ITEM 1. Description
of Business
Overview
On August 31, 2016,
YBCC, Inc. (“YBCC” or the “Company”) through its subsidiary, YibaoConfucian Co. Ltd. (“YibaoHK”)
entered into a series of contractual arrangements with Shandong Confucian Biologics Co.,
Ltd. (“
Confucian
”) which is a limited liability company headquartered in, and organized under the laws of the
PRC.
Confucian is a manufacture and research based bio-science company. It has a large capacity to manufacture tablets,
granule, oral liquid, powders, soft gels and capsules products. Confucian distributes its products through its own network and
white label products. It also has access to a member-based distribution system owned by an affiliated company.
The Company through
its subsidiaries possesses manufacturing permits for food product, hygienic products, sanitary products, and health products. The
Company's main business includes: research and development of chondroitin and garlic oil; trading, cold storage, and pretreating
of garlic, fruit, and vegetables products; trading of chemical products (excluding hazardous chemicals); import and export of goods
and technology (excluding those restricted by government); and, the manufacturing and sale of health products including powder,
granules, tablets, hard capsule, and soft capsule products.
History
YBCC
YBCC, formerly known
as International Packaging and Logistics Group, was originally incorporated as Interactive Medical Technologies, Ltd., on June
2, 1986 in the state of Delaware. On April 17, 2008, IPLO was redomiciled from the State of Delaware to the State of Nevada.
Effective February
3, 1998, Interactive Medical Technologies, Ltd., changed its name to Kaire Holdings Incorporated, which was changed again on May
28, 2008 to International Packaging and Logistics Group, Inc.
On July 2, 2007, IPLO
through its wholly-owned subsidiary, YesRx.com (“YesRx”), acquired all the outstanding shares of H&H Glass, Inc.
(“H&H Glass”), in exchange for 3,915,000 shares of its common stock in a reverse triangular merger.
On May 15, 2016, the
Company and Xiuhua Song (the “Purchaser”) entered into a Stock Purchase Agreement (the “Purchase Agreement”),
pursuant to which IPLO (the “Seller”) sold to the Purchaser, and the Purchaser purchased from the Seller an aggregate
of 3,915,000 newly issued shares of IPLO Common Stock (the “Shares”). The Shares represented 87% of the issued and
outstanding shares of Common Stock. On July 1, 2016, this transaction was completed.
On July 1, 2016,
Standard Resources Ltd. (“Standard”), previously IPLO’s majority stockholder, and IPLO entered into a share purchase
agreement (“H&H Vend Out”) whereby Standard cancelled 3,915,000 shares of IPLO common stock held by it in exchange
for all of the outstanding shares of H&H Glass. The H&H Glass Vend Out was completed on August 31, 2016.
On
July 1, 2016, the Company executed an Exchange Agreement with Yibaoccyb Ltd., a British Virgin Islands limited liability
company (“Yibaoccyb”) and the Yibaoccyb Shareholders. On August 31, 2016, Yibaoccyb became a 51% owned subsidiary
of the Company. Yibaoccyb owns 100% of YibaoConfucian Co., Ltd. (“
YibaoHK
”), a Hong Kong company. YibaoHK
will own 100% of Shenzhen Confucian Biologics Co. Ltd. (yet to be formed, “Yibao”), which will be a wholly
foreign-owned enterprise (“WFOE”) under the laws of the Peoples’ Republic of China (“PRC” or
“China”). On August 31, 2016, YibaoHK entered into a series of contractual arrangements with Confucian. Our
relationship with Confucian is governed by a series of contractual agreements. We do not own any equity interest in
Confucian.
On December 22,
2016, the Company amended its Certificate of Incorporation (the “Amendment”). As a result of the Amendment, the Company’s
corporate name changed from International Packaging and Logistics Group, Inc. to YBCC, Inc. Effective December 22, 2016, the Registrant’s
ticker symbol changed from IPLO to YBAO.
YIBAOCCYB
Yibaoccyb is a limited
liability company incorporated under the laws of the British Virgin Islands on May 30, 2016. On August 31, 2016, Yibaoccyb became
a 51% owned subsidiary of IPLO. Yibaoccyb, in turn, is the sole owner of YibaoHK. Other than 100% of the issued and outstanding
shares of YibaoHK, Yibaoccyb has no other assets or operations.
YIBAOHK
YibaoHK
is
a limited liability company incorporated under the laws of the Hong Kong on June 15, 2016. YibaoHK was formed by Yibaoccyb. YibaoHK
will be the sole owner of Yibao (yet to be formed). On August 31, 2016, YibaoHK entered into a series of contractual arrangements
with Confucian.
YIBAO
Yibao, a wholly foreign
owned enterprise under the laws of the PRC is in the process of being established. All of the issued and outstanding shares of
Yibao will be held by YibaoHK. The principal purpose of Yibao will be to manage, hold and own rights in the business of Confucian
and other potential PRC businesses. Other than management contracts with the aforementioned companies and related activities, Yibao
is expected to have no other separate operations of its own.
CONFUCIAN
PRC law currently
has limits on foreign ownership of certain companies. To comply with these foreign ownership restrictions, we operate our businesses
in China through Confucian which is a limited liability company headquartered in China and organized under the laws of China. Confucian
has the licenses and approvals necessary to operate our businesses in China. We have contractual arrangements with Confucian and
their respective shareholders pursuant to which we provide these companies with technology consulting and other general business
operation services. Through these contractual arrangements, we also have the ability to substantially influence these companies’
daily operations and financial affairs, appoint their senior executives and approve all matters requiring shareholder approval.
As a result of these contractual arrangements, which enable us to control Confucian, we are considered the primary beneficiary
of Confucian. Accordingly, we consolidate the results, assets and liabilities of Confucian in our financial statements.
The following chart
summarizes our organizational and ownership structure as of December 31, 2016:
Going Concern
As described in
auditor’s report on our consolidated financial statements, our auditors have included a “going concern” provision
in their opinion on our consolidated financial statements, expressing substantial doubt that we can continue as an ongoing business
for the next twelve months.
CONTRACTUAL ARRANGEMENTS
WITH CONFUCIAN AND THEIR SHAREHOLDERS
Our relationships
with the Confucian and their shareholders are governed by a series of contractual arrangements between YibaoHK, and Confucian,
which is the operating company of the Yibao Group in the PRC. Under PRC laws, each of YibaoHK and Confucian is an independent legal
person and none of them is exposed to liabilities incurred by the other parties. The contractual arrangements constitute valid
and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations
of the parties thereto are enforceable and valid in accordance with the laws of the PRC. Other than pursuant to the contractual
arrangements between YibaoHK and Confucian described below, Confucian does not transfer any other funds generated from its respective
operations to any other member of the Yibao Group. On August 31, 2016, we entered into the following contractual arrangements (“VIE
Agreements”) with Confucian:
Consulting Services
Agreement
. Pursuant to the exclusive consulting services agreements between YibaoHK and Confucian, YibaoHK has the exclusive
right to provide to Confucian general business operation services, including advice and strategic planning, as well as consulting
services related to the technological research and development of dietary supplements and related products (the “
Services
”).
