Introduction
Until
the change in control described below, we were a medical device company that, subject to government approval, planned to manufacture
and market medical devices.
In
August 2017, Hassan Salari, Francine Salari, Julian Salari, Fredrick Salari, who then collectively owned 53,933,373
shares of our common stock (the “Control Shares”), representing approximately 76.04%, of our outstanding shares
of common stock, sold the Control Shares to Team Youn Bio Medicine International Corp. Limited, a China based company
(“Team Youn”), for a total purchase price of $275,000 pursuant to a Common Stock Purchase Agreement dated July 17
, 2017 (the “Stock Purchase Agreement”).
Contemporaneously
with the sale of the Control Shares, we sold to Dr. Hassan Salari, our former President and Chief Executive Officer, all of the
outstanding shares of our wholly-owned subsidiary, Eternity Healthcare Inc., a British Columbia corporation (“Eternity BC”),
and assigned to Dr. Salari certain intellectual property and technology related to the development, testing and manufacture of
our medical device needle free injection technology, together with all “know-how” and other proprietary rights related
thereto (the “IP Rights”) for a total purchase price of $CAD100,000 (equivalent to $USD79,590) pursuant to the Stock
Purchase Agreement. Payment of the purchase price for the shares of the subsidiary and the IP Rights was made by crediting an
equal amount against the $CAD1,163,966 indebtedness we owed to Dr. Salari for advances made to pay operating expenses. Our remaining
$CAD1,063,966 of indebtedness to Dr. Salari was assigned to Team Youn pursuant to the Stock Purchase Agreement.
On
October 16, 2017, an affiliate of our company transferred all of the shares of Trillion Enterprises Group Limited (“Trillion
Enterprise”), a dormant company incorporated under the law of British Virgin Islands (“BVI”) on February 23,
2013, to us without consideration . Hong Kong Trillion Holdings Limited (“HK Trillion”) was incorporated by Trillion
Enterprise as a wholly-owned subsidiary on March 15, 2013. Both Trillion Enterprise and HK Trillion had no operations since their
inception.
On
December 13, 2017, we and HK Trillion entered into a share exchange agreement pursuant to which we issued 17,181,769 shares of
our common stock to Guizhou Tongren Zoken Biotechnology Co., Ltd. and Guizhou Zhongjing Times Management Co., Ltd., the equity
holders of Guizhou Tongren Healthy China Biotechnology Co. Ltd. (“Guizhou Tongren”), in exchange for all of the outstanding
shares of Guizhou Tongren, a company formed on September 15, 2017 to engage in the business of providing stem cell storage and
related medical therapies in China. As a result of the share exchange, Guizhou Tongren became a wholly-owned subsidiary of HK
Trillion.
On
January 16, 2018, we issued 82,946,800 shares of common stock to Team Youn upon conversion of CAD $1,063,966 (approximately USD$
829,468) at a conversion price of USD$ 0.01 per share, pursuant to a Debt Conversion Agreement with Team Youn.
On
February 22, 2018 we amended our articles of incorporation to authorize the issuance of up to 10,000,000 shares of preferred stock
by our Board of Directors in one or more series, with such designations, powers, privileges, rights, qualifications and limitations
as our Board of Directors may determine, and to increase the number of shares of common stock we are authorized to issue from
300,000,000 to 1,000,000,000 (the “Charter Amendment”). The Charter Amendment was adopted and approved by unanimous
written consent in lieu of a meeting of our Board of Directors dated as of January 18, 2018 and by written consent in lieu of
a meeting of stockholders signed by Team Youn, the record owner of 137,880,173 shares of our common stock, representing approximately
80.60% of our outstanding shares of common stock.
Overview
We
are engaged in the business of providing stem cell storage and related medical therapies in China. Guizhou Tongren, our wholly-owned
subsidiary, a leading stem cell therapy service company serving Guizhou Province and Western China, is constructing a 50,000 square-feet
facility in Tongren, Guizhou Province, China for stem cell harvesting, storage and transformation, and patient treatment that
will utilize the proprietary biotechnology developed by partner entities which is expected to be operational in September 2018.
Guizhou Province is located in southwest China with a population of approximately 35.5 million. The facility will consist of a
fully equipped stem cell therapy laboratory, immune cell research room, a genetics and gene research laboratory, and customer
treatment rooms. Upon completion, the facility will be capable of servicing about 45,000 patients annually, and storing about
200,000 cell units.
Once
completed, the facility will provide its clients with treatments and services similar to those provided by hospitals which rely
upon specialized laboratories to service their clients. Unlike those hospitals, which ship their patients’ stem cells to
external laboratories for storage and transformation, all work will be done on site at the Tongren facility.
On
March 26, 2018, we entered into a Credit Loan Agreement with Shenzhen Dongyang Medical Technology Co., Ltd. (“Dongyang
Medical”), as lender, and our wholly-owned subsidiary, Guizhou Tongren, pursuant to which we agreed to guaranty payment
of the indebtedness under a loan facility providing Guizhou Tongren with advances of up to $25 million. Advances under the loan
facility bear interest at the rate of 10% per annum. The loan facility has a term of five years. Advances under the credit facility
will be used to construct and equip the medical facility and to provide Guizhou Tongren with working capital to operate the medical
facility.
On
May 10, 2018, Guizhou Tongren entered into a Procurement Consignation Agreement with Dongyang Medical and consigned Dongyang Medical
to procure medical equipment costing approximately $31.36 million (RMB 198.568 million) that Guizhou Tongren will need to carry
out its planned cell storage, transformation and application service business. Pursuant to the agreement, Guizhou Tongren will
pay the purchase price to Dongyang Medical in five years after the equipment is accepted by Guizhou Tongren. Any unpaid balances
will bear 10% interest annually from the date of acceptance, and the interest is payable every six months.
Our
organizational structure is as follows:
Eternity
Healthcare Inc. (a Nevada corporation)
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100%
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Trillion
Enterprises Group Limited (a BVI company)
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100%
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Hong
Kong Trillion Holdings Limited (a Hong Kong company)
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100%
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Tongren
Healthy China Biotechnology Co. Ltd. (a PRC company)
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We
were incorporated in the State of Nevada on October 24, 2007 under the name Kids Book Writer Inc. On September 23, 2010, we changed
our name to Eternity Healthcare Inc. Our executive offices are located at Hang Seng Tsim Sha Tsui Bldg., 18 Carnarvon Road, Flat/Rm
1006 10/F,Tsim Sha TsuiI, KL Hong Kong, and our telephone number is +8613691884662.
