate for insurance salesperson, the previously required
approval for the split, merger, organizational change, set-up of branch office and exit of insurance agency and brokerage company.
CIRC will also focus on (i) improving management over entry into and exit from insurance intermediary market and setting up a multilayered
service system; (ii) encouraging and pushing forward reformation and innovation to improve intermediary service; (iii) strengthening
self-management and supervision and promoting the improvement of industrial quality; (iv) placing stronger supervision and management
and improving the comprehensive administrative efficiency; (v) focusing more on organizational construction and industrial self-control;
and (vi) consummating information disclosure system and making better use of social supervision.
On September 29, 2016, CIRC circulated
the Notice on Issuance of Business License to Insurance Intermediaries. In order to promote the sound and steady development of
insurance intermediary market, CIRC instructed its local counterparts to focus on the followings factors while managing the business
licenses of insurance intermediaries: (i) capital contributions to be self-owned, genuine and legal; (ii) registered capital to
be deposited into an escrow account set up with qualified commercial bank; (iii) to maintain sufficient and valid professional
liability insurance; (iv) reasonable and viable business model; (v) established corporate governance; and (vi) to undergo mandatorily
required risk assessment.
An insurance agency may engage in the following
insurance agency businesses:
|
(a)
|
selling insurance products on behalf of the insurer principal;
|
|
(b)
|
collecting insurance premiums on behalf of the insurer principal; and
|
|
(c)
|
conducting loss surveys and handling claims of insurance businesses on behalf of the insurer principal;
and other business activities specified by the CIRC.
|
The name of an insurance agency must contain
the words “insurance agency” or “insurance sales.” The license of an insurance agency company is valid
for a period of three years and may be renewed with due application 30 days prior to its expiration. An insurance agency must report
to the CIRC when it (i) changes its registered name or the name of its branches; (ii) changes its registered address or the operating
address of its branches; (iii) the sponsors or major shareholders change their respective name; (iv) changes its major shareholders;
(v) changes its registered capital; (vi) materially changes its equity structure; (vii)changes its organizational form; (viii)
split, merger; (ix) amends its articles of association; or (x) sets up or closes its branches. The senior managers of an insurance
agency including its branches must meet specific qualification requirements set forth in the Agency Provisions. The appointment
of the senior managers of an insurance agency including its branches is subject to review and approval of the CIRC.
Regulation of Insurance Brokerages
The principal regulation governing insurance
brokerages is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the “Brokerage Provisions”)
promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration
of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1, 2005. According to this Brokerage Provisions,
the establishment of an insurance brokerage is subject to the approval of the CIRC. The term “insurance brokerage”
refers to an entity provides brokerages service on the execution of the insurance contract between the insured and the insurance
company based on the interests of the insured and collects commission as agreed, including the insurance brokerage companies and
their branches, The insurance brokerage shall meet the qualification requirements specified by the CIRC and obtain the license
to operate an insurance brokering business with the approval of the CIRC. Insurance brokering business includes both direct insurance
brokering, which refers to brokering activities on behalf of insurance applicants or the insured in their dealings with the insurance
companies, and reinsurance brokering, which refers to brokering activities on behalf of insurance companies in their dealings with
reinsurance companies. An insurance brokerage may take any of the following forms: (i) a limited liability company; or (ii) a joint
stock limited company. An insurance brokerage company must have a registered capital or capital contribution of at least RMB10
million ($1,566,661). The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the
Brokerage Provisions (the “2013 Brokerage Provisions”), pursuant to which, CIRC has mandated any insurance brokerage
established subsequent to the 2013 Brokerage Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1
million).On October 19, 2015, CIRC issued the Decision on Revising Eight Regulations including Provisions on Insurance Companies
Setting up Offshore Insurance Organizations, which made certain revisions to the 2013 Agency Provisions (the “2015 Brokerage
Provisions”), among which, (i) eliminate the requirement of prior approval by CIRC to establish an insurance brokerage company;
(ii) eliminate the requirement on personnel or senior managers of an insurance brokerage company to obtain certain relevant qualification
certificate; or (iii) eliminate the requirement of prior approval by CIRC on split, merger or change of organizational form of
an insurance brokerage company.
On May 16, 2013, CIRC issued the 2013 Notice,
pursuant to which, professional insurance brokerage established prior to the issuance of the Decision on Revising the Brokerage
Provisions, with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces
where they have the registered office or branch office, but shall not set up any new branches in any province where they do not
have the registered office or any branch office.
On September 17, 2015, CIRC issued Opinions
on Deepening the Reformation of Insurance Intermediary Market (the “Reformation Opinions”), pursuant to which, the
following targets were erected for future reformation of insurance intermediary market: (i) improve management over entry into
and exit from insurance intermediary market and set up a multilayered service system; (ii) encourage and push forward reformation
and innovation and improve intermediary service; (iii) strengthen self-management and supervision and promote the improvement of
industrial quality; (iv) place stronger supervision and management and improve the comprehensive administrative efficiency; (v)
pay more attention to organizational construction and industrial self-control; and (vi) consummate information disclosure system
and make better use of social supervision. The Reformation Opinions will be beneficial to both the improvement of reformation and
development conducted by insurance intermediaries on their own and transformation and upgrading of the insurance intermediary market.
An insurance brokerage may conduct the
following insurance brokering businesses:
|
(a)
|
making insurance proposals, selecting insurance companies and handling the insurance application
procedures for the insurance applicants;
|
|
(b)
|
assisting the insured or the beneficiary to claim compensation;
|
|
(c)
|
reinsurance brokering business; and
|
|
(d)
|
providing consulting services to clients with respect to disaster and damage prevention, risk assessment
and risk management; and other business activities specified by the CIRC.
|
The name of an insurance brokerage must
contain the words “insurance brokerage.” The license of an insurance brokerage company is valid for three years and
may be renewed with due application 30 days prior to its expiration. An insurance brokerage must report to the CIRC when it (i)
changes its registered name or the name of its branches; (ii) change its registered address or the operating address of its branches;
(iii) the sponsors or the major shareholders change their respective name; (iv) changes its major shareholders; (v) changes its
registered capital; (vi) materially changes its equity structure; (vii)changes its organizational form; (viii) split, merger; (ix)
amends its articles of association; or (x) sets up or closes its branches. The senior managers of an insurance brokerage including
its branches must meet specific qualification requirements set forth in the Brokerage Provisions. Appointment of the senior managers
of an insurance brokerage including its branches is subject to review and approval by the CIRC.
On February 9, 2018, the CIRC issued the
Provisions on the Regulation of Insurance Brokers (the “Provisions”), effective as of May 1, 2018. With a total of
109 articles in eight chapters, the Provisions highlight the improved market access and exit, the effective management of matters
no long requiring licensing, the promotion of specialized and well-regulated operations, and the increased protection of consumers’
rights and interests. In particular, the Provisions make adjustments to optimize licensing procedures for insurance brokerage and
tighten examination of shareholders of insurance brokerage firms; also, the Provisions set forth explicit requirements in respect
of the source of capital contributed by shareholders, custodian of the registered capital, corporate governance and internal control,
and information system, and standardize the requirements on qualifications of senior executives in brokerage firms.
Regulation of Insurance Salespersons
The principal regulation governing individual
insurance salespersons is the Measures on the Supervision of Insurance Salespersons issued by the CIRC on January 6, 2013 and effective
on July 1, 2013, which replaced the Provisions on the Administration of Insurance Salespersons promulgated on April 6, 2006 and
effective on July 1, 2006. Under this regulation, the term “insurance salesperson” refers to an individual who sells
insurance products for an insurance company, including those who are engaged by insurance companies or by insurance agencies. To
engage in insurance sales activities as an insurance salesperson, a person first must pass the qualification examination for the
insurance agency practitioners organized by the CIRC to obtain a “Qualification Certificate of Insurance Agency Practitioners”.
The person must have a junior high school education or above to be qualified for the examination. In addition to the qualification
certificate, a person must be registered with the CIRC’s Insurance Intermediary Supervision Information System and obtain
a “Practice Certificate of Insurance Salespersons” issued by the insurance company or insurance agency to which he
or she belongs in order to conduct insurance sales activities. On August 3, 2015, CIRC issued the Notice on Relevant Issues to
Management of Insurance Intermediary Practitioners (the “2015 Notice”), pursuant to which, the qualification certificate
is no more a pre-requisite condition for insurance intermediary practitioners to practice, instead, the insurance intermediary
companies where such practitioners work shall complete the practitioners registration for them and conduct professional training.
CIRC branches shall not accept any application for qualification approval of insurance salesperson (including insurance agency
practitioners) any more.