Under this agreement, YibaoHK owns the intellectual property rights developed or discovered through research and development, in
the course of providing the Services, or derived from the provision of the Services. Confucian pays a quarterly consulting service
fees in Renminbi (“RMB”) to Yibaoccyb that is equal to all of Confucian’s profits for such quarter.
Operating Agreement
.
Pursuant to the operating agreement among YibaoHK, Confucian and all shareholders of Confucian (collectively the “
Shandong
Confucian Biologics Shareholders
”), YibaoHK provides guidance and instructions on Confucian’s daily operations,
financial management and employment issues. Confucian Shareholders must designate the candidates recommended by YibaoHK as their
representatives on the boards of directors of each of Confucian. YibaoHK has the right to appoint senior executives of Confucian.
In addition, YibaoHK agrees to guarantee Confucian’ performance under any agreements or arrangements relating to Confucian’
business arrangements with any third party. Confucian, in return, agrees to pledge their accounts receivable and all of their assets
to YibaoHK. Moreover, Confucian agrees that without the prior consent of YibaoHK, Confucian will not engage in any transactions
that could materially affect their respective assets, liabilities, rights or operations, including, without limitation, incurrence
or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of their assets
or intellectual property rights in favor of a third party or transfer of any agreements relating to their business operation to
any third party. The term of this agreement is ten (10) years from August 31, 2016 and may be extended only upon YibaoHK’s
written confirmation prior to the expiration of this agreement, with the extended term to be mutually agreed upon by the parties.
Equity Pledge Agreement
.
Under
the equity pledge agreement between Confucian Shareholders and YibaoHK, Confucian Shareholders pledged all of their equity interests
in Confucian to YibaoHK to guarantee Confucian’ performance of their obligations under the consulting services agreement.
If Confucian or Confucian Shareholders breaches their respective contractual obligations, YibaoHK, as pledgee, will be entitled
to certain rights, including the right to sell the pledged equity interests. Confucian Shareholders also agreed that upon occurrence
of any event of default, YibaoHK shall be granted an exclusive, irrevocable power of attorney to take actions in the place and
stead of Confucian Shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute
any instrument that YibaoHK may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. Confucian
Shareholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice YibaoHK’s interest.
The equity pledge agreement will expire two (2) years after Confucian’ obligations under the consulting services agreements
have been fulfilled.
Option Agreement
.
Under
the option agreement between Confucian Shareholders and YibaoHK, Confucian Shareholders irrevocably granted YibaoHK or its designated
person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in Confucian
for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable
PRC law. YibaoHK or its designated person has sole discretion to decide when to exercise the option, whether in part or in full.
The term of this agreement is ten (10) years from August 31, 2016 and may be extended prior to its expiration by written agreement
of the parties.
Voting Rights Proxy
Agreement
.
Pursuant to the proxy agreement between Confucian Shareholders and YibaoHK, Confucian Shareholders agreed
to irrevocably grant a person to be designated by YibaoHK with the right to exercise Confucian Shareholders’ voting rights
and their other rights, including the attendance at and the voting of Confucian Shareholders’ shares at shareholders’
meetings (or by written consent in lieu of such meetings) in accordance with applicable laws and its Articles of Association, including
but not limited to the rights to sell or transfer all or any of his equity interests of Confucian, and appoint and vote for the
directors and Chairman as the authorized representative of the shareholders of Confucian. The proxy agreement may be terminated
by joint consent of the parties or upon 30-day written notice from YibaoHK.
CONFUCIAN BUSINESS
History
Confucian was founded under the laws of the
People's Republic of China on October 31, 2012. Confucian is located in Food Industrial Park inside the economic development Zone
of JinXiang County, Ji’ning City in the province of Shandong in China. Confucian is a limited liability company.
Overview
Confusion is a manufacture and research based
bio-science company. It has a large capacity to manufacture tablets, granule, oral liquid, powders, soft gels and capsules products.
Confucian distributes its products through its own network and white label products. It also has access to a member-based distribution
system owned by an affiliated company.
Confusion possesses manufacturing permits for
food product, hygienic products, sanitary products, and health products. Confusion's main business includes: technology study and
transfer of chondroitin and garlic oil; trading, cold storage, and pretreating of garlic, fruit, and vegetables products; trading
of chemical products (excluding hazardous chemicals); import and export of goods and technology (excluding those restricted by
government); the manufacturing and sale of health products including powder, granules, tablets, hard capsule, and soft capsule
products.
Ownership
During the phase of incorporation, Qingbao
Kong accounted for 51% of the initial equity, Xiuhua Song accounted for 49%.
In 2013, Xiuhua Song transferred her 49% of
equity to WenXiu Song.
In March 2016, Qingbao Kong transferred his
51% of equity to Hengchun Zhang.
As of today, the Company’s equity is
owned 51% by Hengchun Zhang and 49% by Wenxiu Song
Product Overview
The Company’s main products can be divided
into health food products and hygienic products
Health Food Products
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Phytocholesterol
tableting candy,
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Phytosterol has strong anti-inflammatory effects
to the human body, which can inhibit the absorption of cholesterol for human and biochemical synthesis of cholesterol. Additionally,
it can promote the degradation and metabolism of cholesterol. Phytosterol can be used for prevention & therapy of coronary
atherosclerosis heart disease. It has the potential for treating ulcers, skin squamous carcinoma and cervical cancer. Phytosterol
may promote wound healing, muscle proliferation, enhance capillary circulation. Phytosterol may be used as blocking agent of formation
of gallstones.
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Polydextrose
tableting candy,
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Polydextrose is used for regulating blood lipid
in order to reduce fat accumulation.
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Dunaliella Salina
Haematococcus Pluvialis tableting candy,
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Dunaliella Salina Haematococcus Pluvialis is
used to replenishing the body's astaxanthin, natural carotene and variety of minerals. It has an effect on antioxidant activity,
protect skin, protect vision and improve immunity.
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Dunaliella Salina
Gum Base Candy,
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Dunaliella salina is rich in antioxidant needed
by the human body health, resistance to radiation and enhance human immunity of natural carotenoids and 70 kinds of minerals and
trace elements.
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Haematococcus
Pluvialis Gum Candy,
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The main component of Haematococcus Pluvialis
is astaxanthin. It has six anti-aging effect protect the skin; protect eye health; helps to support the cardiovascular system;
maintain a healthy joints and connective tissue; and, increase strength and endurance.
