F-1 1 ea132254-f1_tonyfuninc.htm REGISTRATION STATEMENT

As submitted to the Securities and Exchange Commission on January 22, 2021

Registration No.             

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM F-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

TONY FUN, INC.

(Exact Name of Registrant as Specified in its Charter)

 

British Virgin Islands   5311   Not applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

 

c/o Tai’an Tony Fun Shopping Mall Co., Ltd.

555 Taishan Street, Tai’an City, Shandong Province

People’s Republic of China 271000

(+86) 538 807 7188

 

Vcorp Agent Services, Inc.

25 Robert Pitt Dr., Suite 204

Monsey, New York 10952

(888) 528-2677

(Address, including zip code, and telephone number, including

area code, of principal executive offices)

 

(Name, address, including zip code, and telephone

number, including area code, of agent for service)

 

Copies to:

 

Bradley A. Haneberg, Esq.

Matthew B. Chmiel, Esq.

Haneberg Hurlbert PLC

1111 E. Main St., Suite 2010

Richmond, VA 23219

Telephone: (804) 554-4803 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

 

Emerging growth company   ☒

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒ 

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.  

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered  Amount to be
Registered
   Proposed Maximum
Aggregate Price
Per Share
   Proposed Maximum
Aggregate Offering
Price(1)
   Amount of
Registration Fee(2)
 
Common Shares, $0.001 per share to be sold by Registrant   2,200,000   $7.50   $16,500,000    $ 1,800.15 
Common Shares, $0.001 per share to be sold by Selling Stockholders   1,977,500   $7.50   $14,831,250   $1,618.09 
Total   4,177,500   $7.50   $31,331,250    $ 3,418.24(2)

 

(1) This registration fee is based on an estimate of the proposed maximum offering price of the securities pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

 

(2) Paid herewith.

 

 

 

 

 

  

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 22, 2021

 

4,177,500 Common Shares

 

 

TONY FUN, INC.

 

This is the initial public offering of Tony Fun, Inc. We are offering 2,200,000 of our common shares and the selling stockholders are offering 1,977,500 of our common shares. We will not receive any proceeds from the sale of shares by the selling stockholders. We expect the initial public offering price will be between $7.00 to $7.50 per common share. No public market currently exists for our common shares. We have applied for approval of the listing our common shares on the NASDAQ Capital Market and have reserved the symbol “TONY” for such listing for the common shares we are offering. We believe that upon the completion of the offering contemplated by this prospectus, we will meet the standards for listing on the NASDAQ Capital Market. We cannot guarantee that we will be successful in listing our securities on NASDAQ; however, we will not complete this offering unless we are so listed.

 

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startup Act of 2012, and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

Investing in our common shares involves significant risks. See “Risk Factors” beginning on page 12 of this prospectus.

 

   To Our Company   To Selling Stockholders 
   Per Share   Total   Per Share   Total 
Initial public offering price                                        
Underwriting discounts and commissions (1)                    
Proceeds to us, before expenses                    

 

(1)  Represents underwriting discount and commissions equal to ___ per share, which is the underwriting discount we have agreed to pay on all investors in this Offering.

 

Delivery of the shares will be made on or about        , 2021.

 

These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

Prospectus dated                  , 2021

 

 

 

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY   1
RISK FACTORS   12
FORWARD-LOOKING STATEMENTS   39
USE OF PROCEEDS   39
DIVIDEND POLICY   40
EXCHANGE RATE INFORMATION   41
CAPITALIZATION   42
DILUTION   43
POST-OFFERING OWNERSHIP   44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   45
CORPORATE HISTORY AND STRUCTURE   69
OUR BUSINESS   72
REGULATION   91
MANAGEMENT   98
RELATED PARTY TRANSACTIONS   105
PRINCIPAL AND SELLING STOCKHOLDERS   111
DESCRIPTION OF SHARE CAPITAL   112
SHARES ELIGIBLE FOR FUTURE SALE   120
TAX MATTERS APPLICABLE TO U.S. HOLDERS OF OUR COMMON SHARES   121
ENFORCEABILITY OF CIVIL LIABILITIES   127
UNDERWRITING   128
EXPENSES RELATED TO THIS OFFERING   129
LEGAL MATTERS   129
EXPERTS   129
INTERESTS OF NAMED EXPERTS AND COUNSEL   129
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION   129
WHERE YOU CAN FIND MORE INFORMATION   129

 

Through and including                  , 2021 (25 days after the commencement of this offering), all dealers effecting transaction in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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You should rely only on the information contained in this prospectus and any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus and any related free writing prospectus. We and the underwriters take no responsibility for, and can provide no assurances as to the reliability of, any information that others may give you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is only accurate as of the date of this prospectus, regardless of the time of delivery of this prospectus and any sale of our common shares. Our business, financial condition, results of operations and prospects may have changed since that date.

 

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PROSPECTUS SUMMARY

 

This summary highlights information that we present more fully in the rest of this prospectus. This summary does not contain all of the information you should consider before buying common shares in this offering. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and the notes to those statements, before deciding whether to invest in this offering.

 

Our Company

 

We are a retail shopping mall operator in China that seeks to form a joint business and collaborative relationship with and amongst our tenants. Our strategy is to lease, redevelop, and manage well-located, retail shopping malls in Tier 2, Tier 3 and Tier 4 cities, with a primary emphasis on Tier 3 and 4 cites that generate attractive risk-adjusted returns. We renovate these commercial retail shopping malls that have generally been poorly managed, and redevelop and design them to enhance their architectural style and image through interior and exterior improvements. We then lease spaces in these properties to tenants.

 

We are redeveloping properties into innovative retail shopping malls that strategically rethink the types of stores to which consumers will respond. We believe that when consumers visit shopping centers and malls, they are looking for experiences that go well beyond traditional shopping. We focus our tenant mix to emphasize consumer experience. Our retail shopping malls focus on non-designer stores and independent specialty retailers. While we believe anchor tenants, such as supermarkets, that drive traffic are still key, we also see a new emphasis on a curated mix of smaller and independent specialty stores that add a sense of novelty to the shopping experience. We incorporate value-added elements that attempt to recast the mall as a life-style center, including, arts centers, arcades, cosplay of counter strike, ghost houses, childcare, education learning, multi-brands beauty shops, food courts, marketplace and fashion spas. These services provide an experience of leisure and entertainment that online shopping cannot provide. Additionally, we make greater use of temporary, flexible spaces that can accommodate different stores over time. Pop-up stores, showroom spaces and kiosks provide customers with a sense of the unexpected and give them a reason to treasure hunt. We believe shopping malls in China are transitioning from consumer places that only sell things to platforms that provide experiences.

 

Competition for tenants in malls has caused us to find new ways to attract and retain tenants. Our main tenant targets are young entrepreneurs and small retails shop owners that have sound business ideas, but lack experience and are in need of training and consulting services to improve their operational viability. To help offset this issue we have initiated a program to train tenants, a program that we refer to as incubation training. We have dedicated employees that train and teach classes and workshops to our tenants. We believe the benefits of incubation training are two folds: it enables our tenants to attract more customers and increases sales; and it helps us attract quality tenants that develop loyalty to us. In addition, many of our successful tenants become internal trainers and share their practical experiences and strategies with other tenants. Further, our successful clients are awarded network study tours of potential supply markets for their products in larger cities such as Beijing, Shanghai, Guangzhou and Hangzhou and in other Asian countries such as Thailand, Japan and Korea. We provide incubation training to our tenants, as one of our all-around services. We train our tenants in such disciplines as customer service, sales, store display, procurements, management and marketing. Incubation training is available at any time during the term of a tenant’s lease.

 

Our management focuses on expanding our business in Tier 2, Tier 3 and Tier 4 cities, with a primary emphasis on Tier 3 and 4 cities in China that we strategically select based on population and urbanization growth rates, general economic conditions, income and purchasing power of resident consumers, anticipated demand for lifestyle shopping malls, availability of commercial properties and commercial property prices, and governmental urban planning and development policies. Currently, we have focused our expansion projects in Shandong Province. We expect to benefit from rising demand for lifestyle shopping centers as a result of increasing income levels of consumers and growing populations in these cities due to urbanization.

 

Shopping malls will never be able to compete with the endless product selection, price comparisons and always-on nature of online shopping. We believe, our retail shopping malls, however, provide a valuable shared platform of entrepreneurship for tenants and value to the consumer by developing a different direction, away from commoditized shopping experiences and toward a broadened value proposition for consumers.

 

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Industry and Market Background

 

2019 and the Impact of COVID-19 on the Chinese Retail Market

 

China is recovering from the recent COVID-19 outbreak, with many provinces slowly returning to normal levels of activity. However, the crisis has had a significant and lingering impact on the shopping habits of Chinese consumers.

 

In-person shopping is slowly recovering, which fell to around 39% of pre-COVID levels. With the loosening of restrictions, shopping levels have increased to around 79% of pre-COVID levels. During the crisis, supermarkets, convenience stores and drugstores saw an increase in demand. However, after the peak of COVID-19, supermarket volumes fell, while convenience stores and drugstores continued to see higher than normal levels of demand. Discretionary categories, such as food service outlets, apparel stores, and department store demand was down close to 80% during the peak of COVID-19. As of May 2020, approximately 80% of apparel stores have reopened, but foot traffic in discretionary categories is still 40-50% below pre-COVID-19 levels.

 

Online shopping has grown considerably during the crisis, which benefitted from, lockdowns, store closures and the reluctance of consumers to engage face-to-face with sales and service staffs. Due to the physical constraints of the crisis, Chinese consumers have been more willing to try new stores and brands. After COVID-19, approximately 14% do not plan to revert back to their pre-COVID store choices and about 6% do plan to return to their previous brands.

 

The data shows that the trend toward healthier lifestyles accelerated during the COVID-19 outbreak. People also shopped local, both in terms of location and products. We believe this trend may benefit our shopping malls in the long-term, which are focused on lifestyle experience in addition to the shopping experience.

 

Chinese Retail Market and Opportunity

 

In 2018 the total retail sales of consumer goods in China reached approximately $5.61 trillion, up by 9% from the prior year. Despite growing retail sales the impact of e-commerce on China’s traditional retail stores has been significant. China consumers conducted more of their shopping online in 2018 with online retail sales reaching $1.33 trillion in 2018, an increase of 23.9% compared to 2017 according to the National Bureau of Statistics in China.

 

Despite the growing e-commerce industry in China, we believe there is significant market opportunity for us to compete and expand our business. Retail shopping centers will never be able to compete with the endless product selection, price comparisons and always-on nature of online. Nor should they try. Instead, retail shopping centers need to move in a different direction, away from commoditized shopping experiences and toward a broadened experience for consumers. The shopping experience in China is no longer about buying things, people can just do this online, it is about spending time, play, dining, health-cultivation, education, and entertainment in the same environment. We believe our lifestyle focused retail shopping centers will be in greater demand, and that we will be able to take advantage of the growing retail market, despite e-commerce competition as shoppers continue to seek a unique shopping experience. Through a diverse tenant mix that provides experiences in addition to retail, we believe our retail shopping centers provide consumers with shoppable entertainment something they cannot find online or at traditional centers and malls.

 

Commercial Property Inventory

 

There are around 4,500 shopping malls in China and another 7,000 are planned for construction. The Ministry of Commerce will encourage cities with populations of 10 million to build at least 10 shopping malls. The planned construction of shopping malls is partly the result of the country’s initiative to transform the economy into one driven by consumption. As a result, we believe there is an oversupply of commercial real estate inventory for us to choose from in the markets we plan to expand into. Accordingly, we believe we will be able to obtain desirable commercial real estate to redevelop into retail shopping centers at below market rates.

 

Entrepreneurs

 

Over the past two decades, entrepreneurship in China has grown at an exponential rate. Statistics by the State Administration for Industry and Commerce show that the country saw the registration for more than 13 million new enterprises between March 2014 and February 2017, 94.6 percent of which are in the private sector. In 2018, an average of 18,100 new businesses were registered on a daily basis. In addition, in 2000, total revenues earned by Chinese state-owned industrial enterprises and those in non-state-owned Chinese private enterprises were roughly the same at approximately 4 trillion RMB each. By 2013, total revenues in state-owned companies has risen six fold, while revenue in private enterprises has risen by more than 18 times. Profits for the same period demonstrated a larger delta, with state-owned entities showing a sevenfold increase in profits and non-state-owned entities increasing 23 times.

 

China is producing more young entrepreneurs than ever before, and from different socioeconomic backgrounds. The number of college students starting businesses directly after college increased from 1.6% in 2011 to 3% in 2017 or 200,000 out of 7.95 million college graduates became entrepreneurs. In addition to college educated entrepreneurs, more migrant works are returning home to start businesses.

 

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Promotion of entrepreneurship in China has also manifested itself in the government. A guideline was approved at a State Council executive meeting chaired by Premier Keqiang Li to further encourage the support for innovation and entrepreneurship. The push for mass entrepreneurship and innovation was first put forward by the Premier during the annual meeting of the New Champions 2014 in Tianjin.

 

We believe the increase in entrepreneurship in China will cause demand for retail space to increase, which we expect will, in turn, drive demand for tenancy in our retail shopping center. In addition, we believe retail entrepreneurs will be attracted to our business model and incubation training program, which provides for an instructive, and supportive environment for entrepreneurs during the critical stages of starting up a new business.

 

Our Leased Properties and Managed Properties

 

Our Leased Properties

 

Tony Fun Shopping Mall

 

Tony Fun Shopping Mall is an approximate 524,553 square feet retail shopping mall built in 2012, which we leased and redeveloped in 2015. The 12-acre parcel is made up of 422,210 square feet of retail and 102,343 square feet of underground storage and equipment spaces, as well as parking areas in one building. Tony Fun Shopping Mall represents a life-style shopping experience with themed designs and scenic shopping places. The retail shopping mall features iconic global landscapes and structures, such as the Eiffel Tower and Statute of Liberty to give the shopper a sense of belonging to a global community. Its tenants include independently owned businesses such as non-designer specialty retailers, dining, fashion, entertainment, child development and education. The retail shopping mall also includes play areas for kids, an arcade and an art center. The property is located in Tai’an City. As of June 30, 2020, December 31, 2019 and 2018, Tony Fun Shopping Mall occupancy rate was 81%, 87%, and 72%, respectively.

 

Tony Fun Shopping Mall benefits from an economy drawing from the city of Tai’an, which has an approximate population of 5.6 million. Tony Fun Shopping Mall is located in the Shandong Tai’an Development Line. The Shandong Tai’an Development Line is the key development area under the local government’s plan, which contains Tai’an Municipal Government buildings, the Convention Center, Central Business District and an entertainment center. It is also located within 4.35 miles of Tai’an railway station, a high-speed railway station with bullet trains to Beijing, Shanghai and other cities.