Regulation of Insurance Brokerage Practitioner and Insurance
Adjustment Practitioners
The principal regulation governing insurance
brokerage practitioners and insurance adjustment practitioners is the Measures on the Supervision of Insurance Brokerage Practitioners
and Insurance Adjustment Practitioners issued by the CIRC on January 6, 2013 and effective on July 1, 2013. To engage in the insurance
brokerage activities as an insurance brokerage practitioner, or in the insurance adjustment activities as an insurance adjustment
practitioner, a person first must pass the qualification examination organized by the CIRC for the insurance brokerage practitioners
or for the insurance adjustment practitioners to obtain a “Qualification Certificate of Insurance Brokerage Practitioners”
or a “Qualification Certificate of Insurance Adjustment Practitioners”. The person must have a tertiary education or
above to be qualified for the examination. In addition to the qualification certificate, a person also must be registered with
the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice Certificate of Insurance Brokerage
Practitioners” or “Practice Certificate of Insurance Adjustment Practitioners” issued by the insurance brokerage
firm or insurance claims adjusting company to which he or she belongs in order to conduct insurance brokerage or claims adjustment
activities. An insurance brokerage practitioner is not allowed to conduct insurance brokerage activities on behalf of himself or
herself. On August 3, 2015, CIRC issued the 2015 Notice, pursuant to which, the qualification certificate is no more a pre-requisite
condition for insurance intermediary practitioners (including insurance adjustment practitioners) to practice, instead, the insurance
intermediary companies where such practitioners work shall complete the practitioners registration for them and conduct professional
training. CIRC branches shall not accept any application for qualification approval of insurance brokerage practitioners any more.
Content Related to Insurance Industry in the Legal Documents
of China’s Accession to the WTO
According to the Circular of the CIRC on
Distributing the Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO, for the life
insurance sector, within three years of China’s accession to the WTO on December 11, 2001, geographical restrictions were
to be lifted, equity joint venture companies allowed to provide health insurance, group insurance, and pension/annuity services
to Chinese citizens and foreign citizens, and no other restrictions allowed except those on the proportion of foreign investment
(no more than 50%) and establishment conditions. For the non-life insurance sector, within three years of China’s accession,
the geographical restrictions were to be lifted and no restrictions allowed other than establishment conditions. For the insurance
brokerage sector, within five years of China’s accession, the establishment of wholly foreign-funded subsidiary companies
was to be allowed, and no restrictions allowed other than establishment conditions and restrictions on business scope.
According to the latest Catalogue of Industries
for Guiding Foreign Investment (2015 Revision) issued by Ministry of Commerce on March 10, 2015 with effective date on April 10,
2015, both the insurance agency and insurance brokerage do not fall into the prohibited or restricted category any more. On January
12, 2017, the State Council issued the Notice on Certain Measures to Strengthen Opening up and Utilization of Foreign Investment,
pursuant to which, restrictions on foreign investors entry into the industry of insurance institutions and insurance intermediaries
within China will be further relaxed. However, as these regulations are still relatively new, local CIRC counterparts may have
different interpretations. Based on the consultation by the Company with the relevant local counterparts of CIRC, they are of the
view that the proportion of foreign investment in insurance intermediaries shall not exceed 24.9%.
PRC Regulations on Foreign
Exchange
Foreign Currency Exchange
Foreign exchange regulation in China is
primarily governed by the following rules:
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Foreign Currency Administration Rules (2008 Revision), as amended or revised, or the Exchange Rules;
and
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Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), as amended
or revised, or the Administration Rules.
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Under the Exchange Rules, the RMB is convertible
for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange
transactions. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation
of investment, however, is still subject to the approval of the SAFE or relevant authorities.
Under the Administration Rules, foreign-invested
enterprises may only buy, sell or remit foreign currencies at those banks authorized to conduct foreign exchange business after
providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital
investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry
of Commerce, the SAFE and the State Development and Reform Commission.
On June 9, 2016, SAFE issued the Notice
on Reforming and Regulating Management Policies of Settlement of Foreign Exchange under Capital Accounts, pursuant to which, the
domestic entity may, depending on its actual operation need, settle its revenue in foreign currency with the bank, provided such
revenue falls into those under capital accounts with explicit policy on settlement by willingness; while for those revenue under
capital accounts still subject to restrictive regulations, such applicable policies shall prevail.
On January 26, 2017, SAFE issued the Notice
on Further Promoting the Reform of Foreign Exchange Management and Strengthening Verification on Authenticity and Legality, pursuant
to which, banks are mandated to strengthen verification on authenticity and legality on foreign exchange conversion and remittance
offshore.
PRC Regulations on Dividend
Distribution
The principal regulations governing dividend
distributions of wholly foreign-owned companies include:
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Wholly Foreign-Owned Enterprise Law (2016), as amended or revised; and
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Wholly Foreign-Owned Enterprise Law Implementing Rules (2016 Revision), as amended or revised.
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Under these regulations, wholly foreign-owned
companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards.
In addition, these wholly foreign-owned companies are required to set aside at least 10% of their respective accumulated profits
each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of its registered capital.
These reserve funds are not distributable as cash dividends. On January 19, 2015, MOFCOM published a draft version of a proposed
Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. MOFCOM has requested comments
from the public on the Draft Foreign Investment Law by February 17, 2015, which, once promulgated, will replace and integrate the
three existing laws over foreign investment, including the Foreign-Invested Enterprise Law.
PRC Regulations on Tax
PRC Enterprise Income Tax
The PRC EIT is calculated based on the
taxable income determined under the PRC accounting standards and regulations, as well as the EIT law. On March 16, 2007, the National
People’s Congress of China enacted the EIT Law, a new EIT law which became effective on January 1, 2008. On December 6, 2007,
the State Council promulgated the Implementation Rules which also became effective on January 1, 2008. On December 26, 2007, the
State Council issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the EIT Law, or
the Transition Preferential Policy Circular, which became effective simultaneously with the EIT Law. The EIT Law imposes a uniform
EIT rate of 25% on all domestic enterprises and foreign-invested enterprises unless they qualify under certain exceptions. Under
the EIT Law, as further clarified by the Implementation Rules, the Transition Preferential Policy Circular and other related regulations,
enterprises that were established and already enjoyed preferential tax treatments before March 16, 2007 will continue to enjoy
them in the following manners: (i) in the case of preferential tax rates, for a five-year period starting from January 1, 2008,
during which the tax rate will gradually increase to 25%; or (ii) in the case of preferential tax exemption or reduction for a
specified term, until the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments yet
because of its failure to make a profit, its term for preferential treatment will be deemed to start from 2008.
PRC Business Tax and Implementation of VAT
Taxpayers providing taxable services in
China were required to pay a business tax at a normal tax rate of 5% of their revenues, unless otherwise provided. According to
the Announcement on the VAT Reform Pilot Program of the Transportation and Selected Modern Service Sectors issued by the State
Tax Bureau in July 2012, the transportation and some selected modern service sectors, including research and development and technical
services, information technology services, cultural creative services, logistics support services, tangible personal property leasing
services, and assurance and consulting service sectors, should pay value-added tax instead of business tax based on a predetermined
timetable (hereinafter referred to as the “VAT Reform”), effective September 1, 2012 for entities in Beijing and October
1, 2012 for entities in Jiangsu. In March 2016, the PRC State Council further expanded the application of VAT to several other
key sectors, including real estate, construction, financial services and lifestyle services, effective May 1, 2016.
As of December 31, 2017, all of our Consolidated
Affiliated Entities have been requested to convert into the VAT system.
Dividend Withholding Tax
Under the PRC tax laws effective prior
to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises are exempt from PRC withholding tax. Pursuant
to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries
are under a 5% withholding tax subject to PRC laws and regulations, provided that we are determined by the relevant PRC tax authorities
to be a “non-resident enterprise” under the EIT Law.
AVAILABLE INFORMATION
Copies of our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Sections
13(a) or 15(d) of the Securities Exchange Act of 1934, and other filings made with the Securities and Exchange Commission, are
available free of charge through our Web site (http://cuis.asia/cuis_en, under the Investor Relations section) as soon as reasonably
practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. The inclusion
of our Web site address in this report does not include or incorporate by reference into this report any information contained
on, or accessible through, such Web sites.
Item 1A. RISK FACTORS
You should carefully consider the risks
described below together with all of the other information included in this Form 10-K. The statements contained in or incorporated
herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in or implied by forward-looking statements. See “Cautionary Statement
Regarding Forward-Looking Statements.” If any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, you may lose all or part of your investment.
Risks Relating to Our Business
We have been charged with fraud
for manipulating the Company's trading volume.
