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 effects of terrorist activity and international conflicts, which could lead to business interruptions;
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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 Shandong Confucian Biologics
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
Shandong Confucian Biologics. Our ability to control Shandong Confucian Biologics and consolidate its financial results is through
a series of contractual agreements between it and YibaoHK. Management of Shandong Confucian Biologics is affiliates of us and the
stockholders of Shandong Confucian Biologics 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 Shandong Confucian Biologics and of our common stock. The VIE Agreements may be terminated
upon the termination of the business of Shandong Confucian Biologics. 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 Shandong Confucian Biologics 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 Shandong Confucian Biologics' current business
are sometimes vague and uncertain.) In the event that management of Shandong Confucian Biologics decides to breach the VIE
Agreements, the risk of loss of the affiliated shareholders of Shandong Confucian Biologics could be lower than unaffiliated investors
and the interests of the management and shareholders of Shandong Confucian Biologics would be in conflict with the interest of
our other stockholders.
Shandong Confucian Biologics’
failure to compete effectively may adversely affect our ability to generate revenue.
Shandong Confucian Biologics competes with
other companies, many of whom are developing or can be expected to develop products similar to Shandong Confucian Biologics. Shandong
Confucian Biologics’ market is a large market with many competitors. Many of its competitors are more established than Shandong
Confucian Biologics is, and have significantly greater financial, technical, marketing and other resources than it presently possess.
Some of Shandong Confucian Biologics’ 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 Shandong Confucian Biologics 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 Shandong Confucian Biologics.
If Shandong Confucian Biologics’
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 Shandong Confucian Biologics’ ability to grow.
The continued growth of Shandong
Confucian Biologics’ 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 Shandong Confucian Biologics and accounted for as a loan to Shandong Confucian Biologics and eliminated during
consolidation. The proceeds would be used for general corporate purposes of Shandong Confucian Biologics, 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 Shandong Confucian
Biologics currently has sufficient funds from working capital to meet its current operating costs over the next 12 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 Shandong Confucian Biologics' 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 Shandong Confucian Biologics, 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 Shandong Confucian Biologics and accounted for as a loan to Shandong Confucian Biologics
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 Shandong Confucian Biologics 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 Shandong Confucian Biologics' 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.
Rules adopted by the SEC pursuant to Section
404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation
of this assessment by our company's independent registered public accountants. The SEC extended the compliance dates for "non-accelerated
filers," as defined by the SEC. Accordingly, we believe that the annual assessment of our internal controls requirement will
first apply to our annual report for the 2007 fiscal year and the attestation requirement of management's assessment by our independent
registered public accountants will first apply to our annual report for the 2009 fiscal year. The standards that must be met for
management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation,
testing and possible remediation to meet the detailed standards. We have not yet evaluated our internal controls over financial
reporting in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial
reporting, as will be required by Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC. We have
never performed the system and process evaluation and testing required in an effort to comply with the management assessment and
auditor certification requirements of Section 404, which will initially apply to us as of December 31, 2007 and December 31, 2009
respectively. Our lack of familiarity with Section 404 may unduly divert management's time and resources in executing the business
plan. If, in the future, management identifies one or more material weaknesses, or our external auditors are unable to attest that
our management's report is fairly stated or to express an opinion on the effectiveness of our internal controls, this could result
in a loss of investor confidence in our financial reports, have an adverse effect on our stock price and/or subject us to sanctions
or investigation by regulatory authorities. So far, our external auditors have not reported to our board of directors any significant
weakness on our internal control and provided recommendations accordingly.
Shandong Confucian Biologics is
Dependent On Certain Key Personnel And Loss Of These Key Personnel Could Have A Material Adverse Effect On Our and Shandong Confucian
Biologics' 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 Shandong Confucian Biologics. Xiuhua Song,
our President, Chief Executive Officer and Chairman of the Board, performs key functions in the operation of our and Shandong
Confucian Biologics' business. There can be no assurance that Shandong Confucian Biologics 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. Shandong Confucian Biologics 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 Shandong
Confucian Biologics nor do we foresee purchasing such insurance to protect against a loss of key personnel and the key personnel
of Shandong Confucian Biologics.