 

Managed Properties

 

Zibo Tony Fun Youthful Lifestyle Park

 

Zibo Tony Fun provides business management services for Zibo Tony Fun Youthful Lifestyle Park, whose owner is Shandong Haoke Industrial Co., Ltd., a related party of the Company. The shopping center consists of four floors, and the total area is approximately 159,084 square feet (14,779.37 square meters). Zibo Tony Fun is responsible for the daily management of the retailer and the tenants, including marketing and operations in order to increase the reputation and customer traffic of the shopping center. Zibo Tony Fun earns revenue by providing these services. Zibo Tony Fun Youthful Lifestyle Park was open in October 2018.

 

Zibo Tony Fun Youthful Lifestyle Park benefits from an economy drawing from the city of Zibo, which has an approximate population of 4.71 million. Zibo Tony Fun Youthful Lifestyle Park is part of a renovation project of Zibo City, and located in the center of the so-called “Root of Zibo” on Jinjing Avenue next to the city’s core business district.

 

Wuhan Optical Valley International Plaza

 

Wuhan Optical Valley International Plaza is managed by Wuhan Tony Fun Commercial Management Co., Ltd., with a total building area covering approximately 854,655 square feet (79,400 square meters). Wuhan Tony Fun Commercial Management Co., Ltd. is in charge of the daily management and operation of the shopping mall, including increasing its popularity, attracting and retaining tenants and consumers through various methods such as design, decoration, marketing, and earns revenues by providing these services. The company ceased its operation in November 2019 and Shanghai Tony Fun transferred 100% of its equity interest in Wuhan Tony Fun to two third-party companies on June 4, 2020.

 

Our Competitive Strengths

 

We believe the following competitive strengths differentiate us from our competitors and contribute to our ongoing success.

 

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Well Positioned to Capture Opportunities in Tier 3 and Tier 4 Cities and Counties. We are primarily focused on redeveloping shopping malls into lifestyle shopping malls for this market segment and have accumulated substantial knowledge and experience about consumers’ preferences and demands of customers in these markets. We believe we can leverage our experience to capture the growth opportunities in these markets.

 

Experienced Management Team and Personnel with a Demonstrated Track Record. Our management team, led by our Chief Executive Officer Zhiqiang Han, has extensive industry experience and a demonstrated track record of managing costs, adapting to changing market conditions, and redeveloping properties. In addition, Mr. Han has a vast network and understanding of the market. Our workforce is highly skilled with specialized training, designed to address complex and individualized tenant and customer issues.

 

Ability to Attract and Maintain Tenants. We believe our unique incubation-training program attracts young entrepreneurs to our retail shopping centers and helps maintain them as tenants. In addition, we believe our incubation-training program builds loyalty with our tenants.

 

Adaptable Business Model to Changing Consumer Demands. Many people are going to shopping centers and malls to browse, socialize, and consume experiences that go well beyond traditional shopping. Our retail shopping malls offer a diversity of shopping, dining and entertainment facilities to capture this change in consumer demand.

 

Our Strategies

 

Our objective is to become a leading retail shopping operator in China. To achieve this goal, we are pursuing the following strategies:

 

expanding into selected Tier 2, Tier 3 and Tier 4 Cities;

 

attract and retain quality tenants through incubation training;

 

leasing strategy focused on a diverse client mix;

 

offering a large selection of diverse tenants;

 

selectively allocate capital to revenue enhancing projects that we believe will improve the market position of a given commercial property; and

 

selectively invest capital in development and re-development opportunities where we believe the return on such capital is accretive to our shareholders.

 

Our Challenges and Risks

 

We recommend that you consider carefully the risks discussed below and under the heading “Risk Factors” beginning on page 12 of this prospectus before purchasing our common shares. If any of these risks occur, our business, prospects, financial condition, liquidity, results of operations and ability to make distributions to our shareholders could be materially and adversely affected. In that case, the trading price of our common shares could decline and you could lose some or all of your investment. These risks include, among others, the following: 

 

  we face significant competition in the leasing market, which may decrease or prevent increases of the occupancy and rental rates of our properties;

 

we may be classified as a “Resident Enterprise” of China and such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders;

 

since our operations and assets are located in China, shareholders may find it difficult to enforce a U.S. judgment against the assets of our Company, our directors and executive officers;

 

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we must remit the offering proceeds to China before they may be used to benefit our business in China, this process may take a number of months and we will be unable to use the proceeds to grow our business in the meantime;

 

our success depends upon our retaining tenants we have trained through our incubation-training program;

 

we face a wide range of competition that could affect our ability to operate profitably;

 

our ability to implement and maintain an effective system of internal control over our financial reporting;

 

negative publicity surrounding U.S.-listed Chinese companies may unfairly harm our reputation and adversely affect our ability to access capital markets to grow our business; and

 

the regulatory and legal system in China is complex and developing, and future regulations may impose additional requirements on our business.

 

Foreign Private Issuer Status

 

We are incorporated in the British Virgin Islands, and more than 50 percent of our outstanding voting securities are not directly or indirectly held by residents of the United States. Therefore, we are a “foreign private issuer” as defined in Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act. As a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

Corporate Information

 

On October 18, 2017, Tony Fun, Inc. (“Tony Fun”) was incorporated in the British Virgin Islands. On the same day, the company issued 10,000 common shares at $0.001 per share to its incorporator with cash proceeds of $10.

 

Ownership and Purpose

 

Tony Fun, Inc. – Tony Fun, Inc. is our British Virgin Islands holding company. 

 

Glory Han Limited (“Glory Han”) – Glory Han is our wholly owned Hong Kong subsidiary. 

 

Shanghai Tony Fun Brand Management Co., Ltd. (“Shanghai Tony Fun”) – Shanghai Tony Fun is a company incorporated in China and a wholly owned subsidiary of Glory Han. It is the parent company of Beijing Tony Fun and Wuhan Tony Fun and has no other operations at this time.

  

Rongyaohan Technological Enterprise Incubation (Tai’an) Co., Ltd. (“Rongyaohan Tai’an”) – Rongyaohan Tai’an was established August 16, 2019 under the laws of China. Since its formation, Rongyaohan Tai’an has been registered as a Wholly Foreign-Owned Enterprise (“WFOE”) in the State Administration for Industry and Commerce (“SAIC”).

 

Beijing Tony Fun Investment Consulting Co., Ltd. (“Beijing Tony Fun”) – Beijing Tony Fun is a company incorporated in China and a wholly owned subsidiary of Shanghai Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management. It has limited operations at this time.

 

Wuhan Tony Fun Commercial Management Co., Ltd. (“Wuhan Tony Fun”) – Wuhan Tony Fun is a company incorporated in China and a wholly owned subsidiary of Shanghai Tony Fun. Its planned business scope includes operating management and property management and corporate marketing planning. Wuhan Tony Fun ceased its operation in November 2019 and Shanghai Tony Fun transferred 100% of its equity interest in Wuhan Tony Fun to two third-party companies on June 4, 2020.

 

Nanjing Tony Fun Consulting Co., Ltd. (“Nanjing Tony Fun”) – Nanjing Tony Fun is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management. It has limited operations at this time.

 

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Hubei Rongzhida Consulting Co., Ltd. (“Hubei Rongzhida”) – Hubei Rongzhida is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management. The Company ceased its operation in July 2019.

 

Tai’an Tony Fun Shopping Mall Co., Ltd. (“Tai’an Tony Fun”) – Tai’an Tony Fun is an operating company in China and a wholly owned subsidiary of Beijing Tony Fun. Its business scope includes commercial real estate leasing, operating management and property management.

 

Zibo Tony Fun Commercial Management Co., Ltd. (“Zibo Tony Fun”) – Zibo Tony Fun is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management.

 

Tai’an Jinqiao United Business Services Co., Ltd. (“Jinqiao United Business”) – Jinqiao United Business is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management. It has limited operations at this time.

 

Jinan Tony Fun Commercial Management Co., Ltd. (“Jinan Tony Fun”) – Jinan Tony Fun is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management.

 

Corporate Organizational Chart

 

 

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Corporate History

 

Beijing Tony Fun was established on February 28, 2012 under the laws of China. Its original shareholders were Mr. Zhiqiang Han and Ms. Jing Ma, who is the spouse of Zhiqiang Han, which owned 60% and 40% respectively.

  

Shanghai Tony Fun was established on January 9, 2018 under the laws of China, contributed by Glory Han Limited. Since its formation, Shanghai Tony Fun has been registered as a WFOE in the SAIC.

  

Rongyaohan Tai’an was established on August 16, 2019 under the laws of China, as a wholly owned subsidiary of Glory Han Limited. Since its formation, Rongyaohan Tai’an has been registered as a WFOE in the SAIC.

 

On March 16, 2018, Jing Ma, who is the spouse of Zhiqiang Han, entered into an equity transfer agreement with Shanghai Tony Fun, pursuant to which she agreed to transfer all of her equity interests in Beijing Tony Fun to Shanghai Tony Fun. On April 3, 2018, Zhiqiang Han, the other original shareholder of Beijing Tony Fun, entered into an equity transfer agreement with Shanghai Tony Fun, pursuant to which he agreed to transfer all of his equity interests in Beijing Tony Fun to Shanghai Tony Fun for no consideration. After these equity transfers, Beijing Tony Fun became a wholly owned subsidiary of Shanghai Tony Fun.

 

On June 4, 2019, Wuhan Tony Fun was established in Wuhan, Hubei Province, as a wholly-owned subsidiary of Shanghai Tony Fun. In November 2019, Wuhan Tony Fun ceased its operation. On June 4, 2020, Shanghai Tony Fun transferred 100% of its equity interest in Wuhan Tony Fun to two third-party companies.

 

Tai’an Tony Fun, was incorporated in Tai’an, Shandong Province, China, on July 28, 2014. Its original shareholders were Beijing Tony Fun, which owned 60% of the equity interests, and two individuals, Zhiqiang Han and Jing Ma, who is the spouse of Zhiqiang Han, which owned 30% and 10% respectively. On April 27, 2016, Zhiqiang Han increased his equity ownership to 58%, Jing Ma increased her equity ownership to 30% and Beijing Tony Fun’s equity ownership decreased to 12%. On March 15, 2018, Zhiqiang Han and Jing Ma entered into an equity transfer agreement, pursuant to which Jing Ma agreed to transfer all of her equity interests in Tai’an Tony Fun to Zhiqiang Han for no consideration. As a result, Mr. Zhiqiang Han, owned 88% of the equity interests, and Beijing Tony Fun owned 12% of the equity interests. On April 8, 2018, Zhiqiang Han and Beijing Tony Fun entered into an equity transfer agreement, pursuant to which Zhiqiang Han agreed to transfer all of his equity interests in Tai’an Tony Fun to Beijing Tony Fun for no consideration. After this equity transfer, Tai’an Tony Fun became a wholly owned subsidiary of Beijing Tony Fun.

 

Since its formation in 2012, Beijing Tony Fun has established several other wholly owned subsidiaries:

 

  Zibo Tony Fun incorporated on December 1, 2017;

 

  Nanjing Tony Fun incorporated on December 14, 2017;

 

  Jinqiao United Business incorporated on February 23, 2018;

 

 

 

Hubei Rongzhida incorporated on April 24, 2018; and

 

  Jinan Tony Fun incorporated on May 14, 2018.

 

On December 1, 2017, Zibo Tony Fun was established in Zibo, Shandong Province, as a wholly-owned subsidiary of Beijing Tony Fun.

 

On December 14, 2017, Nanjing Tony Fun was established in Nanjing, Jiangsu Province, as a wholly-owned subsidiary of Beijing Tony Fun.

 

On February 23, 2018, Jinqiao United Business was established in Tai’an, Shandong Province, as a wholly owned subsidiary of Beijing Tony Fun.

 

7

 

 

On April 24, 2018, Hubei Rongzhida was established in Jingmen, Hubei Province, as a wholly owned subsidiary of Beijing Tony Fun. In July 2019, the Company ceased the operation of Hubei Rongzhida.

 

On May 14, 2018, Jinan Tony Fun was established in Jinan, Shandong Province, as a wholly owned subsidiary of Beijing Tony Fun.

 

Implications of Being an Emerging Growth Company

 

We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our common shares less attractive as a result. The result may be a less active trading market for our common shares and the price of our common shares may be more volatile.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (the “Securities Act”) for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

We will remain an “emerging growth company” until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed US$1.07 billion, (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”), which would occur if the market value of our common shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. 

 

8

 

 

The Offering

 

Common shares offered by us:   2,200,000
     
Common shares offered by Selling Stockholders:   1,977,500
     
Common shares outstanding immediately prior to this offering:   14,510,000
     
Common shares outstanding immediately after this offering:   16,710,000
     
Offering price per common share:   $          per share
     
Use of proceeds:  

We expect to receive net proceeds of approximately $14.1 million in this offering, assuming an initial public offering price of $7.25 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business.

  

We intend to use the net proceeds of this offering as follows after we complete the remittance process:

     
   

●     approximately $6.0 million for redevelopment of existing shopping malls and future new shopping malls. However, we have no current understandings, agreements or commitments for any specific material acquisition at this time;

 

●     approximately $4.0 million for paying off debt; and

 

●     any balance for additional working capital.

     
    See “Use of Proceeds”
     
Risk factors:   Investing in these securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section of this prospectus before deciding to invest in our common shares.
     
Proposed NASDAQ Capital Market symbol:   “TONY”

 

9

 

 

Prospectus Conventions

 

Except where the context otherwise requires, “we”, “us”, “company”, “Company”, “our” and “Tony Fun” collectively refer to:

 

  Tony Fun, Inc., a British Virgin Islands holding company (“Tony Fun, Inc.”);

 

  Glory Han Limited, a Hong Kong limited company (“Glory Han”), and a wholly owned subsidiary of Tony Fun, Inc.;

 

  Shanghai Tony Fun Brand Management Co., Ltd., a China limited company (“Shanghai Tony Fun”) and a wholly owned subsidiary of Glory Han;
     
  Beijing Tony Fun Investment Consulting Co., Ltd., a China limited company (“Beijing Tony Fun”) and a wholly owned subsidiary of Shanghai Tony Fun;

  

  Nanjing Tony Fun Consulting Co., Ltd., a China limited company (“Nanjing Tony Fun”) and a wholly owned subsidiary of Beijing Tony Fun;

  

  Hubei Rongzhida Consulting Co., Ltd., a China limited company (“Hubei Rongzhida”) and a wholly owned subsidiary of Beijing Tony Fun;

 

  Tai’an Tony Fun Shopping Mall Co., Ltd., a China limited company (“Tai’an Tony Fun”) and a wholly owned subsidiary of Beijing Tony Fun;

  

  Zibo Tony Fun Commercial Management Co., Ltd., a China limited company (“Zibo Tony Fun”) and a wholly owned subsidiary of Beijing Tony Fun;

 

  Tai’an Jinqiao United Business Services Co., Ltd., a China limited company (“Jinqiao United Business”) and a wholly owned subsidiary of Beijing Tony Fun;
     
  Jinan Tony Fun Commercial Management Co., Ltd., a China limited company (“Jinan Tony Fun”) and a wholly owned subsidiary of Beijing Tony Fun.
     