Market
for Our Services
In
recent years, cell therapy and stem cell technologies’ development has induced rapid growth in the stem cell related treatment
market globally. According to Technavio, the global cell therapy market reached $63.5 billion in year 2015 and will
grow at a 34% rate for the next 20 years. China has been a major player in stem cell technology research and application
due to less religious resistance, large clinical resources from its population and patient base, and government policies’
support.
From
the perspective of an industry chain, the first level of the stem cell industry is the extraction and storage of stem cells, the
midstream is the research and development of stem cell preparation and related stem cell drugs, and the last level is the therapeutic
application of stem cells. According to Market Research and Transparency Market Research, China’s stem cell industry
is established. However, the market is still very under-served outside of tier-one cities such as Beijing, Shanghai
and Shenzhen. The current national total stem cell storage rate in 2016 was still less than 1% in China, and the regional storage
rate varies greatly. The estimated stem cell storage rate in 2016 in more developed regions is approximately 3% (based on
the number of new subscriber sign-ups for the year divided by the number of newborns). Market Research & Transparency Market
Research also points out that, China’s stem cell storage market should be expected to exceed RMB 30 billion if it catches developed
countries’ storage rate level.
As
one of the few players in China’s stem cell storage, transformation and application market, we intend to focus on serving
people in provinces in the middle and western part of China. We plan to reach potential customers through cooperation with major
physical examination institutions and health management institutions. Through cooperation with medical research institutions such
as the research departments of major hospitals and leading universities in cell therapy, we hope to reach potential patients who
are not satisfied with traditional treatments methods. By establishing our own healthcare associations and holding healthcare
forums to educate the market, we hope to attract potential consumers.
Competition
As
an emerging industry with advanced technologies, there are few players in the stem cell market in China. Most participants in
the industry are focused on newborns’ core blood stem cell storage (there are seven government-licensed core blood banks
nationally), and fewer provide adult stem cell extraction and storage. There are very few competitors engaged in stem cell transformation
and application. Some companies such as Guanhao Biotech have set up storage centers in highly-developed cities (e.g. Guanhao Biotech’s
new storage center in Hangzhou has the capacity of storing 100,000 cell units).
Geographically,
the current adult stem cell storage banks are all located in North China, East China and South China. There is no company serving
middle and western China. We are establishing our facility in Quizho to open the market in Middle and Western China. The target
market includes Guizhou, Yunan, Guangxi, Xinjiang and Tibet and we have already chosen Tongren, Guizhou as our first storage and
treatment center. The center will be capable of storing 200,000 cell units and serving 45,000 customers annually. We believe
this strategy can differentiate us from our competitors and enable us to gain a leading position in the middle and western regions
of China.
Government
Regulation
We
operate our business in China under a legal regime consisting of the State Council, which is the highest authority of the executive
branch of the PRC central government, and several ministries and agencies under its authority including:
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the
National Health and Family Planning Commission (NHFPC);
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the
China Food and Drug Administration (CFDA);
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the
Ministry of Commerce (MOC); and
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the
National Development and Reform Commission (NDRC).
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The
State Council and ministries and agencies have issued a series of rules that regulate a number of different substantive areas
of our business, which are discussed below.
In
April 2007, the NDRC issued the “Eleventh Five-Year Plan for Bio-industry Development”, which stated the target of:
based on the development foundation and comparative advantages of China’s bio-industry, build up a large-scale industry and enhance
the ability of independent innovation. The requirements of industrialization, agglomeration and internationalization accelerated
the development of biomedicine, bio-agriculture, bio-energy, bio-manufacturing, bio-environmental protection and other industries.
In
June 2009, the General Office of the State Council issued the “Notice on Several Policies for Promoting the Accelerated
Development of the Biological Industry”, which refines the Outline of the National Medium- and Long-Term Scientific and
Technological Development Plan (2006-2020) and the Development of the Biological Industry. The support policy for the bio-industry
in the Five-Planning Plan. Proposing to accelerate the cultivation of the bio-industry is a major measure for China to grasp the
strategic opportunities of the new scientific and technological revolution and comprehensively build an innovative country in
the new century; accelerate the cultivation of the bio-industry into a pillar industry in the high-tech field and a strategic
emerging industry of the country.
In
2016, the “13th Five-Year Plan for National Economic and Social Development”, “Made in China 2025” and “Guidelines
for the Development of Pharmaceutical Industry” were successively introduced to promote new medical technologies such as
precision medicine, tumor immunotherapy and stem cell therapy. The development has positive significance. The “13th Five-Year
Plan for Biological Industry Development” will accelerate the development of new applications that benefit people’s livelihood,
implement the bio-industry project for the development of healthy China and beautiful China, and promote the application of emerging
technologies such as genetic testing and cell therapy. In addition, the CFDA’s “Guidelines for the Research and Evaluation
of Cellular Products” established the principles for the evaluation of future cellular products, releasing a clear signal
to the market, which will prompt the improvement of industry thresholds and supervision, allowing enterprises to focus on upgrading
core technologies and Improve the standardization and standardization of the industry in the cell industry.
On
March 6, 2017, in order to implement the key special management tasks of the national key R&D plan, give full play to the
role of experts in project process management, ensure the implementation of special tasks and the realization of mission objectives,
China Biotechnology Development Center established “stem cells and transformation research” special expert group.
In
June 2017, the Ministry of Science and Technology, the NHFPC, the General Administration of Sports, CFDA, the State Administration
of Traditional Chinese Medicine, and the Logistics Support Department of the Central Military Commission reissued the “13th
Five-Year Plan” for the Health Industry Science and Technology Innovation Project. “A new plan after the “13th
Five-Year Plan for Health and Health Technology Innovation”, both plans explicitly require the accelerated clinical application
of stem cell and regenerative medicine, immunotherapy and other biological treatment frontier technologies. In the same month,
the Guangzhou Municipal Development and Reform Commission publicly solicited the “Guangzhou Biomedical Industry Development
Five-Year Action Plan (2017-2021)” (draft for comments) to clearly define stem cells and regenerative medicine, immune cell
therapy, CAR-T cell therapy, and precision. Medical and other industries are listed as the leading enterprises in the new industry
and strive to achieve a revenue of 100 billion RMB from the end of 2021.
At
the end of August 2017, the US FDA approved Novartis’s cellular immunotherapy market. The China State Food and Drug Administration
has issued the “Guidelines for the Research and Evaluation of Cellular Therapeutic Products (Trial)”. It means that
the door to the clinic application of stem cell technologies has finally opened.