We and Shandong Confucian Biologics
are dependent upon the services of Mrs. Song, for the continued growth and operation of our company because of his experience
in the industry and his personal and business contacts in China. Neither we nor Shandong Confucian Biologics have an
employment agreement with Mrs. Song and do not anticipate entering into an employment agreement in the foreseeable future.
Although we have no reason to believe that Mrs. Song will discontinue her services with us or Shandong Confucian Biologics,
the interruption or loss of his services would adversely affect our ability to effectively run Shandong Confucian Biologics'
business and pursue its business strategy as well as our results of operations.
Shandong Confucian Biologics 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 Shandong Confucian Biologics
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. Shandong Confucian Biologics expects to hire additional sales and plant personnel throughout fiscal year 2016 in order
to accommodate its growth.
If Shandong Confucian Biologics fails
to increase its brand recognition, it may face difficulty in obtaining new customers and business partners.
We believe that establishing, maintaining
and enhancing Shandong Confucian Biologics’ brand in a cost-effective manner is critical to achieving widespread acceptance
of Shandong Confucian Biologics’ current and future products and services and is an important element in Shandong Confucian
Biologics' effort to increase its customer base and obtain new business partners. We believe that the importance of brand recognition
will increase as competition in Shandong Confucian Biologics’ market develops. Some of Shandong Confucian Biologics’
potential competitors already have well-established brands in the pharmaceutical promotion and distribution industry. Successful
promotion of Shandong Confucian Biologics’ 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 Shandong Confucian
Biologics incurs in building its brand. If Shandong Confucian Biologics fails to successfully promote and maintain its brand, or
if Shandong Confucian Biologics 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 Shandong Confucian Biologics' business, operating results and financial condition, further
ours would be materially adversely affected.
Shandong Confucian Biologics' operating
results may fluctuate as a result of factors beyond its control.
Shandong Confucian Biologics' 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 Shandong Confucian Biologics 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 Shandong Confucian Biologics’ pricing policies, suppliers and competitors;
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the ability of Shandong Confucian Biologics’ 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 Shandong Confucian Biologics’ markets; and
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other general economic and seasonal factors.
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Shandong Confucian Biologics faces
risks related to product liability claims.
Shandong Confucian Biologics 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 Shandong Confucian Biologics 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.
Shandong Confucian Biologics faces
marketing risks.
Newly developed dietary supplements and
technologies may not be compatible with market needs. Because markets for drugs differentiate geographically inside China, Shandong
Confucian Biologics must develop and manufacture its products to accurately target specific markets to ensure product sales. If
Shandong Confucian Biologics 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 Shandong Confucian Biologics and its ability to defend its intellectual property
rights. Shandong Confucian Biologics 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 Shandong Confucian Biologics’ intellectual property adequately,
competitors may manufacture and market products similar to Shandong Confucian Biologics.
Shandong Confucian Biologics 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, Shandong Confucian Biologics 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 Shandong Confucian Biologics infringes on their proprietary rights and may prevent Shandong Confucian Biologics
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 Shandong Confucian Biologics 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 Shandong Confucian Biologics or us to incur substantial expense, even if covered by insurance or are successful in the litigation;
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require Shandong Confucian Biologics to divert significant time and effort of its technical and management personnel;
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result in the loss of Shandong Confucian Biologics’ rights to develop or make certain products; and
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require Shandong Confucian Biologics 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 Shandong Confucian Biologics
on acceptable terms. Accordingly, an adverse determination in a judicial or administrative proceeding or a failure to obtain necessary
licenses could prevent Shandong Confucian Biologics 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, Shandong Confucian Biologics 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 Shandong Confucian Biologics. 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 Shandong
Confucian Biologics from manufacturing and selling certain of its products.
Shandong Confucian Biologics’ 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 Shandong Confucian Biologics or us. If Shandong Confucian Biologics 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
Shandong Confucian Biologics’ ability to consistently discover, develop and commercialize new products and find new and
improve on existing technologies and platforms. As such, if Shandong Confucian Biologics 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 Shandong Confucian
Biologics’ Industry
Shandong Confucian Biologics’
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.