  Wuhan Tony Fun Commercial Management Co., Ltd., a China limited company (“Wuhan Tony Fun”) and a wholly owned subsidiary of Shanghai Tony Fun.
     
 

Rongyaohan Technological Enterprise Incubation (Tai’an) Co., Ltd., a China limited company (“Rongyaohan Tai’an”) and a wholly owned subsidiary of Glory Han.

 

  China Operating Companies or China Operating Company refer to, collectively or individually, as the case may be, to Shanghai Tony Fun, Beijing Tony Fun, Nanjing Tony Fun, Hubei Rongzhida, Tai’an Tony Fun, Zibo Tony Fun, Jinqiao United Business, Jinan Tony Fun, Wuhan Tony Fun and Rongyaohan Tai’an.

 

“tier 2 cities” is a classification used to rank cities in China by businesses, and criteria includes GDP of $68 to $299 billion, populations of 3 to 15 million people and include provincial capital cities and economically important cities.

 

“tier 3 cities” is a classification used to rank cities in China by businesses, and criteria includes GDP of $18 to $67 billion, populations of 150,000 to 3 million people and include provincial capital cities and prefecture level cities.

 

  “tier 4 cities” is a classification used to rank cities in China by businesses, and criteria includes GDP below $17 billion, populations of less than 150,000 and include provincial prefecture level cities county-level cities.

 

All references to “RMB,” and “Renminbi” are to the legal currency of China, and all references to “USD,” and “U.S. Dollars” are to the legal currency of the United States.

 

This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at a specified rate solely for the convenience of the reader. Unless otherwise noted, all translations made in this prospectus are based on a rate of RMB 6.9668 to $1.00, which was the exchange rate on December 31, 2019. Unless otherwise stated, we have translated balance sheet amounts, with the exception of equity, at December 31, 2019 at RMB 6.9668 to $1.00 as compared to RMB 6.8764 to $1.00 at December 31, 2018. We have stated equity accounts at their historical rates. The average translation rates applied to income statement accounts for the years ended December 31, 2019 and 2018 were RMB 6.9072 and RMB 6.6146, respectively. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. On January 22, 2021, the exchange rate was RMB 6.4607 to $1.00. See “Risk Factors – Fluctuation of the Renminbi could materially affect our financial condition and results of operations” for discussions of the effects of fluctuating exchange rates on the value of our capital shares. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

For the sake of clarity, this prospectus follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of our Chief Executive Officer will be presented as “Zhiqiang Han,” even though, in Chinese, his name would be presented as “Han Zhiqiang.”

 

We have relied on statistics provided by a variety of publicly-available sources regarding China’s expectations of growth, which have not been independently verified by us, the underwriters or any of their respective affiliates or advisers. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. We have sought to provide current information in this prospectus and believe that the statistics provided in this prospectus remain up-to-date and reliable. 

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Summary Consolidated Financial Information

 

In the table below, we provide you with historical selected financial data for the years ended December 31, 2019 and 2018. This information is derived from our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period. When you read this historical selected financial data, it is important that you read it along with the historical financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

   For the Years Ended
December 31,
 
   2019   2018 
   US$   US$ 
Statements of operation data:        
Revenues   2,019,848    1,906,704 
Gross loss   (1,010,171)   (1,173,621)
Operating expenses   (2,373,132)   (2,362,595)
Loss from operations   (3,383,303)   (3,536,216)
Other income (expenses)   720,534    (149,739)
Income tax expense   (13,731)   (46)
Net loss   (2,676,500)   (3,686,001)
           
   December 31,
2019
   December 31,
2018
 
   US$   US$ 
Balance sheets data        
Current assets   894,132    1,034,294 
Total assets   18,026,647    6,357,526 
Current liabilities   6,563,884    9,822,708 
Total liabilities   23,255,016    10,422,572 
Total stockholders’ deficit   (5,228,369)   (4,065,046)

   

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RISK FACTORS

 

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in this offering unless you can afford to lose your entire investment.

 

Risks Related to Our Business

 

Our operations have been and may continue to be affected by COVID-19 pandemic.

 

Our business and financial performance have been adversely affected by the outbreaks of COVID-19. The global COVID-19 pandemic continues to rapidly evolve and we cannot anticipate with any certainty the length or severity of the effects of COVID-19. As of the date of this prospectus, our business has been adversely affected by COVID-19 pandemic primarily by the occupancy rate at our shopping malls decreased from 87% at December 31, 2019 to 81% at June 30, 2020. While the duration of the pandemic, disruption to our business and related financial impact cannot be reasonably estimated at this time, we currently expect that our consolidated results of operations for the rest of 2020 calendar year will be significantly affected with potential continuing impact of COVID-19 in subsequent periods.

 

In addition to the above impacts, the COVID-19 pandemic caused slower collection of tenants receivables and significant impairment to the growth of our business. The COVID-19 pandemic remains a rapidly evolving situation. While many of the restrictions on movement within China and other countries have been relaxed, there is great uncertainty as to the future progress of the disease. Currently, there is no vaccine or specific anti-viral treatment for COVID-19. Relaxation of restrictions on economic and social life could lead to new cases which may lead to the reimposition of restrictions. Our business operations, results of operations and financial condition could be further adversely affected if a wide spread of COVID-19 happens again in the locations where we have business operations.

 

Overall economic and market conditions may adversely affect the general retail environment.

 

Our concentration in the retail real estate market means that we are subject to a number of factors that could adversely affect the retail environment generally, including, without limitation:

 

changes in international, national, regional and local economic conditions;

 

tenant bankruptcies;

 

the impact on our retail tenants and demand for retail space at our properties from the increasing use of the Internet by retailers;

 

local real estate conditions, such as an oversupply of, or reduction in demand for, retail space or retail goods, decreases in rental rates, declining real estate values and the availability and creditworthiness of tenants;

 

levels of consumer spending, changes in consumer confidence and fluctuations in seasonal spending;

 

the willingness of retailers to lease space in our properties;

 

increased operating costs;

 

changes in applicable laws and regulations, including tax, environmental, safety and zoning;

 

perceptions by consumers of the safety, convenience and attractiveness of our properties;

 

casualties and other natural disasters; and

 

the potential for terrorist activities.

 

In addition, any economic downturn may adversely affect the businesses of many of our tenants. As a result, we may see increases in bankruptcies of our tenants and increased defaults by tenants, and we may experience higher vacancy rates and delays in re-leasing vacant space, which could negatively impact our business and results of operations.

 

Our success depends upon us retaining tenants we have trained through our incubation-training program. 

 

Our future success depends heavily upon the continued leasing of our successful tenants that we have trained through our incubation-training program. We spend significant time and resources on the incubation training of our tenants. If our tenants leave or relocate to another retail shopping center, we will have to expend resources training the new tenant. Accordingly, our business may be significantly disrupted and our financial condition and results of operations may be materially adversely affected if tenants do not commit to us after we have trained them.

 

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Our properties depend on major tenants to attract shoppers and could be adversely affected by the loss of one or more of these major tenants

 

Major tenants typically anchor our properties, and the value of our properties could be materially and adversely affected if these major tenants fail to comply with their contractual obligations or cease their operations.

 

If a major tenant were to close its store at our properties, we may experience difficulty and delay and incur significant expense in replacing the tenant, as well as in leasing spaces in areas adjacent to the major tenant, at attractive rates, or at all. Additionally, major tenant closures may result in decreased customer traffic, which could lead to decreased sales at our properties. If the sales of stores operating in our properties were to decline significantly due to the closing of major tenant stores, adverse economic conditions, or other reasons, tenants may be unable to pay their minimum rents or expense recovery charges. In the event of any default by a tenant, we may not be able to fully recover, and/or may experience delays and costs in enforcing our rights as landlord to recover, amounts due to us under the terms of our agreements with such parties.

 

We face potential adverse effects from tenant bankruptcies or insolvencies.

 

Bankruptcy filings or insolvencies by retailers can occur regularly in the course of our operations. Most of our tenants are individuals or individual businesses, and we cannot be sure that they will avoid the risk of insolvency. However, in accordance with the Regulation on Individual Businesses (2016), and General Rules of the Civil Law (2017) in the PRC, the debts of an individual business shall be secured with the individual’s property if the business is operated by an individual and with the household’s property. Our tenant leases also provide that we are entitled to terminate the lease if the tenant cannot make rental payments to us in a timely manner, as well as to claim all pre-bankruptcy balances due under the lease, fines for delayed payments, the security deposit, and any related damages. A bankruptcy filing by, or relating to, one of our tenants would bar all efforts by us to collect pre-bankruptcy debts from that tenant, or from their property, unless we receive an order permitting us to do so from the court. In addition, we cannot be sure that their property is adequate to satisfy their debt. A bankrupt tenant may not vacate its space in a timely manner, and we may be unable to re-lease the vacated space during that time at attractive rates, or at all. Furthermore, we may be required to incur significant expense in replacing the bankrupt tenant. If the tenant is a corporation, according to the Enterprise Bankruptcy Law of the PRC (2006), all pre-bankruptcy balances due under the lease are classified as common bankruptcy claims, which shall be satisfied after other secured claims such as employees’ wages and welfares, and unpaid taxes are repaid from the bankruptcy estate. In addition, common bankruptcy claims are repaid in the same percentage as all other holders of the common bankruptcy claims, if the bankruptcy estate assets are not sufficient to satisfy all common bankruptcy claims in full. As a result, it is likely that we would recover substantially less than the full value of any claims we hold. We continually seek to re-lease vacant spaces resulting from tenant terminations. The bankruptcy or insolvency of a tenant, particularly an anchor tenant or a national tenant with multiple locations, may make the re-leasing of their space difficult and costly, and it also may be more difficult to lease the remainder of the space at the affected properties. Future tenant bankruptcies may impact our ability to successfully execute our re-leasing strategy and could materially and adversely affect us.

 

We face a wide range of competition that could affect our ability to operate profitably.

 

Our properties compete with other retail properties and other forms of retailing such as catalogs and e-commerce websites. Competition may come from malls, outlet centers, community/lifestyle centers, and other shopping centers, both existing as well as future development and redevelopment/expansion projects, as well as catalogs and e-commerce. The presence of competitive alternatives affects our ability to lease space and the level of rents we can obtain. New construction, renovations and expansions at competing sites could also negatively affect our properties.

 

We also compete with other major real estate investors and developers for attractive commercial property opportunities. Competition for the acquisition of existing properties may result in increased purchase prices and may adversely affect our ability to make attractive investments on favorable terms, or at all. In addition, we compete with other retail property companies for tenants and qualified management.

 

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We may not be able to lease newly developed properties and renew leases and relet space at existing properties.

 

We may not be able to lease new properties to an appropriate mix of tenants. Also, when leases for our existing properties expire, the premises may not be relet or the terms of reletting, including the cost of allowances and concessions to tenants, may be less favorable than the current lease terms. To the extent that our leasing goals are not achieved, we could be materially and adversely affected.

 

Construction and redevelopment projects are subject to risks that materially increase the costs of completion. 

 

When we decide to redevelop existing properties, we will be subject to risks and uncertainties associated with construction and redevelopment. These risks include, but are not limited to, risks related to obtaining all necessary zoning, land-use, building occupancy and other governmental permits and authorizations, risks related to the environmental concerns of government entities or community groups, risks related to changes in economic and market conditions between redevelopment commencement and stabilization, risks related to construction labor disruptions, adverse weather, acts of God or shortages of materials which could cause construction delays and risks related to increases in the cost of labor and materials which could cause construction costs to be greater than projected and adversely impact our results of operations or financial condition.

 

Our portfolio of properties are dependent upon regional and local economic conditions and are geographically concentrated in Shandong province, which may cause us to be more susceptible to adverse developments in those markets than if we owned a more geographically diverse portfolio. 

 

Our properties are located in Shandong province, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. If there is a downturn in the economy in our market, our operations and our revenue could be materially adversely affected. We cannot assure you that our market will grow or that underlying real estate fundamentals will be favorable to owners and operators of retail properties. Our operations may also be affected if competing properties are built in our market. Moreover, submarkets within our market may be dependent upon a limited number of industries. Any adverse economic or real estate developments in Shandong Province, or any decrease in demand for retail space resulting from the regulatory environment, business climate or energy or fiscal problems, could adversely impact our financial condition, results of operations, cash flow, and our ability to satisfy our debt service obligations.

 

We face significant competition in the leasing market, which may decrease or prevent increases of the occupancy and rental rates of our properties. 

 

We compete with numerous developers, owners and operators of real estate, many of which own properties similar to ours in the same submarkets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. As a result, our financial condition, results of operations, and cash flow could be adversely affected. 

 

We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in order to retain and attract tenants, causing our financial condition, results of operations, and cash flow, to be adversely affected. 

 

To the extent adverse economic conditions continue in the real estate market and demand for retail space falls, we expect that, upon expiration of leases at our properties, we may be required to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or capital is otherwise unavailable, we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which could cause an adverse effect to our financial condition, results of operations, and cash flow.

 

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The actual rents we receive for the properties in our portfolio may be less than our asking rents, which could negatively impact our ability to generate cash flow growth. 

 

As a result of various factors, including competitive pricing pressure and adverse conditions in our markets, and a general economic downturn and the desirability of our properties compared to other properties in our markets, we may be unable to realize the asking rents across of our properties. In addition, the degree of discrepancy between our asking rents and the actual rents we are able to obtain may vary both from property to property and among different leased spaces within a single property. If we are unable to obtain rental rates that are on average comparable to our asking rents of our properties, then our ability to generate cash flow growth will be negatively impacted. In addition, depending on asking rental rates at any given time as compared to expiring leases in our properties, from time to time rental rates for expiring leases may be higher than starting rental rates for new leases.

 

We may not be able to rebuild our existing properties to their existing specifications if we experience a substantial or comprehensive loss of such properties.

 

In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications. Further, reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. Environmental and legal restrictions could also restrict the rebuilding of our properties. 

 

Wage increases in China may prevent us from sustaining our competitive advantage and could reduce our profit margins.

 

 Labor costs in China have increased with China’s economic development. Rising inflation in China is also putting pressure on wages. Wage costs for our employees form a part of our costs. For instance, in both 2019 and 2018, our compensation and benefit costs for our employees were approximately $1,408,000 and $892,000. In addition, we are required by Chinese laws and regulations to pay various statutory employee benefits, including pensions, housing funds, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated governmental agencies for the benefit of our employees. We expect that our labor costs, including wages and employee benefits, may increase, particularly as we seek to expand our operations. In addition, the future issuance of equity-based compensation to our professional staff and other employees would also result in additional stock dilution for our shareholders. Unless we are able to pass on these increased labor costs to our tenants by increasing rents, our profitability and results of operations may be adversely affected. Furthermore, the Chinese government has promulgated new laws and regulations to enhance labor protections in recent years, such as the Labor Contract Law and the Social Insurance Law. As the interpretation and implementation of these new laws and regulations are still evolving, our employment practice may not at all times be deemed in compliance with the new laws and regulations. If we are subject to penalties or incur significant liabilities in connection with labor disputes or investigation, our business and profitability may be adversely affected.