On
November 22, 2017, the Stem Cell Biology Branch of the Chinese Society of Cell Biology officially released China’s first universal
standard for stem cells, “General Requirements for Stem Cells,” which will promote the standardization of stem cells
treatment in China. The “General Requirements for Stem Cells” stipulates six parts of stem cell terms and definitions,
classification, ethics, and quality requirements. Based on key issues such as safety, efficacy, and stability of stem cell preparations,
general requirements for donor cell screening tissue collection, cell separation, culture, cryopreservation, and detection have
been established.
On
November 28, 2017, the second batch of stem cell clinical research filing agencies was announced. Up to now, the National Health
and Safety Commission and the Food and Drug Administration have announced the first batch of 114 stem cell clinical research institutions,
including 102 medical units and the first batch of 12 military hospitals. Shenzhen, Guangzhou, Shanghai, Beijing and other cities
have successively issued regional support policies to accelerate the clinical application and approval of stem cell technology.
In
December 2017, the Chinese government issued trial guidelines concerning development and testing of cell therapy products in China.
Although these trial guidelines are not yet codified as mandatory regulation, we believe they provide a measure of clarity and
a preliminary regulatory pathway for our cell therapy operations in a still uncertain regulatory environment.
Employees
As of July 1, 2018, we had no employees other than Wei-Tao Wang, our President, Chief Executive Officer and Chief Financial officer.
An
investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together
with all of the other information included in this report, before making an investment decision. If any of the following risks
actually occurs, our business, financial condition or results of operations could suffer. 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 Business
We
have a history of losses and at April 30, 2018 we had little cash and negative working capital, which raise substantial doubt
about our ability to continue as a going concern.
From
inception to April 30, 2018, we incurred accumulated losses of $3,161,808 and as of April 30, 2018, we had $21,908 of cash and
negative working capital of $1,310,821, respectively.
Although
our wholly-owned subsidiary, Guizhou Tongren Healthy China Biotechnology Co., Ltd., has a credit facility to provide it with advances
for up to $25 million for five years, which we believe will provide sufficient cash to fund its operations for the next 12 months,
the successful completion of our infrastructure for cell storage, transformation and application services, and our transition
to attaining profitable operations, there is no assurance that actual cash requirements will not exceed our estimates. The report
of our independent registered public accountants on our financial statements as of and for the year ended April 30, 2018 states
that these factors raise uncertainty about our ability to continue as a going concern.
We
may require additional financing to implement our business plan, which financing may not be available on acceptable terms.
We
may require additional financing to implement our business plan. We may not be able to obtain additional equity or debt financing
on acceptable terms as required. Even if financing is available, it may not be available on terms that are favorable to us or
in sufficient amounts to satisfy our requirements. Any additional equity financing may involve substantial dilution to our then
existing stockholders. If we require, but are unable to obtain, additional financing in the future, we may be unable to implement
our business plan and our growth strategies, respond to changing business or economic conditions, withstand adverse operating
results and compete effectively.
Our
operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising
from the absence of a significant operating history.
We
have not commenced operations or generated revenues. Due to the nature of our business and the early stage of our development,
our operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties
arising from the absence of a significant operating history. We expect to continue to incur development costs and operating costs.
Consequently, we expect to incur operating losses and negative cash flows until our cell storage and related medical therapies
gain market acceptance sufficient to generate a commercially viable and sustainable level of revenues. We can offer no assurance
that we will ever operate profitably or that we will generate positive cash flow in the future. In addition, our operating results
in the future may be subject to significant fluctuations due to many factors not within our control, such as the unpredictability
of the market and demand for our services, the level of competition and general economic conditions. If our business plan is not
successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.
If
we fail to effectively manage the growth of our company, our future business results could be harmed and our managerial and operational
resources may be strained.
If
we attain market acceptance of our cell storage and related medical therapies, we expect to experience significant growth in the
scope and complexity of our business. We will need to add staff to market our services, manage operations, handle sales and marketing
efforts and perform finance and accounting functions. We anticipate that we will be required to hire a broad range of additional
personnel in order to successfully advance our operations. This growth is likely to place a strain on our management and operational
resources. The failure to develop and implement effective systems, or to hire and retain sufficient personnel for the performance
of all of the functions necessary to effectively service and manage our potential business, or the failure to manage growth effectively,
could have a material adverse effect on our business and financial condition.
We
face intense competition.
We
face intense competition. We believe that our ability to compete depends upon many factors both within and beyond our control.
Some of our current and potential competitors may have greater financial, marketing, and other resources than we have. Certain
of our competitors may be able to devote greater resources to marketing and promotional campaigns than us. Increased competition
may reduce our market share and require us to increase our marketing and promotional efforts, which could negatively affect our
operating margins or force us to incur losses. There can be no assurance that we will be able to compete successfully against
current and future competitors, and competitive pressures may have a material adverse effect on our business, prospects, financial
condition and results of operations.
Changes
in economic conditions and consumer confidence in China may influence the market for our product.
Our
business and revenue growth primarily depend on the size of the market for stem cell storage and related medical therapies in
China. As a result, our revenue and profitability may be negatively affected by changes in national, regional or local economic
conditions and consumer confidence in China. In particular, as we focus on metropolitan markets, where living standards and consumer
purchasing power are relatively high, we are especially susceptible to changes in economic conditions, consumer confidence and
customer preferences of the urban Chinese population. External factors beyond our control that affect consumer confidence include
unemployment rates, levels of personal disposable income, national, regional or local economic conditions, and acts of war or
terrorism. Changes in economic conditions and consumer confidence could adversely affect consumer preferences, purchasing power
and spending patterns. A decrease in overall consumer spending as a result of changes in economic conditions could adversely affect
the market for our stem cell storage and related medical therapies and negatively impact our profitability. In addition, acts
of war or terrorism may cause damage to our facilities, disrupt the market for and our ability to provide stem cell and related
medical therapy services or adversely impact consumer demand. Any of these factors could have a material adverse effect on our
business, financial condition and results of operations.
We
do not have a management team in place.
Mr.
Wei-Tao Wang, is currently our sole director, President and Chief Executive and Chief Financial Officer. Consequently, currently,
we are wholly dependent upon his efforts.
If
we are unable to attract, train and retain qualified personnel, our business will be materially and adversely affected.