Fish Oil adjusts the blood liquid which may,
prevent blood clots, cerebral thrombosis, cerebral hemorrhage and stroke. Additionally, fish oil may prevent arthritis, Alzheimer’s
disease, improve the memory and vision, and control presbyopia.
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Earthworm Protein
tableting Candy,
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Earthworm Protein is used to improve blood circulation,
inhibit platelet aggregation, reduce glucose concentrations, and prevent blood clots. It may be a control efficiency for
coronary heart disease, arteriosclerosis, and other hematologic disorders.
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Collagen Protein
tableting candy,
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Collagen Protein is rich in glycine, proline
hydroxyproline and other amino acid needed for human body. Collagen protein may have a beneficial effect for skin, hair, bones
and muscles.
Krill Oil is rich in EPA and DHA. This may
have beneficial health effects, including cardiovascular, nerve, bones, joints, vision, and skin care.
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Phosphatidylserine
tableting candy,
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Phosphatidylserine may improve the function
of the brain by promoting the recovery of brain; and central nervous system. Phosphatidylserine can be used for auxiliary
treatment dementia and age related memory loss.
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Milk Powder
tableting candy,
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Milk powder tablet is a nutrition supplement.
Hygienic Products
The hygienic product line includes the following
products:
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Feminine Gel products for women,
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Anti-bacteria product used as an auxiliary
treatment for vaginal bacterial.
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Anti-bacterial skin liquid
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Anti-bacteria liquids used for skin sterilization.
Inhibit the bromhidrosis and relief beriberi itch
Confucian owns a 100,000 stage purification
workshops, advanced production lines and manufacturing equipment. The Company has a higher capacity for OEM processing of tablets,
hard capsules, soft capsules, oral liquid, granules, and powders.
Plan
By following the Company motto of being “passionate
for the health industry, bringing together the world's resources, focusing on consumer demand, and creating a win-win situation
‘, the Company is eager to develop businesses in the international health and pharmaceutical market.
The Company’s near term goal is to reach
breakeven within a 6-month period time. In order to reach such goal, the Company is increasing its sales and production volume
through arrangements and networking with its existing customers and its affiliated companies. Additionally, it plans to increase
the size of its sales department to develop new customers.
The Company’s ultimate goal is to make
the business profitable and competitive in the international health and pharmaceutical market. To achieve such goal, the Company
needs to cooperate with other businesses having capital, market, technology, or products. Additionally, the Company needs to recruit
sufficient workforce and talents and actively develop new technology and new products through research and development.
Market Overview
Domestic Markets
Through member based distribution network,
the Company has access to the major markets in Jining City area and most other cities in the Shandong province.
International Market
Currently international markets show an interest
in Chinese herb medicine. For instance, European and US companies in the food industry use advanced technology to extract ginkgo
biloba, then add it in gum, chocolate, and other health foods. The Company focuses on product diversification and innovation. It
plans to sell its produces in well-known retail stores in Europe and US, such as Walmart.
Market Opportunity
Consumers are increasingly concerned about
their own health. The spending on health-related products has increased year by year, and the demand for nutrition and health food
is high. According to the international standard classification, medicine and health care is one of the world's fastest growing
trade sectors. Sales of health food is currently experiencing a rapid annual growth.
In China, the health products market is expanding
along with the growth of economy and acceleration of aged population. People used to see health products as optional. Now they
are necessities of daily life. The sixty and older group is expected to keep growing fast. The elderly group tends to draw attention
to nutrition and health product, which will boost the development of the health market. In addition, young people are beginning
to pay more attention to their heath, and health food and products are the new powerful impetus. Therefore, the Company believes
it will be able to take advantage of this increased demand.
Competition
At present, Chinese health food manufacturers
are mainly concentrated in Shandong, Jiangsu, Zhejiang, Anhui, Ningxia and a few other regions. Although in recent years, the
health and production conditions of the eastern coastal areas have been improved to some extent. Overall, China’s nutrition
and health food businesses are small scaled, use outdated technology, and lack brand recognition.
Intellectual Property
Confucian is actively planning research and
development activities in order to patent these products.
Government Regulation
The great social demand of nutrition and health
care products has led to a policy of governmental support. In December 2011, the Nutrient agency released “125 Development
Plan for Food Industry”, in which nutrition and health care products manufacturing was first listed as the most important
development within the industry. In addition, “the opinions of State Council on Promoting Health Development of Service Industry”
published in 2013, “Notice on Promoting Health and Pension Services” published in 2014, and “Chinese Food and
Nutrition Development Program” published in 2014 all had positive effects on the development of health products industry.
Employees
Confucian currently has 38 full time employees,
including 2 management employees, 7 office employees handling finance and administrative functions, 4 scientific researchers and
technicians; and 25 production workers.
Property
YBCC’s corporate headquarters are located
at 17800 Castleton St. Ste 180, City of Industry, California 91748. YBCC rents approximately 983 square feet of office space for
its headquarters. The lease began on September 1, 2016 and expires on September 30, 2018. As of December 31, 2016, the total monthly
base rent is $2,802.
Confucian is located in Food Industrial Park inside the economic
development Zone of JinXiang County, Jining City in the province of Shandong in China. It has three land use rights with the total
cost of approximately $736,632. One land use right expires in 2063, while the other two land use rights expire in 2065. It has
nearly 30,000 square meters standardized plant facilities.
Litigation
There are no known potential litigation matters.
ITEM 1A.
RISK
FACTORS
You should carefully
consider the risks described below together with all of the other information included in this report before making an investment
decision with regard to our securities. The statements contained in or incorporated into this offering 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. If any of the following risks actually occurs, our business,
financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
Risks Related to Our Industry
Our businesses are subject to fluctuations
in operating results due to general economic conditions, specific economic conditions in the industries in which it operates and
other external forces.
Our businesses and operations
could be affected by the following, among other factors:
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changes in general economic conditions and specific conditions in industries in which our businesses operate that can result in the deferral or reduction of purchases by end-use customers;
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the size, timing and cancellation of significant orders, which can be non-recurring;
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market acceptance of new products and product enhancements;
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announcements, introductions and transitions of new products by us or our competitors;
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deferrals of customer orders in anticipation of new products or product enhancements introduced by us or our competitors;
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changes in pricing in response to competitive pricing actions;
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the level of expenditures on research and development and sales and marketing programs;
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our ability to achieve targeted cost reductions;
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rising interest rates; and
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The loss of Confucian as our operating
business would have a material adverse effect on our business and the price of our common stock.
We have no equity ownership interest in Confucian.