 

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We face certain risks in collecting our tenant receivable, and the failure to collect could have a material adverse effect on our business.

 

At June 30, 2020, our tenant receivable was $149,182. This amount represented 18% of our total revenue in 2020. As of December 31, 2019, our tenants receivable was $152,092. This amount represented 8% of our total revenues in 2019. At December 31, 2018, our tenant receivable was $70,871. This amount represented 4% of our total revenue in 2018. Although we believe that we have developed a robust receivables management system, we have incurred situations where a tenant receivable has become uncollectable, as our business continues to scale, we believe that our tenants receivable balance could grow. This, in turn, increases our risks for bad debts and uncollectible receivables. To the extent we incur additional bad debts and/or uncollectible receivables, our business, financial condition and results of operation may be materially and adversely affected.

 

Our return on investment in redevelopment of retail shopping centers may be different from our projections.

 

Our return on investment in retail shopping center redevelopments will take some time to materialize. At the initial stages of project investment and construction, the depreciation of newly added materials and fixed assets will negatively affect our operating results. In addition, the projects may be subject to changes in market conditions during the installation and implementation phases. Changes in industry policy, the progress of the projects, project management, raw materials supply, market conditions and other variables may affect the profitability and the time in which we profit on projects, which may be different from our initial forecast, thus affecting the actual return on investment of the projects.

 

We have experienced growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan and address competitive challenges, which could have a material adverse effect on our business.

 

Our total revenues increase from $1.9 million in 2018 to $2.0 million in 2019. This growth has resulted, and will continue to result, in substantial demands on our managerial, administrative, operational, financial and other resources. Furthermore, we intend to grow by expanding our business, and redeveloping additional retail shopping centers. To manage this growth, we must develop and improve our existing administrative and operational systems and our financial and management controls and further expand, train and manage our work force. 

 

As we continue these efforts, we may incur substantial costs and expend substantial resources due to, among other things, different technology standards, legal considerations and cultural differences. We will be required to dedicate additional financial resources and personnel to optimize our operational infrastructure and to recruit more personnel to train and manage our growing employee base. If we cannot successfully implement these measures efficiently and cost-effectively, we may be unable to satisfy a growth in demand for our retail shopping centers, which will impair our revenue growth and hurt our overall financial performance.

 

We cannot assure you that our growth strategy will be successful, which may result in a negative impact on our growth, financial condition, results of operations and cash flow.

 

We intend to grow by expanding into new markets. However, many obstacles to this expansion exist, including increased competition from similar businesses, our ability to improve our tenant mix, unexpected costs and costs associated with marketing efforts. As such, we cannot assure you that we will be able to successfully overcome these potential challenges and establish our business in additional markets. Our inability to implement this growth strategy successfully may have a negative impact on our growth, future financial condition, and results of operations or cash flows.

 

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The use of unqualified individual outsourcers may result in substantial liability.

 

Tai’an Tony Fun outsources work to third parties, such as real property management, security guard, cleaning and maintenance services. According to Regulations on Administration of Security Services, Regulations on Sanitation Management of Public Places and its Implementing Rules, enterprises who provide services such as security services and cleaning and maintenance, shall satisfy certain requirements, for example, enterprises who are engaged in security guard services shall obtain the security service permit from the local authority, and the they shall undertake certain obligations, for example, the security guard shall not restrict the freedom of any person at work. The breach of these provisions my cause a fine to these outsourcers, as well as compensation for damage. If the breach is serious, the relevant license of the outsourcer may be revoked, and the outsourcer or their employees may be prosecuted if the relevant activities constitute a crime. We have fulfilled our duty of reasonable care, which is to check the license or permits of the outsourcers and hire those with a good reputation in the area. In addition, we have clarified each party’s liabilities on the outsourcing contracts, including provisions that any fine or other legal consequences resulting from the substandard services provided by the outsourcers, and any damage caused by the outsourcers to us or any third party shall be borne by the outsourcer. However, it is possible that we may outsource work to parties without the required qualifications. If the services provided by unqualified outsourcers do not meet required quality standards and an accident occurs, according to the Tort Law of the PRC, and the Consumer Protection Law of the PRC, the outsourcer shall be ultimately responsible for tort liability for any harm caused to another person. However, the public venue such as shopping center, shall assume the corresponding complementary liability if they fail to fulfill the duty of safety protection. Thus, it is likely that our operations and reputation will be adversely affected in these cases.

 

If we experience a significant disruption in, or a breach in security of, our information technology systems or if we fail to implement, manage or integrate new systems, software and technologies successfully, it could harm our business.

 

Our information technology (“IT”) systems are an integral part of our business. We depend on our IT systems to process transactions, manage logistics, keep financial records, prepare our financial reporting and operate other critical functions. Security breaches, cyber-attacks or other serious disruptions of our IT systems can create systemic disruptions, shutdowns or unauthorized disclosure of confidential information. If we are unable to prevent or adequately respond to such breaches, attacks or other disruptions, our operations could be adversely affected or we may suffer financial or reputational damage.

  

In addition, our ability to effectively implement our business plan in a rapidly evolving market requires effective planning, reporting and analytical processes and systems. We are improving and expect that we will need to continue to improve and further integrate our IT systems, reporting systems and operating procedures on an ongoing basis. If we fail to do so effectively, it could adversely affect our ability to achieve our objectives.

 

We depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services.

 

Our future success depends heavily upon the continued service of our key executives. In particular, we rely on the expertise and experience of Zhiqiang Han, our founder, Chairman and Chief Executive Officer. We rely on his industry expertise and experience in our business operations, and in particular, his business vision, management skills, and working relationship with our employees, our other major shareholders, the regulatory authorities, and many of our tenants and customers. If he became unable or unwilling to continue in his present position, or if he joined a competitor or formed a competing company in violation of his employment agreement, we may not be able to replace him easily, our business may be significantly disrupted and our financial condition and results of operations may be materially adversely affected.

 

We do not maintain key man life insurance on any of our senior management or key personnel. The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our Company. Although each of key executives have signed a confidentiality and non-competition agreement in connection with his or her employment with us, we cannot assure that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key personnel.

 

In addition, we compete for qualified personnel with other industry competitors, and we face competition in attracting skilled personnel and retaining the members of our senior management team. These personnel possess technical and business capabilities, including expertise relevant to the retail shopping industry, which are difficult to replace. There is intense competition for experienced senior management with technical and industry expertise in the retail shopping industry, and we may not be able to retain our key personnel. Intense competition for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.

 

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In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2019, our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

 

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. In connection with the audit of our consolidated financial statements included in this prospectus, our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. 

 

The material weakness that has been identified relates to our lack of the control procedures to ensure that all the related party and related party transactions are identified.

 

The material weakness, if not timely remedied, may lead to material misstatements in our consolidated financial statements in the future. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional deficiencies may have been identified.

 

Following the identification of the material weakness and other control deficiencies, we have taken measures and plan to continue to take measures to remedy these control deficiencies. We have hired an external qualified financial consultant to strengthen the financial reporting function. We are in progress to expedite and streamline our reporting process and develop our compliance process, including establishing accounting, business operation and information system and related party transactions internal control assessment framework to allow early detection, prevention and resolution of potential compliance issues. We intend to conduct regular and continuous U.S. GAAP accounting and financial reporting programs and send our financial staff to attend external U.S. GAAP training courses. However, the implementation of these measures may not fully address these deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct these control deficiencies or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.

 

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

Upon the closing of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. We will design disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

 

Our senior management lacks experience in managing a public company and complying with laws applicable to operating as a U.S. public company domiciled in the British Virgin Islands and failure to comply with such laws could have a material adverse effect on our business.

 

Prior to the completion of this offering, the China Operating Companies have operated as private companies located in China. In connection with this offering, we formed Tony Fun, Inc. in the British Virgin Islands and Glory Han in Hong Kong. Tony Fun, Inc. is structured as the parent company of Glory Han, which is the parent company of Shanghai Tony Fun. Beijing Tony Fun operates as the parent company to the other China Operating Companies. In the process of taking these steps to prepare our company for this initial public offering, Shanghai Tony Fun’s senior management became the senior management of Tony Fun, Inc. None of Tony Fun, Inc.’s senior management has experience managing a public company or managing a British Virgin Islands company.

 

As a result of this offering, our company will become subject to laws, regulations and obligations that do not currently apply to it, and our senior management currently has no experience in complying with such laws, regulations and obligations. For example, Tony Fun, Inc. will need to comply with the British Virgin Islands laws applicable to companies that are domiciled in that country. The senior management is only experienced in operating the business of Shanghai Tony Fun, Inc. in compliance with Chinese laws. Similarly, by virtue of this offering, Tony Fun, Inc. will be required to file annual and current reports in compliance with U.S. securities and other laws. These obligations can be burdensome and complicated, and failure to comply with such obligations could have a material adverse effect on Tony Fun. In addition, we expect that the process of learning about such new obligations as a public company in the United States will require our senior management to devote time and resources to such efforts that might otherwise be spent on the operation of our business.

 

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We have limited business insurance coverage. Any future business liability, disruption or litigation we experience might divert management focus from our business and could significantly impact our financial results.

 

Availability of business insurance products and coverage in China is limited, and most such products are expensive in relation to the coverage offered. The China Operating Companies have maintained the public liability insurance covering elevator liability, lessor’s liability, advertisement and decoration liability, and parking area liability. However, we cannot assure you that such insurance is sufficient enough to cover all risks of our operations in China. If and to the extent we do experience a business disruption, lawsuit or natural disaster, which may result in substantial costs and divert management’s attention from our business, our results of operations and financial condition could be adversely affected.

 

We may require financing in the future and our operations could be curtailed if we are unable to obtain required financing when needed.

 

In addition to the funds raised by the Company in this initial public offering, we may need to obtain debt or equity financing to fund future capital expenditures. While we do not anticipate seeking financing in the immediate future, any additional equity financing may result in dilution to the holders of our outstanding shares of capital stock. Debt financing may impose affirmative and negative covenants that restrict our freedom to operate our business, including covenants that:

 

  limit our ability to pay dividends or require us to seek consent for the payment of dividends;

 

  increase our vulnerability to general adverse economic and industry conditions;

 

  require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and

 

  limit our flexibility in planning for, or reacting to, changes in our business and our industry.

 

We cannot guaranty that we will be able to raise funds in this offering or obtain additional financing on terms that are acceptable to us, or any financing at all, and the failure to obtain sufficient financing could adversely affect our business operations.

 

Potential disruptions in the capital and credit markets may adversely affect our business, including the availability and cost of short-term funds for liquidity requirements, which could adversely affect our results of operations, cash flows and financial condition.

 

Potential changes in the global economy may affect the availability of business and consumer credit. We may need to rely on the credit markets, particularly for short-term borrowings from banks in China, as well as the capital markets, to meet our financial commitments and short-term liquidity needs if internal funds from our operations are not available to be allocated to such purposes. Disruptions in the credit and capital markets could adversely affect our ability to draw on such short-term bank facilities. Our access to funds under such credit facilities is dependent on the ability of the banks that are parties to those facilities to meet their funding commitments, which may be dependent on governmental economic policies in China. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time.

 

Long-term disruptions in the credit and capital markets could result from uncertainty, changing or increased regulations, reduced alternatives or failures of financial institutions could adversely affect our access to the liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures may include deferring capital expenditures, and reducing or eliminating discretionary uses of cash. These events would adversely impact our results of operations, cash flows and financial position.

 

The report of our independent registered public accounting firm on our financial statements for the years ended December 31, 2019 and 2018 includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern, and if our business is unable to continue it is likely investors will lose all of their investment.

 

For the years ended December 31, 2019 and 2018 and for the six months ended June 30, 2020, the Company has incurred a net loss of approximately $2.7 million, $3.7 million and $1.2 million, respectively, and working capital deficit of approximately $5.7 million, $8.8 million and $6.3 million, respectively, and its cash balance and revenues generated are not currently sufficient and cannot be projected to cover operating expenses and meet the Company’s obligations as they become due for the next twelve months. Our auditor, MaloneBailey, LLP, has indicated in their report on the Company’s financial statements for the fiscal years ended December 31, 2019 and 2018 that there is “substantial doubt about our ability to continue as a going concern”. A “going concern” opinion could impair our ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives.

 

Management’s plan to alleviate the substantial doubt about our ability to continue as a going concern include attempting to improve our business profitability, obtain additional working capital funds through debt and equity financings, obtain the forgiveness of debt borrowed from related parties and restructure on-going operations to eliminate inefficiencies in order to meet our anticipated cash requirements. However, there can be no assurance that these plans and arrangements will be sufficient to fund the Company’s ongoing capital expenditures, working capital, and other requirements.  If we are unable to achieve these goals, our business will be jeopardized and we may not be able to continue. If we ceased operations, it is likely that all of our investors will lose their investment.

 

Our bank accounts in China are not insured or protected against loss.

 

The China Operating Companies maintain cash accounts with various banks located in China. Such cash accounts are not insured or otherwise protected. While we have not experienced any losses for uninsured bank deposits and do not believe that we are exposed to significant risks on cash held in bank accounts, should any bank holding such cash deposits become insolvent, or if the China Operating Companies are otherwise unable to withdraw funds, those entities would lose the cash on deposit with that particular bank.

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Risks Relating to Our Corporate Structure

 

We will likely not pay dividends in the foreseeable future.

 

We have not previously paid any cash dividends, and we do not anticipate paying any dividends on our common shares in the foreseeable future.  Dividend policy is subject to the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements and other factors. If we determine to pay dividends on any of our common shares in the future, we will be dependent, in large part, on receipt of funds from Shanghai Tony Fun for our cash needs, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations as described herein. Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our Company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our Company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from Shanghai Tony Fun. See “Dividend Policy.”

 

Pursuant to the Chinese enterprise income tax law, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of 10%. Similarly, dividends payable by a foreign investment entity to its Hong Kong investor who owns 25% or more of the equity of the foreign investment entity is subject to a withholding tax of 5%.

 

The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Shanghai Tony Fun is also required to set aside at least 10% of its after-tax profit based on Chinese accounting standards each year to its compulsory reserves fund until the accumulative amount of such reserves reaches 50% of its registered capital.

 

The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into registered capital, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. As of December 31, 2019 and 2018, the accumulated appropriations to statutory reserves amounted to $11,699 and $0, respectively.

 

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

 

We have never declared or paid cash dividends. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. As a result, capital appreciation, if any, of our ordinary shares will be your sole source of gain for the foreseeable future

 

Our business may be materially and adversely affected if any of our China Operating Companies declare bankruptcy or become subject to a dissolution or liquidation proceeding.

 

The Enterprise Bankruptcy Law of the PRC provides that an enterprise may be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.

 

Our China Operating Companies hold certain assets that are important to our business operations. If any of our China Operating Companies undergoes a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

We may rely on dividends paid by China Operating Companies to satisfy our cash needs.