On December 20, 2018, we agreed to settle
fraud charges brought by the SEC relating to a scheme to manipulate the Company's trading volume and the Company substantially
cooperated with the SEC’s investigation into the activities that led the SEC to bring the fraud charges. Based upon the Company's
substantial cooperation with the SEC’s investigation, the SEC is not seeking a monetary penalty against the Company. While
the Company did not realize any financial gain from this scheme and settled the SEC fraud charges with no economic loss, we can
make no assurances that there will be not be more serious consequences were we to be accused of engaging in this scheme in the
future.
We have restated our prior
consolidated financial statements, which may lead to additional risks and uncertainties.
This Annual Report on Form 10-K of the
Company for the fiscal year ended December 31, 2017, includes restatement of our previously filed consolidated financial statements
and the related consolidated statements of operations, shareholders' equity and cash flows as of and for the fiscal years ended
December 31, 2016 and 2017, as well as restated unaudited condensed consolidated financial information as of and for the interim
periods ended March 31, 2017, June 30, 2017 and September 30, 2017. The determination to restate these financial statements was
made by our Audit Committee upon management's recommendation. As a result of these events, we have become subject to a number of
additional risks and uncertainties, including substantial unanticipated costs for accounting and legal fees in connection with
or related to the restatement. Likewise, such events might cause a diversion of our management's time and attention.
We have identified material weaknesses
in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial
conditions and results of operations in a timely and accurate manner, result in material misstatements in our financial statements
and cause current and potential shareholders to lose confidence in our financial reporting, which in turn could adversely affect
the trading price of our common stocks.
We have concluded that there are material
weaknesses in our internal control over financial reporting, such as 1) the process to hire qualified employees who have proficient
knowledge of US GAAP, and can identify unusual transactions timely and appropriately assessed for financial report impact was not
maintained, 2) the structure, authority, and responsibilities to ensure the objective of internal control over financial reporting
were adequately achieved was not maintained, and 3) the design of our internal control did not include a precise review of the
completeness of the bonus revenue at the period end. These material weaknesses resulted in material misstatements of our historical
financial statements, which necessitated a restatement of our consolidated financial statements for the years ended December 31,
2015 and 2016 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2017.
Disclosure related to the restatement adjustment are included in Part II, Item 8, Note 27 and 28 of this From 10-K.
Under standards established by the Public
Company Accounting Oversight Board (“PCAOB”), 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 our annual
or interim financial statements will not be prevented or detected and corrected on a timely basis. The existence of this issue
could adversely affect us, our reputation or investor perceptions of us. We have and will continue to take additional measures
to remediate the underlying causes of the material weaknesses noted above. As we continue to evaluate and work to remediate the
material weaknesses, we may determine to take additional measures to address the control deficiencies. Also, see Item 9A in Part
II of this Form 10-K. We expect to incur additional costs remediating these material weaknesses.
Although we plan to complete this remediation
process as quickly as possible, we cannot at this time estimate how long it will take, and our measure may not prove to be successful
in remediating these material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional
material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occurred in
the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial
results. In addition, if we are unable to successfully remediate these material weaknesses and if we are unable to produce accurate
and timely financial statements, our stock price may be adversely affected.
If we are unable to obtain
and maintain the licenses to operate our business, our business prospects and future results of operations would be adversely affected.
We operate our businesses with approvals
and licenses granted by the government. If these approvals or licenses are revoked or suspended or are not renewed, or if we are
unable to obtain any additional licenses that we may need to operate or expand our business in the manner we desire, then our financial
condition and results of operations, as well as our prospects, will suffer.
On February 9, 2018, the CIRC issued the
Provisions on the Regulation of Insurance Brokers (the “Provisions”), effective as of May 1, 2018. As an insurance
broker, Jiangsu Law, may potentially be impacted by the Provisions, given that the Provisions grant regulatory authorities greater
discretionary power over approval of license renewal request, which may increase the risk of non-renewal.
We face substantial political
risks associated with doing business in Taiwan, particularly due to domestic political events and the tense relationship between
Taiwan and the People’s Republic of China, which could adversely affect our financial condition and results of operations.
Law Broker’s executive office and
substantial assets are located in Taiwan and most of our revenues are derived from our operations in Taiwan currently. Accordingly,
our business, financial condition and results of operations and the market price of our common shares may be affected by changes
in Taiwan governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments
in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan
and the Chinese mainland have been separately governed. The PRC claims it is the sole government in China and that Taiwan is part
of China. Although significant economic and cultural relations have been established between Taiwan and the PRC, such as the engagement
of Economic Cooperation Framework Agreement (“ECFA”) in 2010 and Cross-strait Investment Protection and Promotion Agreement
in 2012, relations may become strained again. On June 21, 2013, Association for Relations Across the Taiwan Straits of the PRC
and Straits Exchange Foundation of Taiwan entered into the Cross-Strait Agreement on Trade in Services, with the aim of smoothing
and extending the cooperation between the PRC and Taiwan accordingly. However, as of the date of this Annual Report on Form 10-K,
the Taiwan government has not approved Cross-Strait Agreement on Trade in Services. The PRC government has refused to renounce
the use of military force to gain control over Taiwan. Past developments in relations between the Taiwan and the PRC have on occasion
depressed the market prices of the securities of companies in Taiwan. Relations between the Taiwan and the PRC and other factors
affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and
results of operations, as well as the market price and the liquidity of our securities. In addition, the complexities of the relationship
between the Taiwan and PRC require companies involved in cross-strait business operations to carefully monitor its actions and
manage its relationships with both Taiwan and PRC governments. We cannot assure you that we will be able to successfully manage
our relationships with the Taiwan and PRC governments for our cross-strait business operations, which could have an adverse effect
on our ability to expand our business and conduct cross-strait business operations.
Sales of our products are concentrated
in a few select markets. Adverse developments in these markets could have a material and disproportionate impact on us.
Our revenues are highly concentrated in
a few select markets, including Taiwan and PRC. Net revenues generated from sales to customers in Taiwan and PRC, in the aggregate,
accounted for approximately 100% of the Company’s net revenues for the years ended December 31, 2017 and 2016, respectively.
As a result of the concentration of our revenues in these markets, economic downturns, changes in governmental policies and increased
competition in these markets could have a material and disproportionate impact on our revenues, operating results, business and
prospects.
If we fail to attract and retain
productive sales professionals or agents, our business could suffer.
Our entire sales of life, property and
casualty insurance products are conducted through our individual sales professionals or agents, who are independent contractors,
not our employees. Some of these sales professionals or sales agents are significantly more productive than others in generating
sales. If we are unable to attract and retain the core group of highly productive sales professionals or sales agents, our business
could be materially and adversely affected. Competition for sales personnel from insurance companies and other insurance intermediaries
may also force us to increase the compensation of our sales professionals or sales agents, which would increase operating costs
and reduce our profitability.
Our business and prospects
could be materially and adversely affected if we are not able to manage our growth successfully.
Law Broker commenced its insurance intermediary
business in 1992. During the past two decades, Law Broker has expanded its distribution and service networks across Taiwan, with
30 sales and service outlets (including the headquarters) and 2,609 employees and sales professionals as of December 31, 2017.
Anhou commenced its insurance intermediary business in 2003 and has expanded its operations substantially in recent years. Anhou’s
distribution and service networks expanded from one company in one province to two insurance agencies and one brokerage in six
provinces and 43 service outlets as of December 31, 2017. Meanwhile, we broadened our service offerings from the distribution of
only life insurance products to cover a wide variety of property and casualty insurance and automobile insurance products. We anticipate
continued growth in the future through multiple means. Our expansion has placed, and will continue to place, substantial demands
on our managerial, operational, technological and other resources. To manage and support our continued growth, we must continue
to improve our operational, administrative, financial and technological systems, procedures and controls, and expand, train and
manage our growing employee and agent base. Furthermore, our management will be required to maintain and expand our relationships
with insurance companies, other insurance intermediaries, regulators and other third parties. We cannot assure you that our current
and planned personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to effectively
and efficiently manage our expansion could materially and adversely affect our ability to capitalize on new business opportunities,
which in turn could have a material adverse effect on our results of operations.
We may be unsuccessful in identifying
and acquiring suitable acquisition candidates, which could adversely affect our growth.
We expect our future growth to come from
acquisitions of high-quality independent insurance agencies and brokerages as well as establishment of new insurance agencies and
brokerages. There is no assurance we can successfully identify suitable acquisition candidates, especially in those areas where
we do not yet have a presence. Even if we identify suitable candidates, we may not be able to complete an acquisition on terms
that are commercially acceptable to us. In addition, we compete with other entities to acquire high-quality independent insurance
agencies and brokerages. Many of our competitors may have substantially greater financial resources than we do and may be able
to outbid us for these acquisition targets. If we are unable to complete acquisitions, our growth strategy may be impeded and our
earnings or revenue growth may be negatively affected.
If we fail to integrate acquired
companies efficiently, or if the acquired companies do not perform to our expectations, our business and results of operations
may be adversely affected.