Our
future success depends, to a significant extent, on our ability to attract, train and retain qualified personnel, particularly
management, technical and marketing personnel with expertise in stem cell storage and related medical services. Our sales and
customer service teams are critical to establishing and maintaining a reputation for quality as they frequently interact with
our clients. We must attract qualified personnel at a fast pace to develop our management team and offer our services. As we are
still a relatively young company, our ability to train and integrate new employees into our operations may not meet the growing
demands of our business. If we are unable to attract, train, and retain qualified personnel, our business will be materially and
adversely affected.
Our
business, financial condition and results of operations, as well as our ability to obtain financing, may be adversely affected
by the downturn in the global or Chinese economy.
It
is unclear whether the Chinese economy will resume its high growth rate. There is considerable uncertainty over the long-term
effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities
of some of the world’s leading economies, including the United States. Economic conditions in China are sensitive to global
economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic
growth rate in China.
Our
business operations may be affected by economic downturns. Our services may be viewed as discretionary by our prospective clients,
who may choose to discontinue or reduce spending on such services during an economic downturn. In such an event, our ability to
retain existing clients and increase or maintain our sales will be adversely affected, which would in turn negatively impact our
business and results of operations.
Moreover,
a slowdown or disruption in the global or China’s economy may have a material and adverse impact on financing available
to us. There is a risk that our business, results of operations and prospects would be materially and adversely affected by any
global economic downturn or disruption or slowdown of China’s economy.
Future
strategic alliances or acquisitions may have a material and adverse effect on our business, reputation and results of operations.
We
may in the future enter into strategic alliances with various third parties to further our business purposes from time to time.
Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary
information, non-performance by the counter-party, and an increase in expenses incurred in establishing new strategic alliances,
any of which may materially and adversely affect our business. In addition, to the extent the strategic partner suffers negative
publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to
our reputation by virtue of our association with such third parties, and we may have little ability to control or monitor their
actions.
In
addition, although we have no current acquisition plans, if we are presented with appropriate opportunities, we may acquire additional
assets, products, technologies or businesses that are complementary to our existing business. Future acquisitions and the subsequent
integration of new assets and businesses into our own would require significant attention from our management and could result
in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations.
Acquired assets or businesses may not generate the financial results we expect. Furthermore, acquisitions could result in the
use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill
impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired
business. Moreover, the costs of identifying and consummating acquisitions may be significant. In addition to possible shareholders’
approval, we may also have to obtain approvals and licenses from the relevant government authorities in the PRC for the acquisitions
and to comply with any applicable PRC laws and regulations, which could result in increased costs and delay.
If
we or our PRC subsidiaries acquire any domestic companies in China, such acquisition will be subject to PRC laws and regulations
on foreign investment. We and our PRC subsidiaries are restricted or prohibited from directly acquiring interests in companies
in certain industries under PRC laws and regulations. Our consolidated affiliated entities outside of the PRC are not subject
to PRC laws and regulations on foreign investment and may acquire PRC companies operating in industries where foreign investments
are restricted or prohibited. However, there are uncertainties with respect to the interpretation and application of PRC laws
and regulations regarding indirect foreign investments in such industries.
We
have limited business insurance coverage.
Insurance
companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed
economies. We do not have any business liability or disruption insurance to cover our operations. We have determined that the
costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms
make it impractical for us to have such insurance. Any uninsured occurrence of business disruption may result in our incurring
substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial
condition.
Risks
Related to Doing Business in China
The
PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The
PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations,
including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other
matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements.
However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations
of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support
recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation
of economic policies, could have a significant effect on economic conditions in China or particular regions thereof.
The
health care industry within China, in particular, the insurance industry is undeveloped.
The
health care industry in China, in particular, the insurance industry, are in the early stages of development. There is no way
of knowing what impact, if any, the development of this industry will have on us.
Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.
The
PRC legal system is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value
as precedents. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation over the past three decades has significantly increased the protections
afforded to various forms of foreign or private-sector investment in China. Our PRC subsidiary is subject to various PRC laws
and regulations generally applicable to companies in China. However, since these laws and regulations are relatively new and the
PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and
enforcement of these laws, regulations and rules involve uncertainties.
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative
and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be
more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than
in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules
(some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware
of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over
the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to
respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability
to continue our operations.
Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business
and operations.
All
of our assets and all of our clients are located in China. Accordingly, our business, financial condition, results of operations
and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by
continued economic growth in China as a whole.
China’s
economy differs from the economies of most developed countries in many respects, including the level of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented
measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership
of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of
productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant
role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control
over the PRC economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting
monetary policy, and providing preferential treatment to particular industries or companies.
While
China’s economy has experienced significant growth over the past decades, growth has been uneven, both geographically and
among various sectors of the economy, and may slow down in the future. Some of the government measures may benefit the overall
Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax regulations. Any stimulus measures designed to boost
the Chinese economy may contribute to higher inflation, which could adversely affect our results of operations and financial condition.
For example, certain operating costs and expenses, such as employee compensation and office operating expenses, may increase as
a result of higher inflation.
If
relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price
may decrease.
At
various times during recent years, the United States and China have had significant disagreements over political and economic
issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United
States and China, whether or not directly related to our business, could reduce the price of our common stock.
The
slowing economic growth in China may assert a negative impact on our operation and financial results.
According
to several articles published by the Wall Street Journal, CNN, and BBC News in January 2016, after experiencing rapid growth for
more than a decade, China’s economy has been hit by shrinking foreign and domestic demand, weak investment, factory overcapacity
and oversupply in the property market, and has experienced a painful slowdown in the last two years. In 2017, China’s economy
grew by 6.9%, compared with 7.3% a year earlier, marking its slowest growth in a quarter of a century. As the government tried
to shift the growth engine away from manufacturing and debt-fueled investment toward the services sector and consumer spending,
the outlook of the Chinese economy is uncertain.
In
the next two to three years, China’s growth performance could deteriorate because of the overhang of its real estate bubble,
massive manufacturing overcapacity, and the lack of new growth engines. China’s economy grew by 6.5% in 2017. If China’s
economy fails to grow as previously expected, it may negatively affect our business operations and financial results.
Under
the EIT Law, we may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification
would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our
results of operations and the value of your investment.
Under
the PRC Enterprise Income Tax Law, or the EIT Law, that became effective on January 1, 2008, an enterprise established outside
the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC
enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under
the implementation rules to the EIT Law, a “de facto management body” is defined as a body that has material and overall
management and control over the manufacturing and business operations, personnel and human resources, finances and properties
of an enterprise. In addition, a circular, known as SAT Circular 82, issued in April 2009 and amended in January 2014 by the State
Administration of Taxation, or the SAT, specifies that certain offshore incorporated enterprises controlled by PRC enterprises
or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior
management personnel and departments that are responsible for daily production, operation and management; financial and personnel
decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’
meetings; and half or more of the senior management or directors having voting rights. Further to SAT Circular 82, the SAT issued
a bulletin, known as SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT
Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated resident
enterprises.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and
administration on post-determination matters. Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises
controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining
criteria set forth in SAT Circular 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de facto
management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether
they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals.