 

We may rely on dividends and other distributions on equity paid by our China Operating Companies for our cash needs, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, to service any debt we may incur and to pay our operating expenses. Further, the payment of dividends by entities organized in China is subject to limitations as described herein. Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from Shanghai Tony Fun. See “Dividend Policy.”

 

20

 

 

The PRC government may adopt further restrictive measures to slow the increase in prices of real property and real property development.

 

Along with the economic growth in China, investments in the property sectors have increased significantly in the past few years. In response to concerns over the scale of the increase in property investments, the PRC government has introduced policies to curtail property development. We believe those regulations, among others, significantly affect the property industry in China.

 

These restrictive regulations and measures could increase our operating costs in adapting to these regulations and measures, limit our access to capital resources or even restrict our business operations. We cannot be certain that the PRC government will not issue additional and more stringent regulations or measures, which could further slowdown property development in China and adversely affect our business and prospects.

 

Shanghai Tony Fun and Rongyaohan Tai’an are subject to restrictions on paying dividends or making other payments to us, which may have a material adverse effect on our ability to conduct our business.

 

Current PRC regulations permit our Shanghai Tony Fun and Rongyaohan Tai’an to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, Pursuant to Company Law of the PRC (2018 Revision), Shanghai Tony Fun and Rongyaohan Tai’an are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Shanghai Tony Fun and Rongyaohan Tai’an may also allocate a portion of their respective after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. These limitations on the ability of Shanghai Tony Fun and Rongyaohan Tai’an to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments, or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

Our failure to obtain prior approval of the China Securities Regulatory Commission (“CSRC”) for the listing and trading of our common shares on a foreign stock exchange could delay this offering or could have a material adverse effect upon our business, operating results, reputation and trading price of our common shares.

 

On August 8, 2006, six Chinese regulatory agencies, including the Ministry of Commerce of the PRC (“MOFCOM”), jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the New “M&A Rule”), which became effective on September 8, 2006 and was amended on June 22, 2009. The New M&A Rule contains provisions that require that an offshore special purpose vehicle (“SPV”) formed for listing purposes and controlled directly or indirectly by Chinese companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures specifying documents and materials required to be submitted to it by an SPV seeking CSRC approval of overseas listings.

 

21

 

 

However, the application of the New M&A Rule remains unclear with no consensus currently existing among leading Chinese law firms regarding the scope and applicability of the CSRC approval requirement. Our Chinese counsel, GFE Law Office, has given us the following advice, based on their understanding of current Chinese laws and regulations:

 

  At the time of our equity interest acquisition, as the acquiree, Beijing Tony Fun was not related to or connected with the acquirer, Shanghai Tony Fun, and the incorporation of Shanghai Tony Fun and its acquisition of Beijing Tony Fun was not a scheme to circumvent any laws, rules or regulations in the PRC, in particular the New M&A Rule by way of investment in a PRC domestic company by a foreign-invested enterprise. Accordingly, we did not need the approval from MOFCOM. In addition, we have received all relevant approvals and certificates required for the acquisition;

 

  The CSRC approval under the New M&A Rule only applies to overseas listings of SPVs that have used their existing or newly issued equity interest to acquire existing or newly issued equity interest in Chinese domestic companies, or the SPV-domestic company share swap, due to the fact there has not been any SPV-domestic company share swap in our corporate history, Tony Fun, Inc. does not constitute a SPV that is required to obtain approval from the CSRC for overseas listing under the New M&A Rule; and

 

  In spite of the lack of clarity on this issue, the CSRC has not issued any definitive rule or interpretation regarding whether offerings like the one contemplated by this prospectus are subject to the New M&A Rule.

 

The CSRC has not issued any such definitive rule or interpretation, and we have not chosen to voluntarily request approval under the New M&A Rule. If the CSRC requires that we obtain its approval prior to the completion of this offering, the offering will be delayed until we obtain CSRC approval, which may take several months. There is also the possibility that we may not be able to obtain such approval. If prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other Chinese regulatory authorities. These authorities may impose fines and penalties upon our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China, or take other actions that could have a material adverse effect upon our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common shares. The CSRC or other Chinese regulatory agencies may also take actions requiring us, or making it advisable for us, to terminate this offering prior to closing.

 

Risks Related to Doing Business in China

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed China-based companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, this offering and our reputation and could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China 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 has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this type of scrutiny, criticism and negative publicity might have on our Company, our business and this offering. 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 the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our Company and business operations could be severely hampered and your investment in our shares could be rendered worthless.

 

22

 

 

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

 

Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our common 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. In addition, fluctuations of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products against products of foreign manufacturers or products relying on foreign inputs.

 

Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future Chinese authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

 We reflect the impact of currency translation adjustments in our financial statements under the heading “Foreign currency translation gain (loss).” For the six months ended June 30, 2020 and for the years ended December 31, 2019 and 2018, we had an adjustment of $80,204, an adjustment of $67,383 and an adjustment of 372,687 respectively, for foreign currency translations. 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. In addition, our foreign currency exchange losses may be magnified by China exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.

 

Under the Enterprise Income Tax Law of the PRC (the “EIT Law”) and its implementing rules, both of which became effective on January 1, 2008, and the former of which was amended on February 24, 2017, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. According to these regulations, a resident enterprise would have to pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders.

 

On April 22, 2009, the State Administration of Taxation of China issued the Circular 82 Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of De Facto Management Bodies (“Circular 82”) further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or group. Pursuant to Circular 82, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if  (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management are often resident in China.

 

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We do not believe that we meet the conditions outlined in the preceding paragraph since Tony Fun, Inc. does not have a PRC enterprise or enterprise group as its primary controlling shareholder. Further, Tony Fun, Inc. is a holding company incorporated outside China and its key assets are its ownership interests in its subsidiaries, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained outside China. In addition, we are not aware of any offshore company with a corporate structure similar to the company that has been deemed a PRC “resident enterprise” by the PRC tax authorities. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body”, we will continue to monitor our tax status.

 

If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In addition, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident enterprise shareholders may be subject to PRC tax on gains realized on the sale or other disposition of our shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders and any gain realized on the transfer of our shares by such shareholders may be subject to PRC tax at a rate of 10% in the case of non-PRC enterprises or a rate of 20% in the case of non-PRC individuals unless a reduced rate is available under an applicable tax treaty. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our shares.

 

We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-bribery law.

 

In connection with this initial public offering, we will become subject to the U.S. Foreign Corrupt Practices Act (“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 are also subject to the Anti-Unfair Competition Law of the PRC and the relevant anti-bribery provisions in the Criminal Law of the PRC, or together, the “PRC Anti-Bribery Laws.” The current PRC Anti-Bribery Laws prohibit the payment of bribes to government officials, private companies or individuals in a commercial transaction or their agents. We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors clients of our company, because these parties are not always subject to our control. We are in process of implementing an anticorruption program, which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included in all contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy annually. It further requires all hospitality involving promotion of sales to foreign governments and government-owned or controlled entities to be in accordance with specified guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and the PRC Anti-Bribery Laws.

 

However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or PRC Anti-Bribery Laws may result in severe criminal or administrative sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

 

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Since our operations and assets are located in China, shareholders may find it difficult to enforce a U.S. judgment against the assets of our Company, our directors and executive officers.

 

Our operations and assets are located in China. In addition, our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons. See “Enforceability of Civil Liabilities.”

 

We must remit the offering proceeds to China before they may be used to benefit our business in China, this process may take a number of months and we will be unable to use the proceeds to grow our business in the meantime.

 

Under Chinese law, the proceeds of this offering must be sent back to China, and the process for sending such proceeds back to China may take several months after the closing of this offering. In order to remit the offering proceeds to China, we will take the following actions:

 

  First, we will open a special foreign exchange account for capital account transactions. To open this account, we must submit to State Administration of Foreign Exchange approval (“SAFE”) certain application forms, identity documents, transaction documents, form of foreign exchange registration of overseas investments by domestic residents, and foreign exchange registration certificate of the invested company.

 

  Second, we will remit the offering proceeds into this special foreign exchange account.

 

  Third, we will apply for settlement of the foreign exchange. In order to do so, we must submit to SAFE certain application forms, identity documents, payment order to a designated person, and a business certificate.

 

The timing of the process is difficult to estimate because the efficiencies of different SAFE branches can vary materially. Ordinarily, the process takes several months to complete. We may be unable to use these proceeds to grow our business until we receive such proceeds in China. 

 

Fluctuation of the RMB may indirectly affect our financial condition by affecting the volume of cross-border money flow.

 

Although we use the United States dollar for financial reporting purposes, all of the transactions effected by the China Operating Companies are denominated in China’s currency, the RMB. The value of the RMB fluctuates and is subject to changes in China’s political and economic conditions. We do not currently engage in hedging activities to protect against foreign currency risks. Even if we choose to engage in such hedging activities, we may not be able to do so effectively. Future movements in the exchange rate of the RMB could adversely affect our financial condition as we may suffer financial losses when transferring money raised outside of China into the country or paying vendors for services performed outside of China.

 

If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

 

In the event we pay dividends in the future, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

 

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We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.

 

Based on the nature of our business activities, we may be classified as a passive foreign investment company (“PFIC”), by the U.S. Internal Revenue Service (“IRS”), for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, a U.S. investor will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes if either:

 

  75% or more of our gross income in a taxable year is passive income; or

 

  the average percentage of our assets by value in a taxable year that produce or are held for the production of passive income (which includes cash) is at least 50%.

  

The calculation of the value of our assets is based, in part, on the then market value of our common shares, which is subject to change. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. We cannot assure that we will not be a PFIC for any taxable year. See “Taxation – United States Federal Income Taxation-Passive Foreign Investment Company.”

 

Introduction of new laws or changes to existing laws by the Chinese government may adversely affect our business.

 

The Chinese legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal guidelines. Unlike common law jurisdictions such as the U.S., decided cases (which may be taken as precedent) do not form part of the legal structure of China and thus have no binding effect. Furthermore, in line with its transformation from a centrally planned economy to a more market-oriented economy, the Chinese government is still in the process of developing a comprehensive set of laws and regulations. As the legal system in China is still evolving, laws and regulations or their interpretation may be subject to further changes. Such uncertainty and prospective changes to the Chinese legal system could adversely affect our results of operations and financial condition.

 

We may be subject to foreign exchange controls in China, which could limit our use of funds raised in this offering, which could have a material adverse effect on our business.

 

We are subject to Chinese rules and regulations on currency conversion. In China, SAFE regulates the conversion of the RMB into foreign currencies. Currently, FIEs are required to apply to banks for foreign exchange registration under domestic and overseas direct investment. Shanghai Tony Fun is a FIE, with such registration, Shanghai Tony Fun is allowed to open foreign currency accounts including the “current account” and the “capital account”. Currently, conversion within the scope of the “current account” and general “capital account” can be effected without requiring the approval of SAFE. However, conversion of currency in some restricted “capital account” (e.g. for capital items such as direct investments, loans and securities), unless expressly exempted by laws and regulations, still requires the approval of SAFE.

 

In particular, if Shanghai Tony Fun borrows foreign currency through loans from Tony Fun, Inc. or other foreign lenders, these loans must be registered with SAFE. If Shanghai Tony Fun is financed by means of additional capital contributions, certain Chinese government authorities’ registration and/or approvals including MOFCOM, SAIC and SAFE, or their local counterparts are required. These restrictions could limit our use of funds raised in this offering, which could have an adverse effect on our business.

 

Governmental control of currency conversion may affect the value of your investment.

 

The Chinese government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China, which may take as long as six months in the ordinary course. We receive the majority of our revenues in Renminbi. Under our current corporate structure, our income is derived from payments from Shanghai Tony Fun. Shortages in the availability of foreign currency may restrict the ability of Shanghai Tony Fun to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government 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 Chinese government may also at its discretion restrict access in the future 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 dividends in foreign currencies to our shareholders. See “Regulations – Regulations of Foreign Currency Exchange and Dividend Distribution.”

 

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Fluctuation of the Renminbi could materially affect our financial condition and results of operations.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the Chinese 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. This change in policy has resulted in an appreciation of the Renminbi against the U.S. dollar. While the international reaction to the Renminbi revaluation has generally been positive, there remains international pressure on the Chinese government to adopt an even more flexible currency policy, which could result in a further and more rapid appreciation of the Renminbi against the U.S. dollar. Any material revaluation of Renminbi may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S. dollars. For example, an appreciation of Renminbi against the U.S. dollar would make any new Renminbi denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into Renminbi for such purposes. See “Exchange Rate Information.”

 

Failure to make adequate contributions to the housing provident fund for some of our employees could adversely affect our financial condition and we may be subject to labor disputes or complaints.

 

Pursuant to the Regulations on Management of Housing Provident Fund (the “Regulations on HPF”) which was promulgated by the State Council on April 3, 1999 and was last amended on March 24, 2019, PRC enterprises must register with relevant Housing Provident Fund (“HPF”) management center, open special HPF accounts at a designated bank and make timely HPF contributions for their employees. In accordance with the Regulations on HPF, if an enterprise fails to register with HPF or to open special HPF accounts for its employees, it can be ordered by the relevant HPF authority to register and open an account within a certain timeframe, furthermore, the enterprise will be liable for a fine of RMB 10,000 to RMB 50,000 if it fails to comply with such an order. Further, if an enterprise fails to pay in full or in part its HPF contributions, such enterprise will be ordered by the HPF enforcement authorities to make such contributions, and may be compelled by the people’s court that has jurisdiction over the matter to make such contributions.

 

The China Operating Companies are subject to the Regulation on HPF. Accordingly, if the China Operating Companies fail to make adequate HPF contributions for their employees, such failure may give rise to a private cause of action (complaints) by such individual(s) against the relevant China Operating Companies. To the extent any of the China Operating Companies are required to make such payments in full, such payments may have adverse financial or operational impact on the Company. In addition, the China Operating Companies may be subject to labor disputes or complaint from current or former employees. 

 

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Labor laws in China may adversely affect our results of operations.

 

In June 2007, the National People’s Congress of the PRC enacted the Labor Contract Law, which became effective on January 1, 2008 and was amended on December 28, 2012. To clarify certain details in connection with the implementation of the Labor Contract Law, the China State Council promulgated the Implementing Rules for the Labor Contract Law on September 18, 2008, which came into effect immediately. These labor laws impose significant liabilities on employers and affects the cost of an employer’s decision to reduce its workforce. The labor laws formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Among other things, these labor laws provide for specific standards and procedures for the termination of an employment contract and place the burden of proof on the employer. In addition, the laws require the payment of a statutory severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term employment contract. The labor laws also mandate that employers provide social welfare packages to all employees, increasing our labor costs. In addition, in July 2018, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Reform Plan of the Taxation and Collection Systems of National Taxes and Local Taxes, which states that, effective from January 1, 2019, basic pension insurance premiums, basic medical insurance premiums, unemployment insurance premiums, injury insurance premiums and maternity insurance premiums shall be levied by the tax authorities. Under the new system, the social insurance premiums collection is likely to be stringently administrated and enforced. All of our employees working for us exclusively within China are covered by these labor laws, and in the event we decide to significantly change or decrease our workforce, these labor laws could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.