Even if we succeed in acquiring other insurance
agencies and brokerages, our ability to integrate an acquired entity and its operations is subject to a number of factors. These
factors include difficulties in the integration of acquired operations and retention of personnel, especially the sales professionals
and sales agents who are not employees of the acquired company, entry into unfamiliar markets, unanticipated problems or legal
liabilities, and tax and accounting issues. The need to address these factors may divert management’s attention from other
aspects of our business and materially and adversely affect our business prospects. In addition, costs associated with integrating
newly acquired companies could negatively affect our operating margins.
Furthermore, the acquired companies may
not perform to our expectations for various reasons, including legislative or regulatory changes that affect the insurance products
in which a company specializes, the loss of key clients after the acquisition closes, general economic factors that impact a company
in a direct way and the cultural incompatibility of an acquired company’s management team with us. If an acquired company
cannot be operated at the same profitability level as our existing operations, the acquisition would have a negative impact on
our operating margin. Our inability to successfully integrate an acquired entity or its failure to perform to our expectations
may materially and adversely affect our business, prospects, results of operations and financial condition.
Because the commission and
fee revenue we earn on the sale of insurance products is based on premiums and commission and fee rates set by insurance companies,
any decrease in these premiums or commission and fee rates may have an adverse effect on our results of operations.
We are engaged in the insurance agency
and brokerage business and derive revenues primarily from commissions and fees paid by the insurance companies whose policies our
customers purchase. The commission and fee rates are set by insurance companies and are based on the premiums that the insurance
companies charge. Commission and fee rates and premiums can change based on the prevailing economic, regulatory, taxation-related
and competitive factors that affect insurance companies. These factors, which are not within our control, include the ability of
insurance companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for
insurance products, the availability of comparable products from other insurance companies at a lower cost, the availability of
alternative insurance products such as government benefits and self-insurance plans, as well as the tax deductibility of commissions
and fees and the consumers themselves. In addition, premium rates for certain insurance products, such as the mandatory automobile
liability insurance that each automobile owner in Taiwan and the PRC is legally required to purchase, are tightly regulated by
Insurance Bureau of FSC in Taiwan and CIRC in PRC.
Because we do not determine, and cannot
predict, the timing or extent of premium or commission and fee rate changes, we cannot predict the effect any of these changes
may have on our operations. Intense competition among insurance companies has led to a gradual decline in premium rate levels of
some property and casualty insurance products. Although such decline may stimulate demand for insurance products and increase our
total sales volume, it also reduces the commissions and fees we earn on each policy sold. Any decrease in premiums or commission
and fee rates may significantly affect our profitability. In addition, our budget for future acquisitions, capital expenditures
and other expenditures may be disrupted by unexpected decreases in revenues caused by decreases in premiums or commission and fee
rates, thereby adversely affecting our operations.
Competition in our industry
is intense and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively affected.
The insurance intermediary industry in
Taiwan and China is highly competitive, and we expect competition to persist and intensify. In insurance product distribution,
we face competition from insurance companies that use their in-house sales force and exclusive sales agents to distribute their
products, and from business entities that distribute insurance products on an ancillary basis, such as commercial banks, postal
offices and automobile dealerships, as well as from other professional insurance intermediaries. We sell insurance products through
our exclusive sales professionals and sales agents pursuant to agency contracts entered into with our subsidiaries or Consolidated
Affiliated Entities in Taiwan and China, as applicable. The term of these agency contracts with Law Broker generally is for three
years and will be re-signed upon expiration, while the term of these agency contracts with Anhou generally is for one year with
automatic extension in case neither party objects at the end of the term. These sales professionals and sales agents are not our
employees and we cannot assure you that they will continue their services subsequent to the expiration of such agency contracts.
We compete for customers on the basis of product offerings, customer services and reputation. Many of our competitors have greater
financial and marketing resources than we do and may be able to offer products and services that we do not currently offer and
may not offer in the future. If we are unable to compete effectively against those competitors, we may lose customers and our financial
results may be negatively affected.
Quarterly and annual variations
in our commission and fee revenue may have unexpected impacts on our results of operations.
Our commission and fee revenue is subject
to both quarterly and annual fluctuations as a result of the seasonality of its business, the timing of policy renewals and the
net effect of new and lost business. Historically, Law Broker’s commission and fee revenue, particularly revenue derived
from distribution of life insurance products, for the second and fourth quarters of any given year have been higher than the first
and third quarters. Anhou’s commission and fee revenue, particularly revenue derived from distribution of life insurance
products, for the fourth quarter of any given year has been the highest among all four quarters, while Anhou’s commission
and fee revenue for the first quarter of any given year has been the lowest among all four quarters. The factors that cause the
quarterly and annual variations are not within our control. Specifically, consumer demand for insurance products can influence
the timing of renewals, new business and lost business, which generally includes policies that are not renewed, and cancellations.
As a result, you may not be able to rely on quarterly or annual comparisons of our operating results as an indication of our future
performance.
If our contracts with insurance
companies are terminated or changed, our business and operating results could be adversely affected.
We primarily act as agents for insurance
companies in distributing their products to retail customers. Our relationships with the insurance companies are governed by agreements
between Law Broker or Anhou and the insurance companies. See “Corporate History and Structure - Insurance Company Partners.”
These contracts establish, among other things, the scope of authority, the pricing of the insurance products we distributes and
its fee rates. These contracts typically have a term of one year and will be automatically extended for successive one-year term
unless terminated earlier with at least 30 days or 60 days advance notice prior to its expiration.
In the fiscal year ended December 31, 2017,
Law Broker’s major insurance company partners, after aggregating the business conducted between Law Broker and the various
local branches of the insurance companies were AIATW, Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., Shin Kong
Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd. and TransGlobe Life Insurance Inc., arranged in alphabetical order. Among
them, Farglory Life Insurance Co., Ltd., Taiwan Life Insurance Co., Ltd., and TransGlobe Life Insurance Inc. accounted for approximately
25.41%, 12.45%, and 11.18% of our total net revenues in the fiscal year ending December 31, 2017, respectively.
In the fiscal year ended December 31, 2017,
Anhou’s major insurance company partners, after aggregating the business conducted between Anhou and the various local branches
of the insurance companies, were Aegon THTF Life Insurance Co., Ltd., AVIVA Life Insurance Co., Ltd., Funde Sino Life Insurance
Co., Ltd., Huaxia Insurance Co., Ltd., and Taikang Life Insurance Co., Ltd., arranged in alphabetical order. None of these insurance
company partners accounted for more than 10% of our total net revenues for the year ended December 31, 2017.
The termination of our contracts with insurance
companies that in aggregate account for a significant portion of our business, or changes to material terms of these contracts,
could adversely affect our business and operating results.
Our future success depends
on the continuing efforts of our senior management team and other key personnel, and our business may be harmed if we lose their
services.
Our future success depends heavily upon
the continuing services of the members of our senior management team and other key personnel, in particular Mr. Yi Hsiao Mao, the
Chief Executive Officer, Ms. Yung Chi Chuang, the Chief Financial Officer. If one or more of our senior executives or other key
personnel, are unable or unwilling to continue in their present positions, we may not be able to replace them easily, or at all.
As such, our business may be disrupted and our financial condition and results of operations may be materially and adversely affected.
Competition for senior management and key personnel is intense, the pool of qualified candidates is very limited, and we may not
be able to retain the services of our senior executives or key personnel, or attract and retain high-quality senior executives
or key personnel in the future. As is customary in the PRC and Taiwan, we do not have insurance coverage for the loss of our senior
management team or other key personnel.
In addition, if any member of our senior
management team or any of our other key personnel joins a competitor or forms a competing company, we may lose customers, sensitive
trade information and key professionals and staff members. Most of our executive officers and key employees have entered into an
employment agreement with our subsidiaries or Consolidated Affiliated Entities, respectively. If any disputes arise between any
of our senior executives or key personnel and us, we cannot assure you of the extent to which any of these agreements may be enforced.
Sales professionals or sales
agent and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or
litigation costs.
Sales professionals or sales agent and
employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational or financial
harm. Misconduct could include:
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making misrepresentation when marketing or selling insurance products to customers;
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hindering insurance applicants from making full and accurate mandatory disclosures or inducing
applicants into making misrepresentations;
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hiding or falsifying material information in relation to the insurance contracts;
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fabricating or altering insurance contracts without authorization from relevant parties, selling
false policies, or providing false documents on behalf of the applicants;
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falsifying insurance agency business or fraudulently returning insurance policies to obtain commissions;
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colluding with applicants, insured, or beneficiaries to obtain insurance benefits;
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engaging in false claims; or
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otherwise not complying with laws and regulations or our control policies or procedures.