Our ability to control Confucian and consolidate its financial results is through a series of contractual agreements between it
and YibaoHK. Management of Confucian is affiliates of us and the stockholders of Confucian are also our stockholders. Thus, the
VIE Agreements were not entered into as a result of arms’ length negotiations because the parties to the agreement are under
common control. Ms. Song, our CEO and Chairman has control over of the shares of Confucian and of our common stock. The VIE
Agreements may be terminated upon the termination of the business of Confucian. Any other termination would be a breach of the
agreement. While the Company believes that the VIE Agreements are legal and enforceable under PRC law, these affiliates control
the parties to the VIE Agreements and it could be possible for them to cause Confucian to breach the VIE Agreements and our unaffiliated
investors would have little or no recourse because of the inherent difficulties in enforcing their rights since all our assets
are located in the PRC. (See, PRC laws and regulations governing Confucian' current business are sometimes vague and uncertain.) In
the event that management of Confucian decides to breach the VIE Agreements, the risk of loss of the affiliated shareholders of
Confucian could be lower than unaffiliated investors and the interests of the management and shareholders of Confucian would be
in conflict with the interest of our other stockholders.
Confucian’s failure to compete
effectively may adversely affect our ability to generate revenue.
Confucian competes with other companies, many
of whom are developing or can be expected to develop products similar to Confucian. Confucian’s market is a large market
with many competitors. Many of its competitors are more established than Confucian is, and have significantly greater financial,
technical, marketing and other resources than it presently possesses. Some of Confucian’s competitors have greater name recognition
and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer
requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and
adopt more aggressive pricing policies. We cannot assure you that Confucian will be able to compete effectively with current or
future competitors or that the competitive pressures it faces will not harm it business.
We may not be able to effectively control
and manage the growth of Confucian.
If Confucian’s business and markets grow
and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. An expansion would increase demands
on its existing management, workforce and facilities. Failure to satisfy such increased demands could interrupt or adversely affect
its operations and cause delay in production and delivery of its pharmaceutical prescription, over the counter and medical nutrient
products as well as administrative inefficiencies.
We may require additional financing in
the future and a failure to obtain such required financing will inhibit Confucian’s ability to grow.
The continued growth of Confucian’s business
may require additional funding from time to time which we expect to raise in private placements of our equity or debt securities
with accredited investors or by offering our securities for sale pursuant to an effective registration statement on a market where
our common stock is traded. The proceeds of these funding will be forwarded to Confucian and accounted for as a loan to Confucian
and eliminated during consolidation. The proceeds would be used for general corporate purposes of Confucian, which could include
acquisitions, investments, repayment of debt and capital expenditures among other things. We may also use the proceeds to
repurchase our capital stock or for our corporate overhead expenses. If we borrow funds we expect to be the primary obligor on
any debt. Obtaining additional funding would be subject to a number of factors including market conditions, operating performance
and investor sentiment, many of which are outside of our control. These factors could make the timing, amount, terms and conditions
of additional funding unattractive or unavailable to us.
Our management believes that Confucian currently
has sufficient funds from working capital to meet its current operating costs over the next 6 months.
The terms of any future financing may
adversely affect your interest as stockholders.
If we require additional financing in the future,
we may be required to incur indebtedness or issue equity securities, the terms of which may adversely affect your interests in
us. For example, the issuance of additional indebtedness may be senior in right of payment to your shares upon our liquidation.
In addition, indebtedness may be under terms that make the operation of Confucian's business more difficult because the lender's
consent could be required before we take certain actions. Similarly, the terms of any equity securities we issue may be senior
in right of payment of dividends to your common stock and may contain superior rights and other rights as compared to your common
stock. Further, any such issuance of equity securities may dilute your interest in us.
We may engage in future acquisitions
that could dilute the ownership interests of our stockholders, cause us to incur debt and assume contingent liabilities.
We may review acquisition and strategic investment
prospects that we believe would complement the current product offerings of Confucian, augment its market coverage or enhance its
technical capabilities, or otherwise offer growth opportunities. From time to time we review investments in new businesses
and expect to make investments in, and to acquire, businesses, products, or technologies in the future. We expect that when we
raise funds from investors for any of these purposes we will be either the issuer or the primary obligor while the proceeds will
be forwarded to Confucian and accounted for as a loan to Confucian and eliminated during consolidation. In the event of any future
acquisitions, we could:
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issue equity securities which would dilute current stockholders’ percentage ownership;
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incur substantial debt;
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assume contingent liabilities; or
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expend significant cash.
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These actions could have a material adverse
effect on our operating results or the price of our common stock. Moreover, even if we do obtain benefits in the form of increased
sales and earnings, there may be a lag between the time when the expenses associated with an acquisition are incurred and the time
when we recognize such benefits. Acquisitions and investment activities also entail numerous risks, including:
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difficulties in the assimilation of acquired operations, technologies and/or products;
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unanticipated costs associated with the acquisition or investment transaction;
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the diversion of management’s attention from other business concerns;
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adverse effects on existing business relationships with suppliers and customers;
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risks associated with entering markets in which Confucian has no or limited prior experience;
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the potential loss of key employees of acquired organizations; and
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substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items.
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We cannot ensure that we will be able to successfully
integrate any businesses, products, technologies, or personnel that we might acquire in the future and our failure to do so could
have a material adverse effect on our and/or Confucian' business, operating results and financial condition.
We are responsible for the indemnification
of our officers and directors.
Our certificate of incorporation provides for
the indemnification and/or exculpation of our directors, officers, employees, agents and other entities which deal with it to the
maximum extent provided, and under the terms provided, by the laws and decisions of the courts of the state of Nevada. Since we
do not hold any indemnification insurance, these indemnification provisions could result in substantial expenditures, which we
may be unable to recoup, which could adversely affect our business and financial conditions. Xiuhua Song, our Chairman of Board,
President, Chief Executive Officer, and Chief Financial Officer are key personnel with rights to indemnification under our certificate
of incorporation.
We may not have adequate internal accounting
controls. While we have certain internal procedures in our budgeting, forecasting and in the management and allocation of funds,
our internal controls may not be adequate.
We are constantly striving to improve our internal
accounting controls. We expect to continue to improve our internal accounting control for budgeting, forecasting, managing and
allocating our funds and to better account for them as we grow. There is no guarantee that such improvements will be adequate or
successful or that such improvements will be carried out on a timely basis. If we do not have adequate internal accounting controls,
we may not be able to appropriately budget, forecast and manage our funds, we may also be unable to prepare accurate accounts on
a timely basis to meet our continuing financial reporting obligations and we may not be able to satisfy our obligations under US
securities laws.
Confucian is dependent on certain
key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results
of operations.
Our success is, to a certain extent, attributable
to the management, sales and marketing, and manufacturing expertise of key personnel at Confucian. Xiuhua Song, our President,
Chief Executive Officer and Chairman of the Board, performs key functions in the operation of our and Confucian's business.
There can be no assurance that Confucian will be able to retain these officers after the term of their employment contracts
expire. The loss of these officers could have a material adverse effect upon our business, financial condition, and results of
operations. Confucian must attract, recruit and retain a sizeable workforce of technically competent employees. We do not
carry key man life insurance for any of our key personnel or personnel at Confucian nor do we foresee purchasing such insurance
to protect against a loss of key personnel and the key personnel of Confucian.