 

Chinese regulations relating to the establishment of offshore special purpose companies by Chinese residents may subject our Chinese resident shareholders to personal liability and limit our ability to inject capital into our Chinese subsidiaries, limit our subsidiaries’ ability to increase its registered capital, distribute profits to us, or otherwise adversely affect us.

 

On July 4, 2014, China’s SAFE issued the Circular of the State Administration of Foreign Exchange on Issues concerning Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or Circular 37, which became effective as of July 4, 2014. According to Circular 37, prior registration with the local SAFE branch is required for Chinese residents to contribute domestic assets or interests to offshore companies, known as SPVs. Moreover, Circular 37 applies retroactively. As a result, Chinese residents who have contributed domestic assets or interests to a SPV, but failed to complete foreign exchange registration of overseas investments as required before July 4, 2014 shall send a letter to SAFE and its branches for explanation. SAFE and its branches shall, under the principle of legality and legitimacy, conduct supplementary registration, and impose administrative punishment on those in violation of the administrative provisions on the foreign exchange pursuant to the law.

 

We have requested our shareholders who are Chinese residents to make the necessary applications, filings and amendments as required under Circular 37 and other related rules. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that all of our shareholders who are Chinese residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Circular 37 or other related rules. The failure or inability of our Chinese resident shareholders to make any required registrations or comply with other requirements may subject such shareholders to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to (including using the proceeds from this offering) Shanghai Tony Fun, limiting Shanghai Tony Fun’s ability to pay dividends or otherwise distributing profits to us.

 

We may be subject to fines and legal sanctions by SAFE or other Chinese government authorities if we or our employees who are Chinese citizens fail to comply with Chinese regulations relating to employee stock options granted by offshore listed companies to Chinese citizens.

 

On February 15, 2012, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues Concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or Circular 7. Under Circular 7, Chinese citizens who are granted share options by an offshore listed company are required, through a qualified Chinese agent of the offshore listed company, to register with SAFE and complete certain other procedures, including applications for foreign exchange purchase quotas and opening special bank accounts. If we and our Chinese employees are granted share options we and our Chinese employees will be subject to Circular 7. Failure to comply with these regulations may subject us or our Chinese employees to fines and legal sanctions imposed by SAFE or other Chinese government authorities and may prevent us from further granting options under any share incentive plans to our employees. Such events could adversely affect our business operations.

 

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In addition, the State Administration of Taxation, or SAT, has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities.

 

Failure to comply with the Individual Foreign Exchange Rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our Chinese resident stockholders may subject such stockholders to fines or other liabilities.

 

Other than Circular 37, our ability to conduct foreign exchange activities in China may be subject to the interpretation and enforcement of the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE on January 5, 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any Chinese individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with SAFE provisions. Chinese individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.

 

We may not be fully informed of the identities of all our beneficial owners who are Chinese residents. For example, because the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are Chinese residents. Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such Chinese residents will be able to complete the necessary approval and registration procedures required by the Individual Foreign Exchange Rules.

 

It is uncertain how the Individual Foreign Exchange Rules will be interpreted or enforced and whether such interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our Chinese resident stockholders to make the required registration will subject our subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of this offering into the China, restriction on remittance of dividends or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.

 

Changes in China’s political and economic policies could harm our business.

 

Substantially all of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources.

 

The Chinese economy has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development China, we cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In addition, the Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development (“OECD”). These differences include, without limitation:

 

  economic structure;

 

  level of government involvement in the economy;

 

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  level of development;

 

  level of capital reinvestment;

 

  control of foreign exchange;

 

  methods of allocating resources; and

 

  balance of payments position.

 

As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.

 

Since 1979, the Chinese government has promulgated many new laws and regulations covering general economic matters. Despite these efforts to develop a legal system, China’s system of laws is not yet complete. Even where adequate law exists in China, enforcement of existing laws or contracts based on existing law may be uncertain or sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary, in many cases, creates additional uncertainty as to the outcome of any lawsuit. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Our activities in China will also be subject to administration review and approval by various national and local agencies of the Chinese government. Because of the changes occurring in China’s legal and regulatory structure, we may not be able to secure the requisite governmental approval for our activities. Although we have obtained all required governmental approvals to operate our business as currently conducted, to the extent we are unable to obtain or maintain required governmental approvals, the Chinese government may, in its sole discretion, prohibit us from conducting our business.

 

If relations between the United States and China worsen, our share price may decrease and we may have difficulty accessing U.S. capital markets.

 

At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversy between the United States and China could adversely affect the market price of our common shares and our ability to access U.S. capital markets.

 

The Chinese government could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of our investment in that country.

 

Our business is subject to political and economic uncertainties and may be adversely affected by political, economic and social developments in China. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may alter them to our detriment from time to time with little, if any, prior notice.

 

Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business. Nationalization or expropriation could even result in the total loss of our investment in China and in the total loss of any investment in us.

 

Because our operations are located in China, information about our operations is not readily available from independent third-party sources.

 

Because our operations are based in China, our shareholders may have greater difficulty in obtaining information about them on a timely basis than would shareholders of a U.S.-based company. Our operations will continue to be conducted in China and shareholders may have difficulty in obtaining information from sources other than the companies themselves. Information available from newspapers, trade journals, or local, regional or national regulatory agencies such as issuance of construction permits and contract awards for development projects will not be readily available to shareholders and, where available, will likely be available only in Chinese. Shareholders will be dependent upon management for reports of their progress, development, activities and expenditure of proceeds.

 

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Chinese economic growth slowdown may cause negative effect to our business.

 

Since 2010, the annual growth rate of the Chinese economy has declined, from approximately 10.3% gross domestic product in 2010 to 6.6% in 2018. This situation has impacted many types of service industries, such as restaurant and tourism, and some manufacturing industries. Our business operations in China rely primarily on the retail industry, which is influenced by economic growth slowdowns. If China’s economic growth continues to slow down, then our business could be materially adversely affected if such slow down results in reduced activity by the retail industry.

 

Land-use rights policy may cause significantly adverse effect to our operation.

 

China has very conservative land ownership and land use policies. All the lands in China either belong to the nation or collective units. Currently, our properties are leased from local villages, which is a collective unit and legal owner of the land acknowledged by the local government. We may need to obtain land-use rights in order to grow our business. However, under PRC laws obtaining the land use rights is not easy and there is no guarantee that we will successfully obtain a piece of ideal land even if we have enough capitals. So, if we are unable to obtain the land use rights in a timely manner, or even if we do obtain a piece of land in time, the location is not convenient for our business, we will have to face a situation of unstable development and our business operations and plans will be adversely affected.

  

We may be involved from time to time in legal proceedings and commercial or contractual disputes, which could have a material adverse effect on our business, results of operations and financial condition.

 

From time to time, we may be involved in legal proceedings and commercial disputes. Such proceedings or disputes are typically claims that arise in the ordinary course of business, including, without limitation, commercial or contractual disputes, and other disputes with customers and suppliers, intellectual property matters, environmental issues, tax matters and employment matters. There can be no assurance that such proceedings and claims, should they arise, will not have a material adverse effect on our business, results of operations and financial condition.

 

Risks Associated with this Offering and Ownership of Our Common Shares

 

We are an “emerging growth company,” and we cannot be certain if choosing to elect the reduced reporting requirements applicable to emerging growth companies will make our common shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1.07 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our Company of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares may decline.

 

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As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2020 annual report on Form 20-F to be filed in 2021, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

There may not be an active, liquid trading market for our common shares.

 

Prior to this offering, there has been no public market for our common shares. An active trading market for our common shares may not develop or be sustained following this offering. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The initial public offering price was determined by negotiations between us and the underwriters based on a number of factors. The initial public offering price may not be indicative of prices that will prevail in the trading market.

 

The market price of our common shares may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

 

The initial public offering price for our common shares will be determined through negotiations between the underwriters and us and may vary from the market price of our common shares following our initial public offering. If you purchase our common shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our common shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. The market price of our common shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  actual or anticipated fluctuations in our quarterly operating results;

 

  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our Company, or our failure to meet these estimates or the expectations of investors;

 

  announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

  lawsuits threatened or filed against us; and

 

  other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

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In addition, the securities markets have from time to time experienced price and volume fluctuations that are not related to the operating performance of particular companies. As a result, to the extent shareholders sell our shares in a negative market fluctuation, they may not receive a price per share that is based solely upon our business performance. We cannot guarantee that shareholders will not lose some or all of their investment in our common shares.

 

If a limited number of participants in this offering purchase a significant percentage of the offering, the effective public float may be smaller than anticipated and the price of our common shares may be volatile which could subject us to securities litigation and make it more difficult for you to sell your shares.

 

As a company conducting a relatively small public offering, we are subject to the risk that a small number of investors will purchase a high percentage of the offering. While the underwriters are required to sell shares in this offering to at least 300 round lot shareholders (a round lot shareholder is a shareholder who purchases at least 100 shares) in order to ensure that we meet NASDAQ Capital Market initial listing standards, we have not otherwise imposed any obligations on the underwriters as to the maximum number of shares they may place with individual investors. If, in the course of marketing the offering, the underwriters were to determine that demand for our shares was concentrated in a limited number of investors and such investors determined to hold their shares after the offering rather than trade them in the market, other shareholders could find the trading and price of our shares affected (positively or negatively) by the limited availability of our shares. If this were to happen, investors could find our shares to be more volatile than they might otherwise anticipate. Companies that experience such volatility in their stock price may be more likely to be the subject of securities litigation. In addition, if a large portion of our public float were to be held by a few investors, smaller investors may find it more difficult to sell their shares.

 

If we are unable to comply with certain conditions, our common shares may not trade on the NASDAQ Capital Market.

 

We have applied to list our common shares on the NASDAQ Capital Market, which provides that we pay the balance of our entry fee and show that we satisfy NASDAQ’s initial listing requirements. If we are unable to meet these conditions our shares may not trade on the NASDAQ Capital Market. Even when we receive conditional approval to have our shares trade on the NASDAQ Capital Market, investors should be aware that they will be required to commit their investment funds before we provide NASDAQ with confirmation that we have met the final conditions. However, investor funds will be held in escrow with Signature Bank and we will not close this offering unless we meet the listing conditions. In addition, we have relied on an exemption to the blue sky registration requirements afforded to “covered securities”. Securities listed on the NASDAQ Capital Market are “covered securities.” If we were unable to meet the NASDAQ conditions for listing, then we would be unable to rely on the covered securities exemption to blue sky registration requirements and we would need to register the offering in each state in which we planned to sell shares. Consequently, we will not complete this offering until we have met the required listing conditions.

 

If we are listed on the NASDAQ Capital Market and our financial condition deteriorates, we may not meet continued listing standards on the NASDAQ Capital Market.

 

The NASDAQ Capital Market also requires companies to fulfill specific requirements in order for their shares to continue to be listed. In order to qualify for continued listing on the NASDAQ Capital Market, we must meet the following criteria:

 

  Our shareholders’ equity must be at least $2,500,000; or the market value of our listed securities must be at least $35,000,000; or our net income from continuing operations in our last fiscal year (or two of the last three fiscal years) must have been at least $500,000;

 

  The market value of our publicly held shares must be at least $1,000,000;

 

  The minimum bid price for our shares must be at least $1.00 per share;

 

  We must have at least 300 shareholders;

 

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  We must have at least 500,000 publicly held shares;

 

  We must have at least 2 market makers; and

 

  We must have adopted NASDAQ-mandated corporate governance measures, including a board of directors comprised of a majority of independent directors, an Audit Committee comprised solely of independent directors and the adoption of a code of ethics among other items.

 

If our shares are listed on the NASDAQ Capital Market but are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our shares. In addition, if our common shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our common shares quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our common shares are not so listed or are delisted at some later date, our common shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our common shares might decline. If our common shares are not so listed or are delisted from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it difficult to sell their shares.

 

We will incur increased costs as a result of being a public company, which could have a material adverse effect on our profitability.

 

As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. For example, we must now engage U.S. securities law counsel and U.S. GAAP auditors that we did not need prior to this offering, and we will have annual payments for listing on a stock exchange, if we are so listed. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and NASDAQ, has required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur expenses of between $500,000 and $1,000,000 per year that we did not experience prior to commencement of this offering. Added costs of this nature will naturally reduce our profitability and could have a material adverse effect on our business.

 

The requirements of being a public company may strain our resources and divert management’s attention, which could have a material adverse effect on our business.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.

 

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

 

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We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies which could have an adverse effect on our results of operations.

 

Upon completion of this offering, we will be a reporting company in the United States. As a reporting company, we will be required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our Company and shareholders. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our Company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public listing could affect our results of operations.

 

Our classified board structure may prevent a change in control of our Company.

 

Our board of directors is divided into three classes of directors. Class A directors hold office for a term expiring at the 2022 annual meeting of shareholders, Class B directors hold office for a term expiring at the 2020 annual meeting of shareholders and Class C directors hold office for a term expiring as the 2021 annual meeting shareholders. Directors of each class are chosen for three-year terms upon the expiration of their current terms. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our shareholders. See “Management – Board of Directors and Board Committees.

 

Shares eligible for future sale may adversely affect the market price of our common shares, as the future sale of a substantial amount of outstanding common shares in the public marketplace could cause the price of our common shares to decline.

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our common shares. An aggregate of 14,510,000 shares were outstanding as of the date of this filing, and after giving effect to this offering, 16,710,000 shares will be outstanding immediately after this offering. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible for Future Sale.”

 

You will experience immediate and substantial dilution as a result of sales of shares under this offering.

 

The assumed initial public offering price of $7.25 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, is substantially higher than the pro forma net tangible book value per share of our common shares. If you purchase shares in this offering, you will incur immediate dilution of approximately 93.1% or approximately $6.75 in the pro forma net tangible book value per share from the price per share that you pay for the shares, based on the assumed initial public offering price of $7.25 per share and 2,200,000 shares to be offered in this offering. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

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We have not finally determined the uses of the proceeds from this offering, and we may use the proceeds in ways with which you may not agree.

 

While we have identified the priorities to which we expect to put the proceeds of this offering, our management will have considerable discretion in the application of the net proceeds received by us. In addition, in the event we are unable to use the proceeds for the redevelopment of shopping malls we have reserved the right to re-allocate funds currently allocated to that purpose to our general working capital. If that were to happen, then our management would have discretion over even more of the net proceeds to be received by our company in this offering. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve profitability or increase our stock price. The net proceeds from this offering may be placed in investments that do not produce profit or increase value. See “Use of Proceeds.”

 

Our employees, officers and/or directors will control a sizeable amount of our common shares, limiting your influence on shareholder decisions.