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We cannot always deter sales professionals
or sales agent or employee misconduct, and the precautions we take to prevent and detect these activities may not be effective
in all cases. We cannot assure you, therefore, that sales professionals or sales agent or employee misconduct will not lead to
a material adverse effect on our business, results of operations or financial condition.
All of our personnel engaging
in insurance agency or brokering are required under relevant regulations to have a qualification certificate issued by the relevant
government authorities in Taiwan. If these qualification requirements are strictly enforced in the future, our business may be
materially and adversely affected.
All of Law Broker’s personnel who
engage in insurance agency and brokering are required under relevant Taiwan regulations to obtain a registration certificate. To
obtain the registration certificate, the sale professionals have to pass the insurance sales professionals qualification test sponsored
by the Life Insurance Association of the Republic of China or Property Insurance Association of the Republic of China (collectively
the “Associations”, each a “Association”). Once the applicants passed such test, the Associations will
notify Law Broker of those applicants who passed the test and Law Broker is obligated to issue the registration certificate to
them. The registration certificate is valid for five years and the holder shall renew the registration certificate prior to its
expiration date. See “Corporate History and Structure —Regulation.” As of December 31, 2017, all of Law Broker’s
sales professionals had received and held a valid registration certificate.
Any significant failure in
our information technology systems could have a material adverse effect on our business and profitability.
Our business is highly dependent on the
ability of our information technology systems to timely process a large number of transactions across different markets and products
at a time when transaction processes have become increasingly complex and the volume of such transactions is growing rapidly. The
proper functioning of our financial control, accounting, customer database, customer service and other data processing systems,
together with the communication systems of our Taiwan Subsidiaries and Consolidated Affiliated Entities and our main offices in
Taiwan and Jiangsu are critical to our business and to our ability to compete effectively. We cannot assure you that our business
activities would not be materially disrupted in the event of a partial or complete failure of any of these primary information
technology or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks
or conversion errors due to system upgrading. In addition, a prolonged failure of our information technology system could damage
our reputation and materially and adversely affect our future prospects and profitability.
If we are unable to respond
in a timely and cost-effective manner to rapid technological change in the insurance intermediary industry, there may be a resulting
adverse effect on business and operating results.
The insurance industry is increasingly
influenced by rapid technological change, frequent new product and service introductions and evolving industry standards. For example,
the insurance intermediary industry has increased use of the Internet to communicate benefits and related information to consumers
and to facilitate information exchange and transactions. We believe that our future success will depend on our ability to continue
to anticipate technological changes and to offer additional product and service opportunities that meet evolving standards on a
timely and cost-effective basis. There is a risk that we may not successfully identify new product and service opportunities or
develop and introduce these opportunities in a timely and cost-effective manner. In addition, product and service opportunities
that our competitors develop or introduce may render our products and services uncompetitive. As a result, we can give no assurances
that technological changes that may affect our industry in the future will not have a material adverse effect on our business and
results of operations.
Our Company’s affiliates
have significant control over matters requiring approval by shareholders.
The affiliates of our Company hold 100%
of our Company’s outstanding preferred shares, approximately 31.4% of our Company’s outstanding common shares, and
approximately 44.6% of the voting power of our Company as of March 14, 2017 (calculated in accordance with Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended). As a result, our Company’s affiliates, in view of their ownership
percentage of our common stock and voting power, have significant control over matters requiring approval by our shareholders,
including the selection of our board of directors, approval or rejection of mergers, sales or licenses of all or substantially
all of our assets, or other business combination transactions. The interests of our Company’s affiliates may not always coincide
with the interests of our other shareholders and as such our Company may take action in advancement of its affiliates’ interests
to the detriment of our other shareholders, including you. Accordingly, you may not be able to influence any action we take or
consider taking, even if it requires a shareholder vote.
Fluctuation in the value of
the RMB may have a material adverse effect on your investment.
The change in value of the RMB against
the U.S. dollar, the Euro and other currencies is affected by changes in China's political and economic conditions, among other
things. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar.
Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against certain foreign currencies. While
the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure
on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation
of the RMB against the U.S. dollar. As a portion of our costs and expenses is denominated in RMB, the revaluation in July 2005
and potential future revaluation has and could further increase our costs. In addition, any significant revaluation of the RMB
may have a material adverse effect on our financial condition. For example, to the extent that we need to convert U.S. dollars
we receive from financings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect
on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose
of making payments for business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S.
dollar amount available to us.
We are a holding company and
depend upon the earnings of our subsidiaries.
We are a holding company and conduct all
our operations through our subsidiaries. All of our operating income is generated by our operating subsidiaries. We primarily rely
on dividends and other advances and transfers of funds from our subsidiaries, to provide the funds necessary to meet our debt service
obligations or to pay dividends. Although we are the majority stockholder, directly or indirectly, of each of our operating subsidiaries
and therefore able to control their respective declaration of dividends, applicable laws may prevent our operating subsidiaries
from being able to pay such dividends. In addition, such payments may be restricted by claims against our subsidiaries by their
creditors, such as suppliers, vendors, lessors, and employees, and by any applicable bankruptcy, reorganization, or similar laws
applicable to our operating subsidiaries. The availability of funds, and therefore the availability of our operating subsidiaries
to pay dividends or make other payments or advances to us, will depend upon their operating results.
Risks Related to Our Corporate Structure
in the PRC
If the PRC government finds
that the agreements that establish the structure for operating our China business do not comply with applicable PRC laws and regulations,
we could be subject to severe penalties.
We conduct our operations in China principally
through contractual arrangements among our wholly-owned PRC subsidiary, CU WFOE and our operating company in the PRC, namely, Anhou
and its shareholders, where Anhou directly holds 100% equity interests in one PRC insurance agency, namely Sichuan Kangzhuang and
one insurance brokerage, namely Jiangsu Law. Anhou, Sichuan Kangzhuang and Jiangsu Law hold the licenses and permits necessary
to conduct our insurance intermediary business and related businesses in China.
Our contractual arrangements with Anhou
and its shareholders enable us to:
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exercise effective control over Anhou and its subsidiaries;
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receive a substantial portion of the economic benefits of Anhou and its subsidiaries in consideration
for the services provided by our wholly- owned subsidiary in China; and
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have an exclusive option to purchase all or part of the equity interests in Anhou when and to the
extent permitted by PRC law.
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Because of these contractual arrangements,
we are the primary beneficiary of Anhou and its subsidiaries and have consolidated them into our consolidated financial statements.
Although we believe that these agreements are in compliance with current PRC regulations, we cannot assure you that the PRC government
would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with
existing policies or with requirements or policies that may be adopted in the future, such as the Draft Foreign Investment Law
described below.
On January 19, 2015, MOFCOM published a
draft version of a proposed Foreign Investment Law (the “Draft Foreign Investment Law”) with an explanatory note. This
Draft Foreign Investment Law, once promulgated, will replace and integrate the three existing laws over foreign investment, the
Law of the PRC on Chinese-Foreign Equity Joint Ventures, the Wholly Foreign-owned Enterprise Law and the Law of the PRC on Sino-foreign
Cooperative Enterprises. The Draft Foreign Investment Law was formulated with a view to opening wider to the outside, promoting
and regulating foreign investment, protecting the legitimate rights and interests of foreign investors, safeguarding national security
and public interests, and facilitating the healthy development of the socialist market economy. MOFCOM has requested comments from
the public on the draft Law by February 17, 2015.
Some of the more significant concepts in
the Foreign Investment Law include the following:
Effective Control
The proposed law has adopted the concept
of effective control in the foreign investment area. The Draft Foreign Investment Law stipulates that a company established in
China but controlled by foreign investors shall be deemed a foreign investor and foreign entities controlled by Chinese investors
can, under some circumstances, be deemed Chinese domestic investors. According to Draft Foreign Investment Law, “control”
refers to several circumstances including the contractual control by exercising decisive influences on the operation, finance,
personnel or technology of the enterprise by contract, trust or other means.
Negative List Management
Most foreign investments will not need
pre-approval as was previously required. It means that the Chinese market could be more open and efficient in some sectors to set
up foreign invested companies. However, the Draft Foreign Investment Law sets out a Negative List, or Catalogue of Prohibitions.
Foreign investors are not allowed to invest in any sector set out in the Catalogue of Prohibitions. Further, a Catalogue of Restrictions
will set forth those sectors with restrictions imposed on foreign investors. The use of Negative lists represents a method of management
or administration of foreign investments.
How domestic VIEs, potentially deemed to
be foreign enterprises under the Draft Foreign Investment Law and currently operating in Negative List sectors, will be treated
is unclear.
National Security Reviews
The Draft Foreign Investment Law also establishes
a united foreign investment national security review system which will conduct examinations on the foreign investments that endangers
or may endanger the national security.