We
are subject to the 25% enterprise income tax. However, since all of our activities are in China, we do not believe Guizhou Tongren
or our company meet all of the conditions to be classified as a PRC resident enterprise., However, if we engage in activities
outside of Mainland China, the PRC tax authorities may classify Guizhou Tongren or our company as a PRC resident enterprise, which
would result in a number of unfavorable PRC tax consequences. First, we or our offshore subsidiaries will be subject to the uniform
25% enterprise income tax on our world-wide income, which could materially reduce our net income. In addition, we will also be
subject to PRC enterprise income tax reporting obligations.
Furthermore,
although dividends paid by one PRC tax resident enterprise to an offshore incorporated PRC resident enterprise controlled by PRC
enterprises or PRC enterprise groups should qualify as “tax-exempt income” under the EIT Law and Bulletin 45, we cannot
assure you that dividends paid by our PRC subsidiary to Trillion HK will not be subject to a 10% withholding tax, as the PRC foreign
exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued
guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes but not controlled by PRC enterprises or PRC enterprise groups.
Finally,
dividends payable by us to our investors and gains on the sale of our shares may be become subject to PRC withholding tax.
We
may not be able to obtain certain benefits under the relevant tax treaty on dividends paid by our PRC subsidiaries to us through
Trillion HK.
We
are a holding company incorporated under the laws of Nevada and as such rely on dividends and other distributions on equity from
our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to the EIT Law, a withholding tax rate of 10% currently
applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign
investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant
to a Notice 112 issued by the SAT in January 2008 and the Arrangement between the Mainland China and the Hong Kong Special Administrative
Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), such
withholding tax rate may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise at all times within
the 12-month period immediately prior to distribution of the dividends and is determined by the relevant PRC tax authority to
have satisfied other conditions and requirements under the Double Tax Avoidance Arrangement (Hong Kong) and other applicable PRC
laws. Pursuant to a SAT Circular 601 issued by the SAT in October 2009, non-resident enterprises that cannot provide valid supporting
documents as “beneficial owners” may not be approved to enjoy tax treaty benefits, and “beneficial owners”
refers to individuals, enterprises or other organizations which are normally engaged in substantive operations. These rules also
set forth certain adverse factors on the recognition of a “beneficial owner”. Specifically, they expressly exclude
a “conduit company,” or any company established for the purposes of avoiding or reducing tax obligations or transferring
or accumulating profits and not engaged in actual operations such as manufacturing, sales or management, from being a “beneficial
owner.” Whether a non-resident company may obtain tax benefits under the relevant tax treaty will be subject to approval
of the relevant PRC tax authority and will be determined by the PRC tax authority on a case-by-case basis. In June 2012, the SAT
further provides in an announcement that a comprehensive analysis should be made when determining the beneficial owner status
based on various factors supported by documents including the articles of association, financial statements, records of cash movements,
board meeting minutes, board resolutions, staffing and materials, relevant expenditures, functions and risk assumption as well
as relevant contracts and other information. Our Hong Kong subsidiary has not applied for the approval for a withholding tax rate
of 5% from the local tax authority as our PRC subsidiaries have not paid dividends due to their loss-making status in the past
and will not be able to pay dividends in the future until they have achieved accumulated profits. We plan to have our Hong Kong
subsidiary assume some managerial and administrative functions, as well as conduct other business functions in the future. Once
we implement such a plan, we do not believe that our Hong Kong subsidiary will be considered a conduit company as defined under
SAT Circular 601. However, our Hong Kong subsidiary as currently situated may be considered a conduit company and we cannot assure
you that the relevant PRC tax authority will agree with our view when our Hong Kong subsidiary applies to obtain tax benefits
under the relevant tax treaty in the future. As a result, although our PRC subsidiary is currently wholly owned by our Hong Kong
subsidiary, we may not be able to enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement (Hong
Kong) and therefore be subject to withholding tax at a rate of 10% with respect to dividends to be paid by our PRC subsidiary
to Trillion HK.
Enhanced
scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may
pursue in the future.
In
connection with the EIT Law, the Ministry of Finance and the SAT jointly issued a SAT Circular 59 in April 2009, and the SAT issued
a SAT Circular 698 in December 2009. Both SAT Circular 59 and Circular 698 became effective retroactively on January 1, 2008.
According
to SAT Circular 698, where a non-resident enterprise transfers the equity interests of a PRC “resident enterprise”
indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and the overseas holding
company is located in a tax jurisdiction that: (1) has an effective tax rate less than 12.5% or (2) does not tax foreign income
of its residents, the non-resident enterprise, being the transferor, must report to the relevant tax authority of the PRC “resident
enterprise” this Indirect Transfer. Using a “substance over form” principle, the PRC tax authority may disregard
the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose
of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding
tax at a rate of up to 10%. SAT Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests
in a PRC “resident enterprise” to its related parties at a price lower than the fair market value, the relevant tax
authority has the power to make a reasonable adjustment to the taxable income of the transaction. In addition, the PRC “resident
enterprise” is supposed to provide necessary assistance to support the enforcement of SAT Circular 698.
There
is little guidance and practical experience as to the application of SAT Circular 698, and it is possible that the PRC tax authorities
would pursue our offshore shareholders to conduct a filing regarding our offshore restructuring transactions where non-resident
investors were involved and would request our PRC subsidiary to assist in providing such disclosures. In addition, if our offshore
subsidiaries are deemed to lack substance they could be disregarded by the PRC tax authorities. As a result, we and our non-resident
investors may become at risk of being taxed under SAT Circular 698 and may be required to expend valuable resources to comply
with SAT Circular 698 or to establish that we should not be taxed under SAT Circular 698, which may have a material adverse effect
on our financial condition and results of operations or the non-resident investors’ investments in us.
By
promulgating and implementing these circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect
transfer of equity interests in a PRC resident enterprise by a non-resident enterprise. The PRC tax authorities have the discretion
under SAT Circular 59 and SAT Circular 698 to make adjustments to the taxable capital gains based on the difference between the
fair value of the equity interests transferred and the cost of investment. Although we currently have no confirmed plans to pursue
any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate
structures. If we are considered a non-resident enterprise under the EIT Law and if the PRC tax authorities make adjustments under
SAT Circular 59 or SAT Circular 698, our income tax costs associated with such potential acquisitions will be increased, which
may have an adverse effect on our financial condition and results of operations.