We and Confucian are dependent upon the services
of Mrs. Song, for the continued growth and operation of our company because of her experience in the industry and her personal
and business contacts in China. Although we have no reason to believe that Mrs. Song will discontinue her services with us or Confucian,
the interruption or loss of her services would adversely affect our ability to effectively run Confucian's business and pursue its
business strategy as well as our results of operations.
Confucian may not be able to hire and
retain qualified personnel to support its growth and if it is unable to retain or hire these personnel in the future, its ability
to improve its products and implement its business objectives could be adversely affected.
Competition for senior management and senior
personnel in the PRC is intense, the pool of qualified candidates in the PRC is very limited, and Confucian may not be able to
retain the services of its senior executives or senior personnel, or attract and retain high-quality senior executives or senior
personnel in the future. This failure could materially and adversely affect our future growth and financial condition. Confucian
expects to hire additional sales and plant personnel throughout fiscal year 2017 in order to accommodate its growth.
If Confucian fails to increase its brand
recognition, it may face difficulty in obtaining new customers and business partners.
We believe that establishing, maintaining and
enhancing Confucian’s brand in a cost-effective manner is critical to achieving widespread acceptance of Confucian’s
current and future products and services and is an important element in Confucian's effort to increase its customer base and obtain
new business partners. We believe that the importance of brand recognition will increase as competition in Confucian’s market
develops. Some of Confucian’s potential competitors already have well-established brands in the pharmaceutical promotion
and distribution industry. Successful promotion of Confucian’s brand will depend largely on its ability to maintain a sizeable
and active customer base, its marketing efforts and its ability to provide reliable and useful products and services at competitive
prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the
expenses Confucian incurs in building its brand. If Confucian fails to successfully promote and maintain its brand, or if Confucian
incurs substantial expenses in an unsuccessful attempt to promote and maintain its brand, it may fail to attract enough new customers
or retain its existing customers to the extent necessary to realize a sufficient return on its brand-building efforts, in which
case Confucian's business, operating results and financial condition, further ours would be materially adversely affected.
Confucian's operating results may fluctuate
as a result of factors beyond its control.
Confucian's operating results may fluctuate
significantly in the future as a result of a variety of factors, many of which are beyond its control. These factors include:
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the costs of raw material and development;
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the relative speed and success with which Confucian can obtain and maintain customers, merchants and vendors for its products;
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capital expenditures for equipment;
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marketing and promotional activities and other costs;
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changes in Confucian’s pricing policies, suppliers and competitors;
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the ability of Confucian’s suppliers to provide products in a timely manner to its customers;
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changes in operating expenses;
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increased competition in Confucian’s markets; and
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other general economic and seasonal factors.
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Confucian faces risks related to product
liability claims.
Confucian does not maintain product liability
insurance. It faces the risk of loss because adverse publicity associated with product liability lawsuits, whether or
not such claims are valid. It may not be able to avoid such claims. Although product liability lawsuits in the PRC are rare, and
Confucian has not to date experienced significant failure of its products, there is no guarantee that it will not face such
liability in the future. This liability could be substantial and the occurrence of such loss or liability may have a material adverse
effect on its business, financial condition and prospects.
Confucian faces marketing risks.
Newly developed dietary supplements and technologies
may not be compatible with market needs. Because markets for drugs differentiate geographically inside China, Confucian must develop
and manufacture its products to accurately target specific markets to ensure product sales. If Confucian fails to invest in extensive
market research to understand the health needs of consumers in different geographic areas, it may face limited market acceptance
of its products, which could have material adverse effect on its sales and earnings.
We face risks relating to difficulty
in defending intellectual property rights from infringement.
Our success depends on protection of the current
and future technologies and products of Confucian and its ability to defend its intellectual property rights. Confucian has
filed for copyright protection for the various names and brands of its products sold in the PRC. However, it is possible for its
competitors to develop similar competitive products even though it has taken steps to protect its intellectual property. If
we fail to protect Confucian’s intellectual property adequately, competitors may manufacture and market products similar
to Confucian.
Confucian also relies on trade secrets, non-patented
proprietary expertise and continuing technological innovation that it shall seek to protect, in part, by entering into confidentiality
agreements with licensees, suppliers, employees and consultants. These agreements may be breached and there may not be adequate
remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of
confidentiality agreements. Moreover, its trade secrets and proprietary technology may otherwise become known or be independently
developed by its competitors. If patents are not issued with respect to products arising from research, Confucian may not be able
to maintain the confidentiality of information relating to these products.
We face risks relating to third parties
that may claim that Confucian infringes on their proprietary rights and may prevent Confucian from manufacturing and selling certain
of its products.
There has been substantial litigation in the
pharmaceutical industry with respect to the manufacturing, use and sale of new products. These lawsuits relate to the validity
and infringement of patents or proprietary rights of third parties. We and/or Confucian may be required to commence or defend against
charges relating to the infringement of patent or proprietary rights. Any such litigation could:
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require Confucian or us to incur substantial expense, even if covered by insurance or are successful in the litigation;
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require Confucian to divert significant time and effort of its technical and management personnel;
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result in the loss of Confucian’s rights to develop or make certain products; and
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require Confucian or us to pay substantial monetary damages or royalties in order to license proprietary rights from third parties.
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Although patent and intellectual property disputes
within our have often been settled through licensing or similar arrangements, costs associated with these arrangements may be substantial
and could include the long-term payment of royalties. These arrangements may be investigated by regulatory agencies and, if improper,
may be invalidated. Furthermore, the required licenses may not be made available to Confucian on acceptable terms. Accordingly,
an adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent Confucian
from manufacturing and selling some of its products or increase its costs to market these products.
In addition, when seeking regulatory approval
for some of its products, Confucian is required to certify to regulatory authorities, including the SFDA that such products
do not infringe upon third party patent rights. Filing a certification against a patent gives the patent holder the right to bring
a patent infringement lawsuit against Confucian. Any lawsuit would delay the receipt of regulatory approvals. A claim of infringement
and the resulting delay could result in substantial expenses and even prevent Confucian from manufacturing and selling certain
of its products.
Confucian’s launch of a product prior
to a final court decision or the expiration of a patent held by a third party may result in substantial damages to Confucian or
us. If Confucian is found to infringe a patent held by a third party and become subject to such damages, these damages could have
a material adverse effect on the results of its operations and financial condition.
We face risks related to research and
the ability to develop new products.
Our growth and survival depends on Confucian’s
ability to consistently discover, develop and commercialize new products and find new and improve on existing technologies and
platforms. As such, if Confucian fails to make sufficient investments in research, be attentive to consumer needs or does
not focus on the most advanced technologies, its current and future products could be surpassed by more effective or advanced
products of other companies.