Information Reporting System
The Draft Foreign Investment Law establishes
a foreign investment information reporting system. The new rules include submission of a foreign investment report (such as when
setting up a company), a report of any Changes of Foreign Investment (any adjustments of investment) and an annual report. Generally,
reporting obligations arise when a foreign investor purchases not less than 10% of the stock of a domestic entity, or less than
10% but the purchase results in a change of control of the domestic entity.
Supervision and Inspection
The Draft Foreign Investment Law establishes
a mechanism for the supervision and inspection of foreign investors and foreign invested enterprises from industrial and commercial,
taxation, foreign exchange, auditing and other administrative departments. The government’s focus on foreign investments
and foreign investment management has shifted from the approval prior to a foreign invested company being established to the supervision
and inspection after it is set up.
PRC laws and regulations governing the
validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting
these laws and regulations. If the PRC government determines that our contractual arrangements do not comply with applicable laws
and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict
our right to collect revenues, block our website, require us to restructure our operations, impose additional conditions or requirements
with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our
business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our
business.
If the PRC government finds
that we, our PRC subsidiary and Consolidated Affiliated Entities do not comply with applicable PRC laws and regulations, we could
be subject to severe penalties.
If we, our Consolidated Affiliated Entity,
Anhou or any of the existing and future subsidiaries of Anhou are found to be in violation of any existing or future PRC laws or
regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including
the CIRC, will have broad discretion in dealing with such violations, including:
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revoking the business and operating licenses of our PRC subsidiary and Consolidated Affiliated
Entities;
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restricting or prohibiting any related-party transactions among our PRC subsidiary and Consolidated
Affiliated Entities;
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imposing fines or other requirements with which we, our PRC subsidiary or our Consolidated Affiliated
Entities may not be able to comply;
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requiring us, our PRC subsidiary or our Consolidated Affiliated Entities to restructure the relevant
ownership structure or operations; or
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restricting or prohibiting us from providing additional funding for our business and operations
in China.
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The imposition of any of these penalties
could result in a material and adverse effect on our ability to conduct our business in the PRC.
We rely on contractual arrangements
with Anhou and its shareholders for our China operations, which may not be as effective in providing operational control as direct
ownership.
We have relied and expect to continue to
rely on contractual arrangements with our PRC Consolidated Affiliated Entity, Anhou, and its shareholders to operate our business
in China. For a description of these contractual arrangements, see “Corporate History and Structure”. These contractual
arrangements may not be as effective in providing us with control over Anhou and its subsidiaries as direct ownership. We have
no direct or indirect equity interests in Anhou or any of its subsidiaries.
Though subsequent to PRC’s accession
to WTO, the restrictions on foreign investment in insurance intermediaries have been relaxed, except those on qualifications as
well as capital requirement of the investors, the interpretations of local counterparts of CIRC have not been clear and consistent,
especially on the proportion of foreign investment. We rely on contractual arrangements with Anhou to operate our business in China.
If we had direct ownership of Anhou and its subsidiaries, we would be able to exercise our rights as a shareholder to effect changes
in the board of directors of Anhou and its subsidiaries, which in turn could effect changes, subject to any applicable fiduciary
obligations, at the management level. However, under the current contractual arrangements, we rely on Anhou and its shareholders’
performance of their contractual obligations to exercise effective control. In addition, our contractual arrangements generally
have a term of ten-year with an automatic extension of another ten-year term unless our PRC subsidiary, CU WFOE, determines otherwise.
Though neither Anhou nor its shareholders has any right under these agreements to terminate such agreements prior to the expiration
date, we may not be able to strictly enforce these agreements in case they choose to do so, due to the uncertainty associated with
PRC government’s determination on the validity of these contractual arrangements or the lack of assets enforceable outside
PRC. Certain affiliates of our Company are also directors and executive officers of our Consolidated Affiliated Entities. In addition,
though Anhou is under the effective control of CU WFOE through these contractual arrangements, the shareholders and officers of
Anhou may not act in the best interests of our company or may not perform their obligations under these agreements, including the
obligation to renew these agreements when their initial ten-year term expires. Furthermore, as all of Anhou’s assets are
located in China, if Anhou or its shareholders determine to terminate the VIE Agreements, the unaffiliated investors will have
little or no recourse against them. Such risks exist throughout the period in which we intend to operate our business through the
contractual arrangements with Anhou. Therefore, these contractual arrangements may not be as effective as direct ownership in providing
us with control over these Consolidated Affiliated Entities.
If Anhou and its shareholders fail to perform
their obligations under these contractual arrangements, we may have to incur substantial costs and other resources to enforce such
arrangements and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief and claiming
damages, which may not be effective. For example, if the shareholders and officers of Anhou were to refuse to transfer their equity
interest in Anhou to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they
were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their contractual
obligations. However, due to the uncertainty associated with PRC government
’
s
determination on the validity of these contractual arrangements or the lack of assets enforceable against Anhou outside PRC, we
may not be able to effectively enforce our right under these agreements.
All of our contractual arrangements with
Anhou and shareholders are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal
procedures. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As
a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event
we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our Consolidated Affiliated
Entities, and our ability to conduct our business in the PRC may be negatively affected.
Contractual arrangements we
have entered into with Anhou may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could
substantially reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations, arrangements
and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. Since both of CU WFOE and
Anhou are under our common control, either under direct ownership or through contractual arrangements, and certain our officers
and directors used to be and are currently the employees of Anhou and its subsidiaries, the VIE Agreements are likely to be deemed
as arrangements between related parties. In addition, CU WFOE has been granted substantial unilateral right under the VIE Agreements.
We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between
our PRC subsidiary and Anhou are not on an arm’s-length basis and adjust the income of Anhou in the form of a transfer pricing
adjustment, where the relevant PRC tax authorities may, in their discretion, disregard the tax filing of Anhou and impose a different
tax amount payable by Anhou. A transfer pricing adjustment could among other things, result in a reduction, for PRC tax purposes,
of expense deductions recorded by Anhou, which could in turn increase their respective tax liabilities. Moreover, the PRC tax authorities
may impose interest and other penalties on Anhou for underpayment of taxes. Though we have not encountered any challenge or transfer
pricing adjustment by the PRC tax authorities so far, we could not assure you that the PRC tax authorities will not do so in the
future. Our consolidated net income may be materially and adversely affected by the occurrence of any of the foregoing.
PRC regulation of direct investment
by offshore holding companies to PRC entities may delay or prevent us from making additional capital contributions to our PRC subsidiary,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting
our operations in China through our PRC subsidiary and Consolidated Affiliated Entities. In order to provide additional funding
to our PRC subsidiary and Consolidated Affiliated Entities, we may make additional capital contributions to our PRC subsidiary.
Any capital contribution we make to our
PRC subsidiary, shall be filed with the PRC Ministry of Commerce or its local counterparts and settled with banks where we have
opened capital account and registered with the SAFE or its local counterparts. Such filings and settlement shall depend on the
efficiency the relevant government authority and banks and might be time consuming while their outcomes would be uncertain. The
registered capital of CU WFOE is $300,000 and has been contributed.
We cannot assure you that we will be able
to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with
respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals,
our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially
affect our liquidity and our ability to fund and expand our business.
It may be difficult to effect
service of process and enforcement of legal judgments upon us and our officers and directors because they reside outside the United
States.
To better operate our business, some of
our directors and officers reside in the PRC or Taiwan, our service of process on such directors and officers may be difficult
to effect within the United States. Also, with respect to the assets for overseas operation, any judgment obtained in the United
States against us may not be enforceable outside the United States.
Risks Related to Doing Business in
Taiwan
Extensive regulation of our
industry may limit our flexibility to respond to market conditions and competition, and our business may suffer.
Subsequent to our acquisition of AHFL on
August 24, 2012, we operate our insurance agency and brokerage business in Taiwan through our operating entity Law Broker. As an
insurance agency and brokerage service provider in Taiwan, Law Broker is subject to extensive regulation. See “Item 1.Business—Regulation”
for a discussion of the regulatory environment applicable to Law Broker. As revenue generated by Law Broker constitutes a substantial
part of our revenue, any changes in the regulatory environment applicable to Law Broker may adversely affect our business, financial
condition and results of operations.
Currently, Law Broker’s principal
regulator is the FSC, which was formed on July 1, 2004 in accordance with the Financial Supervisory Organization Act, which was
intended to grant regulatory authority over the Taiwan insurance industry to the FSC.
Our operations and financial
results could be severely harmed by natural disasters.
Law Broker’s executive office is
located in Taiwan, which suffered a severe earthquake during fiscal year of 2000. We did not experience significant disruption
to our operations as a result of that earthquake. Taiwan is also exposed to typhoons and tsunamis. If a major earthquake, typhoon,
tsunami or other natural disaster were to affect our operations, our business would suffer serious harm.