 

Upon the conclusion of this offering, our employees, officers and/or directors will, in the aggregate, beneficially own approximately 38.8% of our outstanding shares, based on the number of shares held by them as of December 31, 2019. As a result, our employees, officers and directors will possess substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders for approval. These shareholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our Company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our Company and might reduce the price of our common shares. These actions may be taken even if they are opposed by our other shareholders, including those who purchase shares in this offering. See “Principal and Selling Stockholders.”

 

As the rights of stockholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.

 

Our corporate affairs will be governed by our Amended and Restated Memorandum and Articles of Association, the British Virgin Islands Business Companies Act, 2004 (the “BVI Act”), and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority stockholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.

 

As a result of all of the above, holders of our shares may have more difficulty protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company. For a discussion of material differences between the provisions of the BVI Act and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital – Differences in Corporate Law.”

 

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British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

 

Shareholders of British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States Shareholders of a British Virgin Islands company could, however, bring a derivative action in the British Virgin Islands courts, and there is a clear statutory right to commence such derivative claims under Section 184C of the BVI Act. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

 

The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

 

Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, in our case, our Memorandum and Articles of Association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the Memorandum and Articles.

 

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s Memorandum and Articles of Association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

 

Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline.

 

If a trading market for our common shares develops, the trading market will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common shares will have had relatively little experience with us or our industry, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline and result in the loss of all or a part of your investment in us. 

 

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We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements and we do not intend to file quarterly reports. We will not be required to disclose detailed individual executive compensation information and we do not intend to disclose detailed executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime and we do not intend to file Section 16 reports for officers and directors. 

As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we do plan to disclose material information to all investors at this time. In addition, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies. 

As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with corporate governance listing standards. 

As a foreign private issuer, we are permitted to take advantage of certain provisions in the Nasdaq rules that allow us to follow our home country law for certain governance matters. Certain corporate governance practices in our home country, the British Virgin Islands, may differ significantly from corporate governance listing standards. Currently, we do not plan to rely on home country practice with respect to our corporate governance after we complete this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers. 

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses. 

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter. We would lose our foreign private issuer status if, for example, more than 50% of our common shares are directly or indirectly held by residents of the United States and we fail to meet additional requirements necessary to maintain our foreign private issuer status. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the Nasdaq rules. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. 

You may be unable to present proposals before general meetings or extraordinary general meetings not called by shareholders.  

British Virgin Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our Articles of Association allow our shareholders holding shares representing in aggregate not less than 30% of our voting share capital in issue, to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting. Although our Articles of Association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders, any shareholder may submit a proposal to our Board of Directors for consideration of inclusion in a proxy statement. Advance notice of at least seven (7) calendar days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. At any meeting of shareholders, a quorum will be present if there are shareholders present in person or by proxy representing not less than on 1/3 of the issued common shares entitled to vote on the resolutions to be considered at the meeting. Such quorum may be represented by only a single shareholder or proxy. If no quorum is present within two hours of the start time of the meeting, the meeting shall be dissolved if it was requested by shareholders. In any other case, the meeting shall be adjourned to the next business day, and if shareholders representing not less than one-third of the votes of the common shares or each class of shares entitled to vote on the matters to be considered at the meeting are present within one hour of the start time of the adjourned meeting, a quorum will be present

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FORWARD-LOOKING STATEMENTS

 

We have made statements in this prospectus, including under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and elsewhere that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

Examples of forward-looking statements include:

 

  the timing of the development of future business;

 

  projections of revenue, earnings, capital structure and other financial items;

 

  statements regarding the capabilities of our business operations;

 

  statements of expected future economic performance;

 

  statements regarding competition in our market; and

 

  assumptions underlying statements regarding us or our business.

 

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under the heading “Risk Factors” above. Many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements.

 

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

USE OF PROCEEDS

 

After deducting the estimated underwriting discounts and commissions and expenses of this offering payable by us, we expect net proceeds from this offering of approximately $14.1 million, based on an assumed initial public offering price of $7.25 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business. The procedure to remit funds may take several months after completion of this offering, and we will be unable to use the offering proceeds in China until remittance is completed. See “Risk Factors – We must remit the offering proceeds to China before they may be used to benefit our business in China, and this process may take a number of months.”

 

We intend to use the net proceeds of this offering as follows after we complete the remittance process:

 

 

approximately $6.0 million for redevelopment of existing shopping malls and future new shopping malls. However, we have no current understandings, agreements or commitments for any specific material acquisition at this time; 

     
  approximately $4.0 million for paying off debt; and

 

  any balance for additional working capital.

 

The precise amounts and percentage of proceeds we devote to particular categories of activity, and their priority of use, will depend on prevailing market and business conditions as well as on the nature of particular opportunities that may arise from time to time. Accordingly, we reserve the right to change the use of proceeds that we presently anticipate and describe herein. Pending remitting the offering proceeds to China, we intend to invest our net proceeds in short-term, interest bearing, and investment-grade obligations. These investments may have a material adverse effect on the U.S. federal income tax consequences of an investment in our common shares. It is possible that we may become a passive foreign investment company for U.S. federal income taxpayers, which could result in negative tax consequences to you. These consequences are discussed in more detail in “Material Tax Matters Applicable to U.S. Holders of Our Common Shares.”

 

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DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our common shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the board of directors may deem relevant.

 

Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital.

 

If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from Shanghai Tony Fun. Current Chinese regulations permit our China Operating Companies to pay dividends to Glory Han only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Our China Operating Companies are also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. Our subsidiaries in China are required to set aside statutory reserves.

 

In addition, pursuant to the EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us by Shanghai Tony Fun are subject to withholding tax at a rate of 10% unless otherwise exempted or reduced according to treaties or arrangements between the Chinese central government and governments of other countries or regions where the non-Chinese-resident enterprises are incorporated.

 

Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations in China may be used to pay dividends to our company.

 

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EXCHANGE RATE INFORMATION

 

Our business is conducted in China, and the financial records of the China Operating Companies are maintained in RMB, its functional currency. However, we use the U.S. dollar as our reporting currency; therefore, periodic reports made to shareholders will include current period amounts translated into U.S. dollars using the then-current exchange rates. Our financial statements have been translated into U.S. dollars in accordance with Accounting Standards Codification (“ASC”) 830-10, “Foreign Currency Matters.” We have translated our asset and liability accounts using the exchange rate in effect at the balance sheet date. We translated our statements of operations using the average exchange rate for the period. We reported the resulting translation adjustments under other comprehensive income (loss). The consolidated balance sheet amounts, with the exception of equity at December 31, 2019 and 2018 were translated at RMB 6.9668 and RMB 6.8764 to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied to consolidated statements of income and comprehensive income and cash flows for the years ended December 31, 2019 and 2018 were RMB 6.9072 and RMB 6.6146 to $1.00, respectively. 

  

We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The Chinese government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On January 22, 2021, the Forex exchange rate was RMB 6.4607 to $1.00. We do not currently engage in currency hedging transactions.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of December 31, 2019 on an actual basis and on a pro forma basis giving effect to the sale of 2,200,000 shares at an assumed initial public offering price of $7.25 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and to reflect the application of the proceeds after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

 

You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

 

Pre- and Post-Offering Capitalization 

 

December 31, 2019

 

   Actual   Pro Forma (1) 
     
Common shares, $0.001 par value; 500,000,000 shares authorized; 14,510,000 shares issued and outstanding as of December 31, 2019, actual; 16,710,000 shares issued and outstanding, pro forma  $14,510   $16,710 
Additional paid-in capital   8,426,971    22,059,271 
Accumulated deficit   (14,052,511)   (14,052,511)
Statutory reserves   11,699    11,699 
Accumulated other comprehensive income   370,962    370,962 
Total stockholders’ equity (deficit)   (5,228,369)   8,406,131 
Total capitalization  $(5,228,369)  $8,406,131 

 

(1)

Pro forma additional paid-in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts and commissions and other expenses payable by us. We expect to receive net proceeds of approximately $13,634,500, after deducting the estimated underwriting discounts and commissions and offering expenses, at the assumed initial public offering price of $7.25, the midpoint of the estimated price range set forth on the cover page of this prospectus, calculated as follows: $15,950,000 gross offering proceeds, less estimated underwriting discounts and commissions of $1,276,000, offering expenses of $800,000, and a non-accountable expense allowance of $239,500.

  

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DILUTION

 

If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per common share and the pro forma net tangible book value per common share after the offering. Dilution results from the fact that the per common share offering price is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding common shares. Our net tangible book value attributable to shareholders at December 31, 2019 was $(5,228,369) or approximately $(0.36) per common share. Net tangible book value per common share as of December 31, 2019 represents the amount of total tangible assets less acquired intangible assets, total liabilities and non-controlling interest, divided by the number of common shares outstanding. 

 

Upon completion of this offering, our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after December 31, 2019, will be approximately $8,406,131 or $0.50 per common share. This would result in dilution to investors in this offering of approximately $6.75 per common share or approximately 93.1% from the assumed initial public offering price of $7.25 per common share, the midpoint of the estimated price range set forth on the cover page of this prospectus. Net tangible book value per common share would increase to the benefit of present shareholders by $0.86 per share attributable to the purchase of the common shares by investors in this offering.

 

The following table sets forth the estimated net tangible book value per common share after the offering and the dilution to persons purchasing common shares based on the foregoing offering assumptions.

 

    Post-
Offering(1)
 
Assumed offering price per common share   $ 7.25  
Net tangible book value per common share before the offering   $ (0.36 )
Increase per common share attributable to payments by new investors   $ 0.86  
Pro forma net tangible book value per common share after the offering   $ 0.50  
Dilution per common share to new investors   $ 6.75  

  

(1)Assumes net proceeds of $13,634,500 from offering of common shares, calculated as follows: $15,950,000 offering, less estimated underwriting discounts and commissions of $1,276,000, offering expenses of $800,000, and a non-accountable expense allowance of $239,500.

 

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POST-OFFERING OWNERSHIP

 

The following table illustrates our pro forma proportionate ownership, upon completion of the offering, by present shareholders and investors in this offering, compared to the relative amounts paid by each. The table reflects payment by present shareholders as of the date the consideration was received and by investors in this offering at the assumed initial public offering price of $7.25, the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and offering expenses payable by us. The table further assumes no changes in net tangible book value other than those resulting from the offering.

 

   Shares Purchased   Total Consideration   Average Price 
   Amount (#)   Percent (%)   Amount ($)   Percent (%)   Per Share ($) 
                     
Existing shareholders   14,510,000    87%  $788,524    5%  $0.05 
New investors(1)   2,200,000    13%  $15,950,000    95%  $7.25 
Total   16,710,000    100%  $16,738,524    100%  $1.00 

 

A $1.00 increase (or decrease) in the assumed initial public offering price of $7.25 per share would increase (or decrease) total consideration paid by new investors by $2.20 million, assuming that the number of shares offered by us on the cover page of this prospectus remains the same.

 

(1)New investors does not include the purchases from Selling Stockholders.

 

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

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We are a retail shopping mall operator in China that seeks to form a joint business and collaborative relationship with and amongst our tenants. Our strategy is to lease, redevelop, and manage well-located, retail shopping malls in Tier 2, Tier 3 and Tier 4 cities, with a primary emphasis on Tier 3 and 4 cites that generate attractive risk-adjusted returns. We renovate these commercial retail shopping malls that have generally been poorly managed, and redevelop and design them to enhance their architectural style and image through interior and exterior improvements. We then lease spaces in these properties to tenants.

 

We are redeveloping properties into innovative retail shopping malls that strategically rethink the types of stores to which consumers will respond. We believe that when consumers visit shopping centers and malls, they are looking for experiences that go well beyond traditional shopping. We focus our tenant mix to emphasize consumer experience. Our retail shopping malls focus on non-designer stores and independent specialty retailers. While we believe anchor tenants, such as supermarkets, that drive traffic are still key, we also see a new emphasis on a curated mix of smaller and independent specialty stores that add a sense of novelty to the shopping experience. We incorporate value-added elements that attempt to recast the mall as a life-style center, including, arts centers, arcades, cosplay of counter strike, ghost houses, childcare, education learning, multi-brands beauty shops, food courts, marketplace and fashion spas. These services provide an experience of leisure and entertainment that online shopping cannot provide. Additionally, we make greater use of temporary, flexible spaces that can accommodate different stores over time. Pop-up stores, showroom spaces and kiosks provide customers with a sense of the unexpected and give them a reason to treasure hunt. We believe shopping malls in China are transitioning from consumer places that only sell things to platforms that provide experiences.

 

Our property management philosophy is focused on providing the best-quality management to our clients, creating a win-win relationship and environment. We started with managing commercial properties with square footage under fifty thousand square meters in the Tier 3 and Tier 4 cities that are situated along China’s high-speed rail lines. We focus on attracting tenants of original brand manufactures and local brands instead of large chain retailers.

 

Revenues

 

We derive our revenues from leasing space in retail properties and service providing, such as rental revenue, property management service revenue, operating management service revenue, recoveries from tenants and others miscellaneous services, including decoration design service, and food court cleaning service. Revenue consists of the invoiced value for the sales, net of value-added tax (“VAT”), business tax and applicable local government levies.

 

The following factors affect the revenues we derive from our operations.

 

Maintain our competitive advantages. We actively pursue markets and applications in which our services can make a substantial difference to our tenants. We especially target projects in Tier 3 and Tier 4 cities and counties that present redevelopment opportunities that are well suited for our business model, however, during the year ended December 31, 2019, we expanded into Wuhan, a Tier 2 City that fits our business model. This strategy leverages our resources and capabilities to help our tenants improve operating efficiencies within their processes. We believe our unique incubation-training program attracts young entrepreneurs to our retail shopping malls and helps maintain them as tenants because we offer the training throughout the duration of their tenancy. Our retail shopping malls offer a diversity of shopping, dining and entertainment facilities to capture this change in consumer demand. We also believe our incubation-training program helps us attract tenants we may not have been able to obtain, if we did not have the program. In addition, we encourage our entire staff from senior management to front-line staff to focus on marketing. We believe that this approach is crucial to win and retain customer and tenants and increases our ability to withstand competition. If we fail to maintain our reputation and competitiveness, customer and tenant demand at our retail shopping malls could decline. 

 

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Competition. We often compete with many other companies ranging from small regional companies to large international companies. Our competition varies and is a function of the business areas in which, and the client sectors for which, we perform our business. The retail real estate industry in China, however, is volatile and competitive. We compete with numerous merchandise distribution channels, including malls, outlet centers, and community/lifestyle centers. We also compete with Internet retailing sites and catalogs that provide retailers with distribution options beyond existing brick and mortar retail properties. The existence of competitive alternatives could have a material adverse effect on our ability to lease space and on the level of rents we can obtain. This results in competition for both the tenants that occupy the properties and their customers. We believe the following competitive strengths differentiate us from our competitors and contribute to our ongoing success: well positioned to capture opportunities in Tier 2, Tier 3 and Tier 4 cities and counties; experienced management team and personnel with a demonstrated track record; ability to attract and maintain tenants and adaptable business model to changing consumer demands. When less work becomes available in a given market, price becomes an increasingly important factor. 