Risk Related To Confucian’s
Industry
Confucian’s certificates, permits,
and licenses related to its operations are subject to governmental control and renewal and failure to obtain renewal will cause
all or part of its operations to be terminated.
Confucian is subject to various PRC laws and
regulations pertaining to our industry. Confucian has attained certificates, permits, and licenses required for the operation of
a dietary supplement enterprise and the manufacturing of our products in the PRC.
Confucian intends to apply for renewal of these
health food production permits prior to expiration. During the renewal process, Confucian will be re-evaluated by the appropriate
governmental authorities and must comply with the then prevailing standards and regulations which may change from time to time.
In the event that it is not able to renew the certificates, permits and licenses, all or part of its operations may be terminated.
Furthermore, if escalating compliance costs associated with governmental standards and regulations restrict or prohibit any part
of its operations, it may adversely affect its operation and our profitability.
According to
Drug Administration Law of
the PRC
and its implemental rules, SFDA approvals may be suspended or revoked prior to the expiration date under circumstances
that include:
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producing counterfeit medicine,
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producing inferior quality products,
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failing to meet the drug GMP standards;
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purchasing medical ingredients used in the production of products sources that do not have a Pharmaceutical Manufacturing Permit or Pharmaceutical Trade Permit;
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fraudulent reporting of results or product samples in application process,
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failing to meet drug labeling and direction standards,
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bribing doctors or hospital personnel to entice them to use products,
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producing pharmaceuticals for use or resale by companies that are not approved by the SFDA, or
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the approved drug has a serious side effect.
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If Confucian’s products fail to
receive regulatory approval or are severely limited in these products' scope of use, it may be unable to recoup considerable
research and development expenditures.
Confucian’s research and development
of pharmaceutical products is subject to the regulatory approval of the SFDA in China. The regulatory approval procedure for pharmaceuticals
can be quite lengthy, costly, and uncertain. Depending upon the discretion of the SFDA, the approval process may be significantly
delayed by additional clinical testing and require the expenditure of resources not currently available; in such an event, it may
be necessary for Confucian to abandon its application. Even where approval of the product is granted, it may contain significant
limitations in the form of narrow indications, warnings, precautions, or contra-indications with respect to conditions of use.
If approval of Confucian’s product is denied, abandoned, or severely limited in terms of the scope of products use, it may
result in the inability to recoup considerable research and development expenditures.
Price control regulations may decrease
Confucian’s profitability.
The laws of the PRC provide for the government
to fix and adjust prices. The prices of certain medicines Confucian distributes, including those listed in the Chinese government's
catalogue of medications that are reimbursable under China's social insurance program, or the Insurance Catalogue, are subject
to control by the relevant state or provincial price administration authorities. The PRC establishes price levels for products
based on market conditions, average industry cost, supply and demand and social responsibility. In practice, price control with
respect to these medicines sets a ceiling on their retail price. The actual price of such medicines set by manufacturers, wholesalers
and retailers cannot historically exceed the price ceiling imposed by applicable government price control regulations. Although,
as a general matter, government price control regulations have resulted in drug prices tending to decline over time, there has
been no predictable pattern for such decreases.
None of our products are subject to price controls.
It is possible that products may be subject to price control, or that price controls may be increased in the future. To the extent
that Confucian’s products are subject to price control, its revenue, gross profit, gross margin and net income will
be affected since the revenue we derive from Confucian’s sales will be limited and it may face no limitation on its
costs. Further, if price controls affect both Confucian’s revenue and costs, its ability to be profitable and the extent
of our profitability will be effectively subject to determination by the applicable regulatory authorities in the PRC.
Adverse publicity associated with Confucian’s products,
ingredients or network marketing program, or those of similar companies, could harm its financial condition and operating
results.
The results of Confucian’s operations
may be significantly affected by the public's perception of Confucian’s product and similar companies. This perception is
dependent upon opinions concerning:
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the safety and
quality of its products and ingredients;
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the safety and quality of similar products and ingredients distributed by other companies; and
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Adverse publicity concerning any actual or
purported failure of Confucian to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing
practices, or other aspects of Confucian’s business, whether or not resulting in enforcement actions or the imposition
of penalties, could have an adverse effect on the goodwill of Confucian and could negatively affect its sales and ability generate
revenue.
In addition, Confucian’s consumers' perception
of the safety and quality of its products and ingredients as well as similar products and ingredients distributed by other companies
can be significantly influenced by media attention, publicized scientific research or findings, widespread product liability claims
and other publicity concerning Confucian’s products or ingredients or similar products and ingredients distributed by
other companies. Adverse publicity, whether or not accurate or resulting from consumers' use or misuse of Confucian’s
products, that associates consumption of its products or ingredients or any similar products or ingredients with illness or other
adverse effects, questions the benefits of Confucian’s or similar products or claims that any such products are ineffective,
inappropriately labeled or have inaccurate instructions as to their use, could negatively impact its reputation or the market demand
for Confucian’s products.
If Confucian fails to develop new products
with high profit margins, and its high profit margin products are substituted by competitor's products, our gross and net profit
margins will be adversely affected.
There is no assurance that Confucian will
be able to sustain its profit margins in the future. The supplement industry is very competitive, and there may be pressure
to reduce sale prices of products without a corresponding decrease in the price of raw materials. In addition, the supplement industry
in China is highly competitive and new products are constantly being introduced to the market. In order to increase the sales of
Confucian’s products and expand its market, it may be forced to reduce prices in the future, leading to a decrease in gross
profit margin. The research and development of new products and technologies is costly and time consuming, and there are no assurances
that Confucian’s research and development of new products will either be successful or completed within the anticipate timeframe,
if ever at all. There is no assurance that Confucian’s competitors' new products, technologies, and processes will not
render its existing products obsolete or non-competitive. To the extent that Confucian fails to develop new products with high
profit margins and its high profit margin products are substituted by competitors' products, our gross profit margins will
be adversely affected.
Risks Related To Doing Business In The PRC
Changes in the policies of the PRC government
could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business
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Confucian’s business operations may be
adversely affected by the current and future political environment in the PRC. The PRC has operated as a socialist state since
the mid-1900s and is controlled by the Communist Party of China. The Chinese government exerts substantial influence and control
over the manner in which we and it must conduct our business activities. The PRC has only permitted provincial and local economic
autonomy and private economic activities since 1988. The government of the PRC has exercised and continues to exercise substantial
control over virtually every sector of the Chinese economy, particularly the pharmaceutical industry, through regulation and state
ownership. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those
relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other
matters. Under current leadership, the government of the PRC has been pursuing economic reform policies that encourage private
economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue
to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
The PRC's economy is in a transition from a
planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national
economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC.