PRC
regulations establish complex procedures for some acquisitions of PRC companies by foreign investors, which could make it more
difficult for us to pursue growth through acquisitions in China.
Six
PRC regulatory agencies promulgated regulations effective on September 8, 2006 that are commonly referred to as the M&A Rules.
The M&A Rules establish procedures and requirements that could make some acquisitions of PRC companies by foreign investors
more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance
of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In addition, national
security review rules issued by the PRC governmental authorities in 2011 require acquisitions by foreign investors of domestic
companies engaged in military-related or certain other industries that are crucial to national security to be subject to prior
security review. Moreover, the Anti-Monopoly Law requires that the Ministry of Commerce shall be notified in advance of any concentration
of undertaking if certain thresholds are triggered. We may expand our business in part by acquiring complementary businesses.
Complying with the requirements of the M&A Rules, security review rules and other PRC regulations to complete such transactions
could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may
delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain
our market share.
PRC
regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase
their registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiaries, or otherwise
expose us to liability and penalties under PRC law.
The
PRC State Administration of Foreign Exchange, or the SAFE, promulgated in October 2005 a SAFE Circular 75 that requires PRC citizens
or residents to register with SAFE or its local branch in connection with their establishment or control of an offshore entity
established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires
or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents
must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to increases
or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments,
external guarantees, or other material events that do not involve roundtrip investments. Subsequent regulations further clarified
that PRC subsidiaries of an offshore company governed by the SAFE regulations are required to coordinate and supervise the filing
of SAFE registrations in a timely manner by the offshore holding company’s shareholders who are PRC citizens or residents.
If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE branches. If our shareholders
who are PRC citizens or residents do not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited
from distributing its profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted
in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the various SAFE registration
requirements described above could result in liabilities for our PRC subsidiary under PRC laws for evasion of applicable foreign
exchange restrictions, including (1) the requirement by SAFE to return the foreign exchange remitted overseas within a period
specified by SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted overseas and deemed to have been
evasive and (2) in circumstances involving serious violations, a fine of no less than 30% of and up to the total amount of remitted
foreign exchange deemed evasive. Furthermore, the persons-in-charge and other persons at our PRC subsidiary who are held directly
liable for the violations may be subject to criminal sanctions.
These
foreign exchange regulations provide that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport
or resident identification card, and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic
ties to the PRC. We have requested PRC residents holding direct or indirect interest in our company to our knowledge to make the
necessary applications, filings and amendments as required under SAFE Circular 75 and other related rules. However, we cannot
assure you that all of our shareholders who are PRC citizens and hold interests in us have registered with the local SAFE branch
as required under SAFE Circular 75. In addition, we may not be informed of the identities of all the PRC residents holding direct
or indirect interest in our company, and we cannot provide any assurances that these PRC residents will comply with our request
to make or obtain any applicable registrations or comply with other requirements required by SAFE Circular 75 or other related
rules. A failure by our PRC resident shareholders or future PRC resident shareholders to comply with the SAFE regulations, if
SAFE requires it, could subject us to fines or other legal sanctions, restrict our cross-border investment activities, limit our
PRC subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely
affect our business and prospects.
Furthermore,
it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted,
amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business
operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to
our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely
affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, either
we or the owners of such company, as the case may be, may not be able to obtain the necessary approvals or complete the necessary
filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition
strategy and could adversely affect our business and prospects.
Fluctuations
in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
Substantially
all of our revenues and expenditures are denominated in RMB. As the functional currency for our PRC subsidiary and consolidated
affiliated entities is RMB, fluctuations in the exchange rate may cause us to incur foreign exchange losses on any foreign currency
holdings they may have. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would
affect our financial results in U.S. dollar terms without giving effect to any underlying change in our business or results of
operations. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary
shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S.
dollar amount available to us.
The
value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s
political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the RMB to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S.
dollar over the following three years. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely
traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the current situation may last and when
and how it may change again. There remains significant international pressure on the PRC government to adopt a substantial liberalization
of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against
the U.S. dollar. Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example,
to the extent that we need to convert U.S. dollars we receive from securities offering into Renminbi for our operations, appreciation
of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common
stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the
U.S. dollar amount available to us. In August 2015, the PRC Government devalued its currency by approximately 3%, represented
the largest yuan depreciation for 20 years. Concerns remain that China’s slowing economy, and in particular its exports,
will need a stimulus that can only come from further cuts in the exchange rate.
In
addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results
reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. The income
statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the
extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions
results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S.
dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased
revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations
as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in
foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will
lead to a translation gain or loss, which is recorded as a component of other comprehensive income. Very limited hedging transactions
are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions.
While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all.
Dividends
we receive from our subsidiaries located in the PRC may be subject to PRC withholding tax.
The
EIT Law provides that a maximum income tax rate of twenty percent (20%) is applicable to dividends payable to non-PRC investors
that are “non-resident enterprises,” to the extent such dividends are derived from sources within the PRC. However,
the State Council has reduced such rate to ten percent (10%) through the implementation regulations. Although we are a Nevada
corporation, all of our income is derived from our Guizhou Tongren subsidiary located in the PRC. Therefore, dividends paid to
us from China may be subject to the ten percent (10%) income tax if we are considered a “non-resident enterprise”
under the EIT Law. If we are required under the EIT Law and its implementation regulations to pay income tax for any dividends
we receive from our PRC subsidiaries, it may have a material and adverse effect on our net income and materially reduce the amount
of dividends, if any, we may pay to our shareholders.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our business
.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the
purpose of obtaining or retaining business. We have operations, agreements with third parties and we make the majority of our
sales in China. PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized
payments or offers of payments by the employees, consultants, sales agents or distributors of our Company, even though they may
not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees.
However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants,
sales agents or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA
or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities,
which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek
to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us.
We
conduct all of our business through Guizhou Tongren, our subsidiary in the PRC. Guizhou Tongren is subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal
system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value.
Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of
foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which
may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition, all of our executive officers and all of our directors
are residents of China and not of the US, and substantially all the assets of these persons are located outside the US. As a result,
it could be difficult for investors to effect service of process in the US or to enforce a judgment obtained in the US against
our Chinese operations, subsidiary and affiliate.