Stockholders may have more
difficulty protecting their interests under the laws of the Taiwan than they would under the laws of the United States.
Our corporate affairs are governed by our
articles of incorporation, the Company Law, and by the laws governing corporations incorporated in Taiwan. In addition, our corporate
affairs may remain governed by the Statute of Law Broker. The rights of stockholders and the responsibilities of management and
the members of the board of directors of Taiwan companies are different from those applicable to a corporation incorporated in
the United States. For example, controlling or major stockholders of Taiwan companies do not owe fiduciary duties to minority stockholders.
As a result, holders of our common shares may have more difficulty in protecting their interests in connection with actions taken
by our management or members of our board of directors than they would as public stockholders of a United States corporation.
Fluctuation in the value of
the New Taiwanese Dollar may have a material adverse effect on your investment.
The value of the New Taiwanese Dollar (“NTD”
or “NT$”) against the US dollar (“US$”) and other currencies may fluctuate and is affected by, among other
things, changes in political and economic conditions. As of December 31, 2017, the exchange rate of NT$ to the US$ was NT$1=US$0.03372.
In Taiwan, our revenues and costs are denominated
in the NT$, and a significant portion of our financial assets are also denominated in NT$. We rely substantially on dividends and
other fees paid to us by our Taiwan Subsidiary. Any significant appreciation or depreciation of the NT$ against the USD may affect
our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our shares in USD. For
example, a further appreciation of the NT$ against the USD would make any new NT$-denominated investments or expenditures more
costly to us, to the extent that we need to convert USD into the NT$ for such purposes. An appreciation of the NT$ against the
USD would also result in foreign currency translation losses for financial reporting purposes when we translate our USD denominated
financial assets into the NT$, as the NT$ is our reporting currency in Taiwan. Conversely, a significant depreciation of the NT$
against the USD may significantly reduce the USD equivalent of our reported earnings, and may adversely affect the price of our
shares.
Sensitivity analysis
The following table indicates the instantaneous
change in our Company's (loss) / profit after tax (and accumulated losses) that would arise if foreign exchange rates at the reporting
date had changed at that date, assuming all other risk variables remained constant.
For the year ended December 31, 2017
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Depreciation in NTD
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Decrease in net income
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Decrease in retained earnings
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3
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%
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$
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309,438
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$
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163,542
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The weakening of the US Dollar against
the above currencies by the same percentages would have had the equal but opposite effect on the above currencies to the amounts
shown above, on the basis that all other variables remain constant.
The sensitivity analysis assumes that the
change in foreign exchange rates had been applied to re-measure those financial instruments held by our Company which expose our
Company to foreign currency risk at the reporting date. The analysis excludes differences that would result from the translation
of the financial statements of foreign operations into our Company's presentation currency.
Risks Related to Doing Business in
China
Our limited operating history
in China, especially our limited experience in distributing property and casualty insurance products may not provide an adequate
basis to judge our future prospects and results of operations.
We have a limited operating history in
China. Anhou commenced our insurance intermediary business in 2003 by distributing life insurance products and expanded our offerings
to other types of property and casualty insurance products in 2009. Anhou started distributing automobile insurance business in
2010. Life insurance products distributed by Anhou accounted for approximately 92.33% of Anhou’s total net revenues in the
fiscal year ending December 31, 2017. Property and casualty insurance products distributed by Anhou accounted for approximately
7.67% of Anhou’s total net revenues in the fiscal year ending December 31, 2017. While life insurance and property and casualty
insurance distribution are two major areas of our future growth strategy in China, we cannot assure you that our efforts to further
develop these businesses will be successful. If Anhou’s life insurance distribution and property and casualty insurance distribution
fail to grow, our future growth in China will be significantly affected. In addition, our limited operating history in China, especially
our limited experience in selling property and casualty insurance products, may not provide a meaningful basis for you to evaluate
our business, financial performance and prospects.
Our businesses in China are
highly regulated, and the administration, interpretation and enforcement of the laws and regulations currently applicable to us
involve uncertainties, which could materially and adversely affect our business and results of operations.
Anhou operates in a highly regulated industry.
The CIRC has authority to supervise and regulate the insurance industry in China. In exercising its authority, the CIRC has wide
discretion, and the administration, interpretation and enforcement of the laws and regulations applicable to us involve uncertainties
that could materially and adversely affect our business and results of operations. Although we have not had any material violations
to date, we cannot assure you that our operations will always be consistent with the interpretation and enforcement of the laws
and regulations by the CIRC from time to time.
The principal regulation governing insurance
agencies in China is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency
Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009 (restated on October 19, 2015),
which replaced the Provisions on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective
on January 1, 2005. The Agency Provisions have not only set forth the market entrance standards for applicants to establish an
insurance agency, but also stipulate the qualification criteria of senior management for such insurance agency. The Agency Provisions
have also provided general rules on business operations as well as granted relatively broad supervision rights to the CIRC. The
principal regulation governing insurance brokerages in China is the Provisions on the Supervision and Administration of Insurance
Brokerage Institutions (the “Brokerage Provisions”) promulgated by the CIRC on September 25, 2009 and effective on
October 1, 2009 (restated on October 19, 2015), which replaced the Provisions on the Administration of Insurance Brokerages issued
by the CIRC on December 15, 2004 and effective on January 1, 2005. The Brokerage Provisions have not only set forth the market
entrance standards for applicants to establish a brokerage firm, but also stipulate the qualification criteria of senior management
for such brokerage firm. The Brokerage Provisions have also provided general rules on business operations as well as granted relatively
broad supervision rights to the CIRC. On January 6, 2013, CIRC issued Measures on the Supervision of Insurance Salespersons and
Measures on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners, which sets forth a higher
academic requirement for candidates to take the qualification examination for the insurance agency and brokerage practitioners
organized by the CIRC. On August 3, 2015, CIRC issued the 2015 Notice, pursuant to which, in lieu of the qualification examination/test
previously required for insurance salesperson, insurance agency practitioners and insurance brokerage practitioners, CIRC only
requires their companies to complete such practitioner registrations on their behalves and conduct professional training on them.
The enactment of any new laws and regulations in replacement of the above-mentioned laws or the change of interpretations of any
such current laws and regulations may have a significant impact on the operation and financial results of our Company.
For an expanded discussion of the material
regulations affecting our Company, please review the discussion located under the “Regulation” heading in the “Corporate
History and Structure” section of this annual report.
Further development of regulations
in China may impose additional costs and restrictions on our activities.
China’s insurance regulatory regime
is undergoing significant changes. Some of these changes and the further development of regulations applicable to us may result
in additional restrictions on our activities or more intensive competition in this industry. For example, under the provisions
for administration of professional insurance agencies and brokerages promulgated on September 25, 2009, insurance agencies and
brokerage companies are required to increase their guaranty deposit, which generally cannot be withdrawn without the CIRC’s
approval, when they open any new branches. Furthermore, pursuant to the provisions, the minimum registered capital requirements
for insurance agencies and brokerages were increased substantially. Under the provisions for administration of professional insurance
agencies and brokerages promulgated on October 19, 2015, CIRC now allows professional insurance agency companies and insurance
brokerage companies to more freely use their guaranty deposit under the following circumstances, among which: (i) reduction in
their registered capital; (ii) cancellation of their licenses; (iii) purchase of qualified professional liability insurance; or
(iv) other circumstances as set forth by CIRC, provided that a written report be submitted within 5 days of such use. On April
27, 2013, CIRC issued the Decision on Revising the Agency Provisions and Decision on Revising the Brokerage Provisions, pursuant
to which, CIRC has mandated any insurance agency and insurance brokerage established subsequent to the Decisions to meet a minimum
registered capital requirement of RMB50 million ($8.1 million). On May 16, 2013, CIRC issued the 2013 Notice, pursuant to which,
professional insurance agencies and insurance brokerages established prior to the issuance of the above Decisions, with registered
capital less than RMB50 million($8.1 million), can continuously operate their existing business within the provinces where they
have the registered office or branch office, but shall not set up any new branches in any province where they do not have the registered
office or any branch office. See “Corporate History and Structure - Regulation.” In addition, the CIRC issued an Opinion
of CIRC on Reforming and Improving the Management System of Insurance Salespersons in September 2010 (the “Reforming Opinion”),
which requires the insurance companies and insurance intermediaries to build up a clear legal relationship with the insurance salespersons,
improve the fundamental protection rights of the insurance salespersons, and encourage the insurance companies and insurance intermediaries
to actively explore new models and marketing channels for insurance sales system. On September 14, 2012, CIRC issued another opinion
to reiterate and push forward the Reforming Opinion above.
Adverse changes in economic
and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which
could adversely affect our business.