The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we
believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development
in the PRC will follow market forces. While we believe that this trend will continue, there can be no assurance that this will
be the case.
A change in policies by the PRC government
could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory
taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private
enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance
that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in
the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC's political, economic
and social life.
The PRC laws and regulations governing
Confucian’s current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may
harm its business.
The PRC laws and regulations governing Confucian’s
current business operations are sometimes vague and uncertain. The PRC’s legal system is a civil law system based on written
statutes, in which system decided legal cases have little value as precedents unlike the common law system prevalent in the United
States. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including
but not limited to the laws and regulations governing its business, or the enforcement and performance of its arrangements
with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese government
has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and
regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation
and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases
and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations
involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied
retroactively. We are considered a foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required
to comply with PRC laws and regulations. We cannot predict what effect the interpretation of existing or new PRC laws or regulations
may have on its businesses. If the relevant authorities find that we are in violation of PRC laws or regulations, they would
have broad discretion in dealing with such a violation, including, without limitation:
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revoking Confucian’s business and other licenses;
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requiring that we restructure its ownership or operations; and
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requiring that we discontinue any portion or all of our business.
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A slowdown, inflation or other adverse
developments in the PRC economy may harm Confucian’s customers and the demand for Confucian’s services and products.
All of Confucian’s operations are conducted
in the PRC and all of its revenues are generated from sales in the PRC. Although the PRC economy has grown significantly in recent
years, we cannot assure you that this growth will continue. A slowdown in overall economic growth, an economic downturn, a recession
or other adverse economic developments in the PRC could significantly reduce the demand for its products and harm Confucian’s
business.
While the PRC economy has experienced rapid
growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid
economic growth could lead to growth in the money supply and rising inflation. If prices for Confucian’s products rise at
a rate that is insufficient to compensate for the rise in the costs of supplies, it may harm its profitability. In order to control
inflation in the past, the PRC government has imposed controls on bank credit, limits on loans for fixed assets and restrictions
on state bank lending. Such an austere policy can lead to a slowing of economic growth. In October 2004, the People's Bank of China,
the PRC's central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure
was prompted by inflationary concerns in the Chinese economy. Repeated rises in interest rates by the central bank would likely
slow economic activity in China which could, in turn, materially increase its costs and also reduce demand for its products.
Governmental control of currency conversion
may affect the value of your investment.
The PRC government imposes controls on the
convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive
substantially all of our revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability
of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign
currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval
from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from
appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China
to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government may also in the future restrict
access to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining
sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
The fluctuation of the Renminbi may harm
your investment.
The value of the Renminbi against the U.S.
dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions.
As we rely entirely on revenues earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect
our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from
an offering of our securities into Renminbi for Confucian’s operations, appreciation of the Renminbi against the U.S. dollar
would diminish the value of the proceeds of the offering and this could harm Confucian’s business, financial condition and
results of operations because it would reduce the proceeds available to us for capital investment in proportion to the appreciation
of the Renminbi. In addition, the depreciation of significant RMB denominated assets could result in a charge to our income statement
and a reduction in the dollar value of these assets.
On July 21, 2005, the PRC government changed
its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted
to fluctuate within a narrow and managed band against a basket of certain foreign currencies. While the international reaction
to the Renminbi 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 Renminbi
against the U.S. dollar.
PRC state administration of foreign exchange
("SAFE") regulations regarding offshore financing activities by PRC residents which may increase the administrative burden
we face. The failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations
may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC
law.
SAFE, issued a public notice ("SAFE #75")
effective from November 1, 2005, which requires registration with SAFE by the PRC resident shareholders of any foreign holding
company of a PRC entity. Without registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise.
In October 2005, SAFE issued a public notice,
the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, or the SAFE notice, which requires PRC residents, including both legal persons and natural persons,
to register with the competent local SAFE branch before establishing or controlling any company outside of China, referred to as
an "offshore special purpose company," for the purpose of overseas equity financing involving onshore assets or equity
interests held by them. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required
to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in connection with
any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest
over any assets located in China. Moreover, if the offshore special purpose company was established and owned the onshore assets
or equity interests before the implementation date of the SAFE notice, a retroactive SAFE registration is required to have been
completed before March 31, 2006. If any PRC shareholder of any offshore special purpose company fails to make the required SAFE
registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their
profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company.
Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under
PRC laws for evasion of applicable foreign exchange restrictions.
It is unclear whether our other PRC resident
shareholders must make disclosure to SAFE. We believe that only PRC resident shareholders who receive ownership of the foreign
holding company in exchange for ownership in the PRC operating company are subject to SAFE #75, there can be no assurance that
SAFE will not require our other PRC resident shareholders to register and make the applicable disclosure. In addition, SAFE #75
requires that any monies remitted to PRC residents outside of the PRC be returned within 180 days; however, there is no indication
of what the penalty will be for failure to comply or if shareholder non-compliance will be considered to be a violation of SAFE
#75 by us or otherwise affect us.
In the event that the proper procedures are
not followed under SAFE #75, we could lose the ability to remit monies outside of the PRC and would therefore be unable
to pay dividends or make other distributions. Our PRC resident shareholders could be subject to fines, other sanctions and even
criminal liabilities under the PRC Foreign Exchange Administrative Regulations promulgated January 29, 1996, as amended.
The PRC's legal and judicial system may
not adequately protect our business and operations and the rights of foreign investors.
The PRC legal and judicial system may negatively
impact foreign investors. In 1982, the National People's Congress amended the Constitution of China to authorize foreign investment
and guarantee the "lawful rights and interests" of foreign investors in the PRC. However, the PRC's system of laws is
not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary, and enforcement of existing laws is inconsistent.
Many judges in the PRC lack the depth of legal training and experience that would be expected of a judge in a more developed country.
Because the PRC judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation of judicial decision-making
is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement
of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC's legal
system is based on the civil law regime, that is, it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied
to reflect domestic political changes.
The promulgation of new laws, changes to existing
laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation
over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control by foreign
parties of their investments in Chinese enterprises. There can be no assurance that a change in leadership, social or political
disruption, or unforeseen circumstances affecting the PRC's political, economic or social life, will not affect the PRC government's
ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on Confucian’s
business and prospects.
The practical effect of the PRC legal system
on Confucian’s business operations in the PRC can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In
addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise
participants. These laws, however, do impose standards concerning corporate formation and governance, which are qualitatively different
from the general corporation laws of the United States. Similarly, the PRC accounting laws mandate accounting practices, which
are not consistent with U.S. generally accepted accounting principles. PRC's accounting laws require that an annual "statutory
audit" be performed in accordance with PRC accounting standards and that the books of account of Foreign Invested Enterprises
are maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise
Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial
and tax authorities, at the risk of business license revocation. While the enforcement of substantive rights may appear less clear
than United States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies,
which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Any award rendered
by an arbitration tribunal is enforceable in accordance with the United Nations Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (1958). Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure,
while different in operation from its United States counterpart, should not present any significant impediment to the operation
of Foreign Invested Enterprises
Because our principal assets are located
outside of the United States and all of our directors and all of our officers reside outside of the United States, it may be difficult
for you to enforce your rights based on U.S. federal securities laws against us and our officers or to enforce U.S. court judgment
against us or them in the PRC.