You
may have difficulty enforcing judgments against us.
Virtually
all of our assets are located outside the US and all of our current operations are conducted by Guizhou Tongren in the PRC. In
addition, our sole director and officer is resident of China. Substantially all of his assets are located outside the US. As a
result, it may be difficult for you to effect service of process within the US upon him. It may also be difficult for you to enforce
in US courts judgments predicated on the civil liability provisions of the US federal securities laws against us and our officer
and director. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of US
courts. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures
Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China
does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments
with the US. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against
us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty,
security or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the US.
Future
inflation in China may inhibit our ability to conduct business in China
.
In
recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During
the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the
adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of
credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls
on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market
for our products and our company.
Risks
Relating to Our Common Stock and Our Status as a Public Company
Our
common stock is quoted on OTC Pink which may have an unfavorable impact on our stock price and liquidity
.
Our
common stock is quoted on OTC Pink under the symbol “ETAH”. The trading market for securities of companies quoted
on OTC Pink or other quotation systems is substantially less liquid than the average trading market for companies listed on a
national securities exchange. The quotation of our shares on OTC Pink or other quotation system may result in a less liquid market
available for existing and potential stockholders to trade shares of our common stock, could depress the market price of our common
stock and could have a long-term adverse impact on our ability to raise capital in the future.
Our
principal stockholder has substantial influence over our company, and its interests may not be aligned with the interests of our
other stockholders.
Team
Youn, our principal stockholder, owns approximately 80.60% of our outstanding shares. As a result, Team Youn has significant influence
over our business, including decisions regarding mergers, consolidations, the sale of all or substantially all of our assets,
election of directors and other significant corporate actions. As a result of this concentration of ownership, you and our other
stockholders, acting alone, may not have the ability to determine the outcome of matters requiring stockholder approval, including
the election of our directors or significant corporate transactions. In addition, this concentration of ownership, which is not
subject to any voting restrictions, may discourage, delay or thwart efforts by third parties to take-over or effect a change in
control of our company which could deprive our stockholders of an opportunity to receive a premium for their shares as part of
a sale of our company, and may limit the price that investors are willing to pay for our common stock.
Our
management is not familiar with the United States securities laws.
Our
management is generally unfamiliar with the requirements of the U.S. securities laws and may not appreciate the need to devote
the resources necessary to comply with such laws. A failure to adequately respond to applicable securities laws could lead to
investigations by the SEC and other regulatory authorities that could be costly, divert management’s attention and disrupt
our business.
We
do not have an internal accounting staff responsible for the preparation of our financial statements and the personnel we rely
upon in China for the preparation of our financial statements under generally accepted accounting principles in the U.S. have
had no education or training in U.S. GAAP and SEC rules and regulations pertaining to financial reporting, which could impact
our ability to prepare our financial statements and convert our books and records to U.S. GAAP.
We
maintain our books and records in accordance with generally accepted accounting principles in the PRC, or PRC GAAP. The accounting
personnel in the PRC who have the primary responsibilities of preparing and supervising the preparation of financial statements
under U.S. GAAP have had no education or training in U.S. GAAP and related SEC rules and regulations. As such, they may be unable
to identify potential accounting and disclosure issues that may arise upon the conversion of our books and records from PRC GAAP
to U.S. GAAP, which could affect our ability to prepare our financial statements in accordance with U.S. GAAP. We have taken steps
to ensure that our financial statements are in accordance with U.S. GAAP, including our hiring of a U.S. accounting firm to work
with our PRC accounting personnel and management to convert our books and records to U.S. GAAP and prepare our financial statements.
However, the measures we have taken may not be sufficient to mitigate the foregoing risks. Furthermore, the need to comply with
U.S. GAAP may require us to expend substantial amounts of resources and time that could divert our management’s attention
and disrupt our business.
We
will incur significant costs as a result of operating as a public company, and our management will be required to devote substantial
time to new compliance requirements, including establishing and maintaining internal controls over financial reporting, and we
may be exposed to potential risks if we are unable to comply with these requirements.
PRC
companies have historically not adopted a Western style of management and financial reporting concepts and practices, which include
strong corporate governance, internal controls and, computer, financial and other control systems. We have no middle and top management
staff educated and trained in the Western system, and we may have difficulty hiring new employees in the PRC with such training.
As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and corporate records and instituting business practices that
meet Western standards.
The
Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure
controls and procedures. In particular, we must perform system and process evaluations and testing of our internal controls over
financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. Compliance with Section 404 may require that we incur substantial accounting expenses
and expend significant management efforts. Our financial controls and disclosure controls and procedures are not adequate for
a public company. Among others weaknesses, the lack of personnel and the lack of familiarity of the accounting staff we utilize
with US GAAP constitutes a material weakness in our controls for financial reporting. We have taken steps to rectify this weakness,
including hiring a US accounting firm to work with us. There is no assurance, however, that the steps taken to date will be sufficient
to rectify this material weakness. In the event that we fail to remedy the weaknesses in our controls over financial reporting
and adopt appropriate disclosure controls and procedures, our financial reporting may be deficient and we may fail to comply with
the reporting requirements of the Securities Exchange Act and other US securities laws, in which event, the market price of our
common stock could decline if investors and others lose confidence in the reliability of our financial statements and we could
be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.
If
we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S. publicly-traded Chinese companies,
we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock
price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed
and resolved favorably.
Recently,
U.S. public companies that have substantially all of their operations in China, particularly companies that have completed reverse
merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity have focused on financial and
accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate
governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism
and negative publicity, the publicly traded stock of many Chinese companies has sharply decreased in value and, in some cases,
has become virtually worthless. Many of these companies are now subject to stockholder lawsuits, SEC enforcement actions and are
conducting internal and external investigations into the allegations. It is not clear what affect this sector-wide scrutiny, criticism
and negative publicity will have on our company, our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate
such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from
growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely
impacted and your investment in our stock could be rendered worthless.
Techniques
employed by manipulative short sellers in Chinese small-cap stocks may drive down the market price of our common stock.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the
intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from the
difference in the sale price of the borrowed securities and the purchase price of the replacement shares. As it is therefore in
the short seller’s best interests for the price of the stock to decline, there have been incidents of short sellers publishing,
or arranging to publish negative opinions in order to create negative market momentum. While traditionally these disclosed shorts
have been limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise
of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”)
have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called
research reports that mimic the type of investment analysis performed by large Wall Street firms and independent research analysts.