We conduct our business in China primarily
through our PRC subsidiary and Consolidated Affiliated Entities. Accordingly, our results of operations, financial condition and
prospects in China are subject to a significant degree to economic, political and legal developments in China. China’s economy
differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced
significant growth in the past 40 years or so, growth has been uneven across different regions and among various economic sectors
of China and has been slowed down during the past few years. The PRC government has implemented various measures to encourage economic
development and guide the allocation of resources. While some of these measures benefit the overall PRC economy, they may also
have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government
control over capital investments or changes in tax regulations that are applicable to us.
Although the PRC government has implemented
measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership
of productive assets and the establishment of improved corporate governance in business enterprises, the PRC government still owns
a substantial portion of productive assets in China. In addition, the PRC government continues to play a significant role in regulating
industry development by imposing industrial policies. The PRC government also exercises significant control over China’s
economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary
policy and providing preferential treatment to particular industries or companies. Actions and policies of the PRC government could
materially affect our ability to operate our business.
Uncertainties with respect
to the PRC legal system could adversely affect us.
We conduct our business in China primarily
through our PRC subsidiary and Consolidated Affiliated Entities. The business conducted by our PRC subsidiary and Consolidated
Affiliated Entities in China are governed by PRC laws and regulations. Our PRC subsidiary is generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal
system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.
Although, since 1979, PRC legislation and
regulations have significantly enhanced the protections afforded to various forms of foreign investments in China, China has not
developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of
economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited
volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve
uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are
not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation
of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result
in substantial costs and diversion of resources and management attention.
Governmental control of currency
conversion may affect the value of your investment.
The PRC government imposes controls on
the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing
PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures
from trade-related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain
procedural requirements. But approval from appropriate government authorities is required where RMB is to be converted into foreign
currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The
PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions,
and the recent drop in foreign exchange reserve of PRC has made it more likely to impose tighter control on foreign currency conversion
and remittance offshore. Under our current corporate structure in the PRC, the primary source of our income at the holding company
level from our PRC operations is dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiary and our Consolidated Affiliated Entities to remit sufficient foreign currency to pay
dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. If the foreign exchange
control system in China prevents us from obtaining sufficient foreign currency to satisfy our currency needs, we may not be able
to pay dividends in foreign currencies to our shareholders.
We rely principally on dividends
and other distributions on equity paid by our subsidiary to fund any cash and financing requirements we may have, and any limitation
on the ability of our subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company, and in the PRC
we rely principally on dividends from our PRC subsidiary in China and service, license and other fees paid to our PRC subsidiary
by our Consolidated Affiliated Entities for our cash requirements, including any debt we may incur. Current PRC regulations permit
our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its after-tax profits each
year as reported in its PRC statutory financial statements, if any, to fund a statutory reserve until such reserve reaches 50%
of its registered capital, and our PRC subsidiary that is considered foreign-invested enterprises is required to further set aside
a portion of its after-tax profits as reported in its PRC statutory financial statements to fund the employee welfare fund at the
discretion of the board. These reserves are not distributable as cash dividends. However, according to the Draft Foreign Investment
Law, which may replace the Wholly Foreign-owned Enterprise Law once promulgated, no such reserve is required. Furthermore, if our
PRC subsidiary and Consolidated Affiliated Entities in China incur debt on their own behalf in the future, the instruments governing
the debt may restrict their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require
us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially
and adversely affect our PRC subsidiary’s ability to pay dividends and other distributions to us.
The PRC subsidiary has not made any profits
to date and as a result has no accumulated profits available for the purposes of dividend distribution. Even though we expect the
PRC subsidiary to become profitable in 2017, we intend to use any profits to fund our business operations or expansion of our business.
Any limitation on the ability of our subsidiary
and Consolidated Affiliated Entities to distribute dividends or other payments to us could materially and adversely limit our ability
to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct
our business.
The PRC Labor Contract Law
and its implementing rules may adversely affect our business and results of operations.
On June 29, 2007, the Standing Committee
of the National People’s Congress of China promulgated the Labor Contract Law, which became effective on January 1, 2008
and revised in 2012. On September 18, 2008, the State Council promulgated the implementing rules for the Labor Contract Law, which
became effective upon adoption. This new labor law and its implementing rules have reinforced the protection for employees, who,
under the existing PRC Labor Law, already have certain rights, such as the right to have written labor contracts, the right to
enter into labor contracts with indefinite terms under specific circumstances, the right to receive overtime wages when working
overtime, and the right to terminate in the labor contracts. In addition, the Labor Contract Law and its implementing rules have
made some amendments to the existing PRC Labor Law and added some clauses that could increase cost of labor to employers. In the
event that we decide to significantly reduce our workforce, the Labor Contract Law and its implementing rules could adversely affect
our ability to effect these changes cost-effectively or in the manner we desire, which could lead to a negative impact on our business
and results of operations in the PRC.
We may have difficulty establishing
adequate management, legal and financial controls in the PRC.
The PRC historically has been deficient
in western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control
systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. Currently,
we do not have any employees that are formally trained in US GAAP or in ICFR in the PRC. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements,
books of account and corporate records and instituting business practices that meet western standards.
We may have limited legal recourse
under the PRC laws if disputes arise under our contracts with parties in China.
The Chinese government has enacted significant
laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation
and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our
ability to enforce commercial claims or to resolve commercial disputes is unpredictable. Our Company faces the risk that the parties
to contracts may seek ways to terminate the transactions. For example, management of our Consolidated Affiliated Entities may hinder
or prevent us from accessing important information regarding the financial and business operations of the Consolidated Affiliated
Entities or refuse to pay us contractual consideration due under the VIE Agreements. The resolution of these matters may be subject
to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a
particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction
under the PRC laws, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal
system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse
effect on our business, financial condition and results of operations. Although legislation in China over the past 40 years or
so has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China,
these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties,
which could limit the legal protection available to us, and our stockholders. The inability to enforce or obtain a remedy under
any of our existing or future agreements could result in a significant loss of business, business opportunities or capital and
could have a material adverse impact on our operations.
Certain affiliates of ours are also directors
and executive officers of our Consolidated Affiliated Entities. PRC laws provide that a director or certain members of senior management
owes a fiduciary duty to the company he/she directs or manages. These individuals must therefore act in good faith and in the best
interests of the relevant PRC company pursuant PRC laws and must not use their respective positions for personal gains. These laws
do not require them to consider our best interests when making decisions as a director or member of management of the relevant
PRC company. For example, it may be possible for management of Anhou to breach the VIE agreements and while their actions may be
in violation of US laws they could be legal in the PRC. Any judgment for violation of fiduciary duty under U.S. law may not be
enforceable outside the United States. It may not be possible to effect service of process within the United States or elsewhere
outside China upon certain our directors or senior executive officers residing in China, irrespective of matters arising under
U.S. federal securities laws or applicable state securities laws. Any court judgment of United States for violation of fiduciary
duty under U.S. law may not be enforceable in the PRC due to the lack of bilateral treaties between PRC and the United States providing
for the reciprocal recognition and enforcement of civil judgment of courts.
Risks Relating to Ownership of Our
Shares
The value of your investment might
not accurately reflect the actual market value of such investment as a result of deceitful historical practices relating to the
appearance of greater market demand for our common stock than factually accurate.
We have previously
engaged in the manipulation of the appearance market demand for our common stock and as a result historical market prices of our
common stock might not be reflective of the actual market price of our common stock at such time and should not be relied upon
for purposes of an evaluation of the market value of your investment. Even though such activities did not result in a profit for
the Company or any of its employees, these activities may have affected the our common stock market prices and as such the market
value of your investment in our common stock might be less than otherwise presumed.
You may not be able to liquidate
your investment since there is no assurance that a public market will develop for our common stock, that our common stock will
ever be approved for trading on a recognized exchange and you may not rely on historic trading activity for our common stock as
an indication of our common stock price, that a public market will develop or we will be approved for trading on a recognized exchange.
There is no established public trading market
for our securities and any historic trading activity indicating that an established trading market might have existed cannot be
relied upon. Though we have engaged a market maker to apply for a quotation on the OTCQB in the United States and obtained the
approval for trading, our shares are not and have not been listed on any recognized exchange. We cannot assure you that a regular
trading market will develop or that if developed, will be sustained. In the absence of a regular trading market, you may be unable
to liquidate its investment, which will result in the loss of your investment.
We have no plans to declare
any dividends to shareholders in the near future.
We currently intend to retain our future
earnings, if any, to support our operations and to finance expansion. The declaration, and amount of any future dividends will
be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash
flows and financial condition, operating and capital requirements, and other factors as our board of directors considers relevant.
There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the
amount of any such dividend. If you require dividend income, you should not rely on an investment in our Company. Income received
from an investment in our Company will only come from a rise in the market price in our Company’s stock, which is uncertain
and unpredictable.