Shandong Confucian Biologics is subject
to various PRC laws and regulations pertaining to our industry. Shandong Confucian Biologics has attained certificates, permits,
and licenses required for the operation of a dietary supplement enterprise and the manufacturing of our products in the PRC.
Shandong Confucian Biologics intends to
apply for renewal of these health food production permits prior to expiration. During the renewal process, Shandong Confucian Biologics
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 t 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 Shandong Confucian Biologics’
pharmaceutical 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.
Shandong Confucian Biologics’ 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 Shandong Confucian Biologics 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 Shandong Confucian Biologics’ 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
Shandong Confucian Biologics' profitability.
The laws of the PRC provide for the government
to fix and adjust prices. The prices of certain medicines Shandong Confucian Biologics 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 Shandong Confucian Biologics’ products are subject to price control, its revenue, gross
profit, gross margin and net income will be affected since the revenue we derive from Shandong Confucian Biologics’
sales will be limited and it may face no limitation on its costs. Further, if price controls affect both Shandong
Confucian Biologics’ 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 Shandong
Confucian Biologics' products, ingredients or network marketing program, or those of similar companies, could harm its
financial condition and operating results.
The results of Shandong Confucian Biologics’
operations may be significantly affected by the public's perception of Shandong Confucian Biologics’ 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 Shandong Confucian Biologics to comply with applicable laws and regulations regarding product claims and
advertising, good manufacturing practices, or other aspects of Shandong Confucian Biologics’ business, whether or not
resulting in enforcement actions or the imposition of penalties, could have an adverse effect on the goodwill of Shandong Confucian
Biologics and could negatively affect its sales and ability generate revenue.
In addition, Shandong Confucian Biologics’
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 Shandong Confucian Biologics’ 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 Shandong Confucian Biologics’ 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 Shandong Confucian Biologics’
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 Shandong Confucian Biologics’ products.
If Shandong Confucian Biologics 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 Shandong Confucian Biologics 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 Shandong Confucian Biologics’ 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 Shandong
Confucian Biologics’ 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 Shandong Confucian Biologics’ competitors' new
products, technologies, and processes will not render its existing products obsolete or non-competitive. To the extent that
Shandong Confucian Biologics 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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Shandong Confucian Biologics’ 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
Shandong Confucian Biologics’ 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
Shandong Confucian Biologics’ 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 Shandong
Confucian Biologics’ 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 Shandong Confucian Biologics’ customers and the demand for Shandong Confucian Biologics’
services and products.
All of Shandong Confucian Biologics’
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 Shandong Confucian Biologics’ 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 Shandong Confucian Biologics’
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 Shandong Confucian Biologics’
operations, appreciation of the Renminbi against the U.S. dollar would diminish the value of the proceeds of the offering and
this could harm Shandong Confucian Biologics’ 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 Shandong
Confucian Biologics’ business and prospects.
The practical effect of the PRC legal system
on Shandong Confucian Biologics’ 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
Any Recurrence Of Severe Acute Respiratory
Syndrome, Or SARS, Or Another widespread public health problem, could harm Shandong Confucian Biologics’ Operations.
A renewed outbreak of SARS or another widespread
public health problem (such as bird flu) in the PRC, where all of our revenues are derived, could significantly harm Shandong Confucian
Biologics’ operations. Shandong Confucian Biologics’ operations may be impacted by a number of health-related factors,
including quarantines or closures of some of its offices that would adversely disrupt its operations. Any of the foregoing events
or other unforeseen consequences of public health problems could significantly harm its operations.
Because Our Principal Assets Are
Located Outside Of The United States And Most 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.
Most of our directors and all of our officers
reside outside of the United States. In addition, Shandong Confucian Biologics’ 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 92% of our common stock. As a result, he 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 92% 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 Shandong Confucian Biologics' 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 Shandong Confucian Biologics’ 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
Shandong Confucian Biologics’ 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
Shandong Confucian Biologics 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.