These short attacks have, in the past, resulted in the selling of shares in the market, on occasion on a large scale and broad
base. Issuers with business operations based in the PRC, that have limited trading volumes and that are susceptible to higher
volatility levels than U.S. domestic large-cap stocks can be particularly vulnerable to such short attacks.
These
short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the
U.S., are not subject to the certification requirements imposed by the SEC in Regulation Analyst Certification and, accordingly,
the opinions they express may be based on distortion of the actual facts or, in some cases, fabrication of the facts. In light
of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful
short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed shorts
will continue to issue such reports.
While
we intend to strongly defend our public filings against any such short seller attacks, oftentimes we are constrained, either by
principles of freedom of speech, applicable state law (often called Anti-SLAPP statutes), or issues of commercial confidentiality,
in the manner in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom
to operate that such persons enjoy – oftentimes blogging from outside the U.S. with little or no assets or identity requirements
– should we be targeted for such an attack and the rumors not dismissed by market participants, our stock will likely suffer
from a temporary, or possibly long term, decline in market price.
Because
we do not intend to pay any cash dividends on our common stock, our stockholders will not be able to receive a return on their
shares unless they sell them.
We
have not declared or paid any cash dividends on our common stock nor do we anticipate paying any in the foreseeable future. Furthermore,
we expect to retain any future earnings to finance our operations and expansion. The payment of cash dividends in the future will
be at the discretion of our Board of Directors (“BOD”) and will depend upon our earnings levels, capital requirements,
any restrictive loan covenants and other factors the Board considers relevant.
Unless
we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. We cannot assure
you that you will be able to sell shares when you desire to do so.
The
market price of our common stock can become volatile, leading to the possibility of its value being depressed at a time when you
may want to sell your holdings.
The
market price of our common stock can become volatile. Numerous factors, many of which are beyond our control, may cause the market
price of our common stock to fluctuate significantly. These factors include:
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our
earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to
meet the expectations of financial market analysts and investors;
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changes
in financial estimates by us or by any securities analysts who might cover our stock;
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speculation
about our business in the press or the investment community;
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significant
developments relating to our relationships with our customers or suppliers;
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stock
market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industry;
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customer
demand for our services;
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investor
perceptions of our industry in general and our Company in particular;
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the
operating and stock performance of comparable companies;
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general
economic conditions and trends;
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announcements
by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
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changes
in accounting standards, policies, guidance, interpretation or principles;
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loss
of external funding sources; and
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sales
of our common stock, including sales by our directors, officers or significant stockholders; and departures of key personnel.
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Securities
class action litigation is often instituted against companies following periods of volatility in their stock price. Should this
type of litigation be instituted against us, it could result in substantial costs to us and divert our management’s attention
and resources.
Moreover,
securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to the operating
performance of particular companies. These market fluctuations may adversely affect the price of our common stock and other interests
in our Company at a time when you want to sell your interest in us.
If
we fail to develop and maintain an effective system of internal controls, we may not be able to accurately report our financial
results or prevent fraud, as a result, current and potential stockholders could lose confidence in our financial reports, which
could harm our business and the trading price of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting. Compliance with
Section 404 requires that we strengthen, assess and test our system of internal controls to provide the basis for our report.
The process of strengthening our internal controls and complying with Section 404 is expensive and time consuming, and requires
significant management attention. We cannot be certain that the measures we undertake will ensure that we will maintain adequate
controls over our financial processes and reporting in the future. Furthermore, if we are able to rapidly grow our business, the
internal controls that we will need will become more complex, and significantly more resources will be required to ensure our
internal controls remain effective. Failure to implement required controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our reporting obligations. If we discover a material weakness in
our internal controls, the disclosure of that fact, even if the weakness is quickly remedied, could diminish investors’
confidence in our financial statements and harm our stock price. In addition, non-compliance with Section 404 could subject us
to a variety of administrative sanctions, including the suspension of trading, ineligibility for listing on the OTC Markets, and
the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price.
There
is no active trading market for our shares of common stock.
There
is no active trading market for our common stock. There can be no assurance that a regular trading market for our securities will
develop, or that if one develops, that it will be sustained. The trading price of our securities could be subject to wide fluctuations,
in response to announcements by us or others, developments affecting us, and other events or factors. In addition, the stock market
has experienced extreme price and volume fluctuations in recent years. These fluctuations have had a substantial effect on the
market prices for many companies, often unrelated to the operating performance of such companies, and may adversely affect the
market prices of the securities. Such risks could have an adverse effect on the stock’s future liquidity.
Our
common stock is subject to the “Penny Stock” Rules of the SEC and the trading market in our securities is limited,
which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The
SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as
any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker
or dealer approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor
a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information
and investment experience and objectives of the person; and (b) make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable
of evaluating the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission
relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the
suitability determination; and (b) that the broker or dealer received a signed, written agreement from the investor prior to the
transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock”
rules. This may make it more difficult for investors to dispose of our common shares and cause a decline in the market value of
our stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny
stocks.
Under
our Articles of Incorporation, our Board of Directors has the authority, without stockholder approval, to issue preferred stock
with terms that may not be beneficial to common stockholders and with the ability to adversely affect stockholder voting power
and perpetuate the board’s control over our company.
Our
Articles of Incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock by our Board of Directors in one
or more series, with such designations, powers, privileges, rights, qualifications and limitations as our Board of Directors may
determine, in its sole discretion, with no further authorization by security holders required for the issuance of such shares.
The
issuance of preferred stock may adversely affect the voting power and other rights of the holders of common stock. Preferred stock
may be issued quickly with terms calculated to discourage, make more difficult, delay or prevent a change in control of our company
or make removal of management more difficult. As a result, the ability of the Board of Directors to issue preferred stock may
discourage the potential hostile acquirer, possibly resulting in beneficial negotiations. Negotiating with an unfriendly acquirer
may result in terms more favorable to us and our stockholders. Conversely, the issuance of preferred stock may adversely affect
the market price of, and the voting and other rights of the holders of the common stock. We presently have no plans to issue any
preferred stock.
We
may, in the future, issue additional shares of common stock, which would reduce investors’ percent of ownership and may
dilute our share value.
Our
Articles of Incorporation authorizes the issuance of up to 1,000,000,000 shares of common stock. We have outstanding 171,058,437
shares of common stock. The future issuance of common stock may result in substantial dilution in the percentage of our common
stock held by our then existing stockholders. We may value any common stock issued in the future on an arbitrary basis. The issuance
of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the
shares held by our investors, and might have an adverse effect on any trading market for our common stock.