All of our directors and all of our officers
reside outside of the United States. In addition, Confucian’s operating company is located in the PRC and substantially all
of its assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce
their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either
the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further,
it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against
us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.
The relative lack of public company experience
of our management team may put us at a competitive disadvantage.
Our management team lacks public company experience,
which could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of
2002. The individuals who now constitute our senior management have never had responsibility for managing a publicly traded company.
Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior
management may not be able to implement programs and policies in an effective and timely manner that adequately responds to such
increased legal, regulatory compliance and reporting requirements. Our failure to comply with all applicable requirements could
lead to the imposition of fines and penalties and distract our management from attending to the growth of our business.
RISKS RELATED TO OUR COMMON STOCK.
Our officers and directors control us
through their positions and stock ownership and their interests may differ from other stockholders.
Our officers and directors beneficially own
approximately 42% of our common stock. As a result, she is able to influence the outcome of stockholder votes on various matters,
including the election of directors and extraordinary corporate transactions including business combinations. Yet Mrs. Song's interests
may differ from those of other stockholders. Furthermore, ownership of 42% of our common stock by our officers and directors reduces
the public float and liquidity, and may affect the market price.
We are not likely to pay cash dividends
in the foreseeable future.
We intend to retain any future earnings for
use in the operation and expansion of Confucian’s business. We do not expect to pay any cash dividends in the foreseeable
future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating
subsidiaries. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make
distributions to us, including restrictions on the conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions.
Our common stock is illiquid and subject
to price volatility unrelated to Confucian’s operations.
If a market for our common stock does develop,
its market price could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve
Confucian’s planned growth, quarterly operating results of other companies in the same industry, trading volume in our common
stock, changes in general conditions in the economy and the financial markets or other developments affecting Confucian or its
competitors. In addition, the stock market itself is subject to extreme price and volume fluctuations. This volatility has had
a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance
and could have the same effect on our common stock.
Investors may have difficulty liquidating
their investment because our common stock Is subject to the "Penny Stock" rules, which require delivery of a schedule
explaining the penny stock market and the associated risks before any sale.
Our common stock may be subject to regulations
prescribed by the SEC relating to "penny stocks." The SEC has adopted regulations that generally define a penny stock
to be any equity security that has a market price (as defined in such regulations) of less than $5 per share, subject to certain
exceptions. These regulations impose additional sales practice requirements on broker-dealers who sell penny stocks to persons
other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 and individuals
with a net worth in excess of $1,000,000 or annual income exceeding $200,000 (individually) or $300,000 (jointly with their spouse).
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of these
securities and have received the purchaser's prior written consent to the transaction. Additionally, for any transaction, other
than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the
sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally,
monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on
the limited market in penny stocks.
Legal remedies, which may be available to the
investor, are as follows:
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If penny stocks are sold in violation of the investor's rights listed above, or other federal or state securities laws, the investor may be able to cancel his purchase and get his money back.
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If the stocks are sold in a fraudulent manner, the investor may be able to sue the persons and firms that caused the fraud for damages.
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If the investor has signed an arbitration agreement, however, s/he may have to pursue a claim through arbitration.
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If the person purchasing the securities is
someone other than an accredited investor or an established customer of the broker-dealer, the broker-dealer must also approve
the potential customer's account by obtaining information concerning the customer's financial situation, investment experience
and investment objectives. The broker-dealer must also make a determination whether the transaction is suitable for the customer
and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of
evaluating the risk of transactions in such securities. Accordingly, the SEC's rules may limit the number of potential purchasers
of the shares of our common stock and stockholders may have difficulty selling their securities.
A large number of shares will be eligible
for future sale and may depress our stock price.
We may be required, under terms of future financing
arrangements, to offer a large number of common shares to the public, or to register for sale by future private investors a large
number of shares sold in private sales to them.
Sales of substantial amounts of common stock,
or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stock at prices
that may be below the then-current market price of our common stock, could adversely affect the market price of our common stock
and could impair our ability to raise capital through the sale of our equity securities, either of which would decrease the value
of any earlier investment in our common stock.
We are authorized to issue "blank
check" preferred stock, which, if issued without stockholders’ approval, may adversely affect the rights of holders
of our common stock.
We are authorized to issue 50,000,000 shares
of preferred stock, of which 974,730 have been issued as Series A Preferred Stock. The Series A Preferred shares are convertible
into common shares on a 1:1 ratio at a fixed rate of $3 per share. Preferred shares have no voting rights, have no redemption
rights and earn no dividends. Holders of Series A Convertible Preferred Stock are not permitted to convert their stock into common
shares until the Company’s market capital reaches $15,000,000. Upon dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary, the holders of the then outstanding shares of Series A Convertible Preferred Stock shall be entitled
to receive out of the assets of the Company the sum of $0.0001 per share (the “Liquidation Rate”) before any payment
or distribution shall be made on any other class of capital stock of the Company ranking junior to the Series A Convertible Preferred
Stock. This could dilute your ownership.
The Board of Directors is authorized under
our Articles of Amendment to provide for the issuance of additional shares of preferred stock by resolution, and to fix the designation,
powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof without
any further vote or action by the stockholders. Any shares of preferred stock so issued are likely to have priority over the common
stock with respect to dividend or liquidation rights. In the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in control, which could have the effect of discouraging
bids for our company and thereby prevent stockholders from receiving the maximum value for their shares. We have no present intention
to issue any shares of its preferred stock in order to discourage or delay a change of control. However, there can be no assurance
that preferred stock will not be issued at some time in the future.
Failure to raise additional capital
as needed could adversely affect the Company and its ability to grow.
The Company will need considerable
amounts of capital to develop its business. It may raise funds through public or private equity offerings or debt financings. If
the Company cannot raise funds on acceptable terms when needed, it may not be able to grow or maintain the business. Furthermore,
such lack of funds may inhibit the Company’s ability to respond to competitive pressures or unanticipated capital needs,
or may force the Company to reduce operating expenses, which could significantly harm the business and development of operations.
Because the Company’s independent auditors have expressed doubt as to the Company’s ability to continue as a “going
concern,” as reported in the consolidated financial statements of the Company, its ability to raise capital may be severely
hampered. Similarly, the Company’s ability to borrow any such capital may be more expensive and difficult to obtain until
this “going concern” issue is eliminated.