 

Expansion. We believe that we should continue to expand our business to other regions of China to increase our market share. Our management focuses on expanding our business in Tier 2, Tier 3 and Tier 4 cities in China that we strategically select based on population and urbanization growth rates, general economic conditions, income and purchasing power of resident consumers, anticipated demand for lifestyle shopping malls, availability of commercial properties and commercial property prices, and governmental urban planning and development policies. Currently, we have strategically selected expansion projects in Tier 2, Tier 3 and Tier 4 cities in Shanxi, Jiangsu, and Shandong Provinces. We expect to benefit from rising demand for lifestyle shopping centers as a result of increasing income levels of consumers and growing populations in these cities due to urbanization. If we fail to expand to other geographic regions, our revenue growth could slow down.

   

Costs and Expenses

 

We primarily incur the following costs and expenses:

 

Cost of revenues. Cost of revenues consists primarily of property rental costs the Company pays to its lessors; sublease loss; direct payroll of staff; costs for utility and supply consumed at the property; depreciation expense of leasehold improvements; and overhead expenses necessary to services provided. As our customer base continues to grow and reduce unleased space, we expect our cost of revenues as a percentage of revenue to decrease.

 

Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of compensation expenses for our corporate staff in support departments, advertising and marketing expenses, communication costs, maintenance fees, welfare expenses, education expenses, professional fees (including consulting, audit and legal fees), and travel and business hospitality expenses. We anticipate that our administrative expenses, particularly support personnel costs and professional fees will increase when we are a publicly-traded company in the United States.

 

Income tax expense. We account for income taxes under the provisions of Section 740-10-30 of the FASB Accounting Standards Codification, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns.

 

The following factors affect our cost of revenues and expense.

 

Prevailing salary levels. Our cost of revenues is impacted by prevailing salary levels. Although we have not been subject to significant wage inflation in China, a significant increase in the market rate for wages could harm our operating results and our operating margin. Our ability to attract, retain, and expand our senior management and our professional and technical staff is an important factor in determining our future success. The market for a qualified professional and technical staff is competitive and, from time to time, it may be difficult to attract and retain qualified individuals with the required expertise at a fair wage. An increase in compensation of our professional and technical staff may increase our operating costs. 

 

Depreciation. Our depreciation and amortization expenses are mainly driven by the historical cost of leasehold improvements and other office equipment. Depreciation of leasehold improvements and equipment are calculated based on cost, less their estimated residual value, if any, using the straight-line method over estimated useful life of 3-10 years. Any change of the depreciation accounting policy or impairment of our property may affect our operating results.

 

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Impact of COVID-19 Pandemic on the Company’s Operations 

 

Since early 2020, the epidemic of the novel strain of coronavirus (COVID-19) (the “COVID-19 pandemic”) has spread across China and other countries, and has adversely affected businesses and economic activities in the first quarter of 2020 and beyond. The Company followed the restrictive measures implemented in China, by shutting down of shopping mall and having employees work remotely until late February 2020, when the Company started to gradually resume normal operation. Consequently, the COVID-19 pandemic may adversely affect the Company’s business operations, financial condition and operating results for 2020, including but not limited to negative impact to occupancy rate of the shopping mall and the Company’s total revenues, slower collection of tenants receivables and significant impairment to the Company’s growth of business. We are able to maintain certain income from previous tenants and operating management agreements, however, we anticipate some economic impact due to COVID-19.

 

We are monitoring the global outbreak and spread of COVID-19 and taking steps in an effort to identify and mitigate the adverse impacts on, and risks to, our business (including but not limited to our employees, customers, and other business partners) posed by its spread and the governmental and community reactions thereto. We continue to assess and update our business continuity plans in the context of this pandemic, including taking steps in an effort to help keep our workforces healthy and safe. The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations in certain cases, and cancellation of physical participation in certain meetings, events and conferences), and we expect to take further actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees, customers and other business partners. We are also working with our suppliers to understand the existing and future negative impacts, and to take actions in an effort to mitigate such impacts. Due to the speed with which the COVID-19 pandemic is developing, the global breadth of its spread and the range of governmental and community reactions thereto, there is uncertainty around its duration and ultimate impact; therefore, any negative impact on our overall financial and operating results (including without limitation our liquidity) cannot be reasonably estimated at this time, but the pandemic could lead to extended disruption of economic activity and the impact on our financial and operating results.

 

Results of Operations 

 

Comparison of the years ended December 31, 2019 and 2018

 

   For the Years Ended
December 31,
   Change 
   2019   2018   Amount   % 
Revenues  $1,483,862   $1,555,769   $(71,907)   (5)%
Revenues from related parties   535,986    350,935    185,051    53%
Total revenues   2,019,848    1,906,704    113,144    6%
Cost of revenues   3,030,019    3,080,325    (50,306)   (2)%
Gross loss   (1,010,171)   (1,173,621)   163,450    (14)%
                     
Operating expenses:                    
Selling expenses   473,703    907,658    (433,955)   (48)%
General and administrative expenses   1,899,429    1,454,937    444,492    31%
Total operating expenses   2,373,132    2,362,595    10,537    0%
                     
Loss from operations   (3,383,303)   (3,536,216)   152,913    (4)%
                     
Gain from forgiveness of debts   678,219    -    678,219    100%
Interest expense   -    (272,897)   272,897    (100)%
Government grants   4,262    156,893    (152,631)   (97)%
Other income (expenses)   38,053    (33,735)   71,788    (213)%
Total other income (expenses)   720,534    (149,739)   870,273    (581)%
                     
Loss before income tax   (2,662,769)   (3,685,955)   1,023,186    (28)%
                     
Income tax expense   (13,731)   (46)   (13,685)   29,750%
                     
Net loss  $(2,676,500)  $(3,686,001)  $1,009,501    (27)%

 

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Revenues. We are a retail shopping mall operator and manager in China that seeks to form a joint business and collaborative relationship with and amongst our tenants. Our main business is to lease space in retail properties, and to provide property management and operating management services for tenants and property owners. Through on-going tenant-mix adjustments, subsequent operations and retail startup incubation services, the Company obtains continuous steady rental income and value-added service income. 

 

For the years ended December 31, 2019 and 2018, the Company operated in two reportable business segments: (1) leasing segment, consisting of leasing space to the tenants, providing property management service, recoveries from tenants and others, and providing other miscellaneous services to tenants, (2) operating management segment, providing operating management service to tenants and property owners, such as the retail-aimed training and the incubation training program, marketing and operations in order to increase the reputation and customer traffic of the shopping centers. Our reportable segments are strategic business units that offer different services and are managed separately based on the fundamental differences in their operations. All of our operations are conducted in the PRC.

  

Information with respect to these reportable business segments for the fiscal years 2019 and 2018 was as follows:

 

   2019   2018   Variance   % 
Revenues                
Leasing  $951,334   $1,549,356   $(598,022)   (39)%
Operating management service   1,068,514    357,348    711,166    199%
Total revenues  $2,019,848   $1,906,704   $113,144    6%

 

Our total revenue was $2,019,848 and $1,906,704 for the years ended December 31, 2019 and 2018, respectively, representing an increase of $113,144, or 6%. Our revenue growth in fiscal year 2019 resulted primarily from increase of revenue from operating management services we provided and recognized in 2019 from the three shopping malls in Tai’an, Zibo and Wuhan, managed on behalf of the property owners in 2019. Beginning September 2018, the Company has shifted its focus to operating management service. In September and October 2018, the Company entered into several operating management consulting agreements that focused on services in retail-aimed training and our incubation-training program, marketing and operations in order to help increase the reputation and customer traffic of the shopping centers. Our revenue from operating management service segment increased by 199%, while revenue from leasing segment decreased by 39% in fiscal year 2019, as compared to fiscal year 2018.

 

Our leasing segment revenues only represent rental income in fiscal year 2019, but the leasing segment revenues consist of rental income, and income from property management service with collecting of recoveries in fiscal year 2018. After evaluating past serval year operating performance of leasing segment, the Company decided to outsource property management service and the collection of recoveries from tenants to a related party, Northern Region of Commercial Asset Management Department of Junhao Chains Real Estate Management Co., Ltd. (“Junhao Real Estate Company”) from November 1, 2018. The Company acted as an agent to recognize net revenue regarding the two revenue streams during the year ended December 31, 2019. We subleased a total of 277,956 square feet (25,823 square meters) retail space to 170 tenants during the year ended December 31, 2019, representing an increase of 20% in sublease space, and a decrease of 9% in the number of tenants compared to sublease space of 232,393 square feet (21,590 square meters) to 187 tenants for the year ended December 31, 2018.

 

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Our revenues from third parties decreased from 82% to 73% of our total revenue, but revenues from related parties increased from 18% to 27% of total revenue in the year ended December 31, 2019, as compared to the same period in 2018. Our revenues from related parties increased to $535,986 for the year ended December 31, 2019, from $350,935 for the year ended December 31, 2018. The increase for rental revenue from related parties was mainly attributed to the increase of revenue from the operating management service provided to Jintou Qiangjing, a related party, during the period from June 2019 to November 2019. No such operating management service was provided to this related party in 2018. We do not record bad debt allowance for tenants receivable from related parties. For the years ended December 31, 2019 and 2018, we recorded bad debt expense of tenants receivable from related party amounting to $0 and $15, respectively. Since we did not renew lease agreement with Tai’an Kuwang in October 2018, we wrote-off $15 of outstanding balance of management service fee due from Tai’an Kuwang and recorded $15 as bad debt expense at December 31, 2018. Except for the bad debt expense of $15, all the tenants receivables from related parties as of December 31, 2019 and 2018 was collected in full as of the filing of this F-1.

 

We believe our lifestyle-focused retail shopping malls will be in greater demand, and that we will be able to take advantage of the growing retail market, despite e-commerce competition as shoppers continue to seek a unique shopping experience. Through a diverse tenant mix that provides entertainment experience in addition to retail, we believe our retail shopping malls provide consumers with something they cannot experience online or at traditional centers and malls. 

 

Cost of revenues. For the year ended December 31, 2019, cost of revenues amounted to $3,030,019 as compared to $3,080,325 for the year ended December 31, 2018, decreased by $50,306, or 2%.  

 

Information with respect to cost of revenues by reportable business segments for the fiscal years 2019 and 2018 was as follows:

 

   2019   2018   Variance   % 
Cost of revenues                
Leasing  $2,529,129   $2,836,175   $(307,046)   (11)%
Operating management service   500,890    244,150    256,740    105%
Total cost of revenues  $3,030,019   $3,080,325   $(50,306)   (2)%

  

The decrease of cost of revenues in 2019 was mainly due to the decrease in cost of leasing in the amount of $307,046, or 11%, and offset by the increase in cost of operating management in the amount of $256,740, or 105%. As the result from outsourcing Tony Fun Shopping Mall’s property management service and the collection of recoveries from tenants to Junhao Real Estate Company, the Company presented net revenue as an agent, hence our cost of leasing was decreased in the year ended December 31, 2019. The decrease in cost of leasing was also in line with the decrease of revenue.

 

The increase of cost of operating management was primarily attributable to the increase of revenues in operating management. The increase in operating management service costs was mainly due to increased payroll costs of our two subsidiaries, Wuhan Tony Fun and Jinqiao United Business who provided operating management services for property owners in 2019.

 

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Our cost of revenues as a percentage of revenue was 150% and 162% for the years ended December 31, 2019 and 2018, respectively, which was mainly due to the high rent expenses for our lessors, Neighborhood Committee of Dongqili Community and Neighborhood Committee of Xiqili Community.

 

Gross loss. Our gross loss decreased from $1,173,621 for the year ended December 31, 2018 to $1,010,171 for the year ended December 31, 2019. While our total revenue increased by 6% and cost of revenues decreased by 2% for the year ended December 31, 2019 compared to the prior year, our gross loss decreased by 14%. Lower gross loss was mainly attributed to our gross margin in operating management service increased from 32% to 53% in the year ended December 31, 2019, compared with that in 2018.

 

Information with respect to gross profit (loss) by reportable business segments for the fiscal years 2019 and 2018 was as follows:

 

    2019     2018     Variance     %  
Gross profit (loss)                        
Leasing   $ (1,577,795 )   $ (1,286,819   $ (290,976 )     23 %
Operating management service     567,624       113,198       454,426       401 %
Total gross loss   $ (1,010,171 )   $ (1,173,621   $ 163,450       (14 )%

 

 Selling expenses. Selling expenses were $473,703 for the year ended December 31, 2019, and $907,658 for the year ended December 31, 2018, a decrease of $433,955, or 48%. The decrease in selling expenses was mainly due to a decrease in payroll expense and employee benefits for sales personnel, a decrease in advertising and promotional expenses, a decrease in travel expenses, and a decrease in depreciation expenses.

 

Payroll expense and employee benefits for sales personnel decreased by $81,404 or 56%, from $144,198 in 2018 to $62,794 in 2019. Advertising and promotional expenses decreased by $230,766 or 52%, from $439,570 in 2018 to $208,804 in 2019. Travel expenses decreased by $16,713 or 52%, from $31,874 in 2018 to $15,161 in 2019. Depreciation expenses decreased by $22,079 or 17%, from $130,335 in 2018 to $108,256 in 2019. The Company commenced its management of Zibo Tony Fun Youthful Lifestyle Park and Jinan Tony Fun Top Brand No. 1 Street in 2018, which required more marketing consulting service, advertising and promotional activities, and more office facilities and staffs to run these properties in 2018. The contract to manage Jinan Tony Fun Top Brand No. 1 Street was terminated on April 1, 2019. In addition, as the Company operated on track in 2019, these expenses decreased accordingly.

 

General and administrative expenses. General and administrative expenses were $1,899,429 for the year ended December 31, 2019, and $1,454,937 for the year ended December 31, 2018, an increase of $444,492, or 31%. The increase in general and administrative expenses was mainly due to an increase in payroll and employee benefits, offset by a decrease in bad debt expenses.

 

Payroll and employee benefits expenses increased by $478,883 or 106%, from $452,210 in 2018 to $931,093 in 2019, which was mainly due to the increase in average payroll in 2019 compared with that in 2018 and the expansion of our business in Wuhan in 2019.

 

Bad debt expenses decreased by $16,120 or 44%, from $36,610 in 2018 to $20,490 in 2019, after evaluating the collectability of individual receivable balance by our management. 

 

Loss from operations. Our loss from operations was $3,383,303 for the year ended December 31, 2019 and $3,536,216 for the year ended December 31, 2018. Our operating loss as a percentage of total revenues was 168% for the year ended December 31, 2019 and 185% for the year ended December 31, 2018. The decrease in our loss from operations resulted from the decreased gross loss due to the higher revenue and the lower cost of revenues as we discussed above, and a decreased selling expenses, offset by an increase in general and administrative expenses as the expansion and growth of our business for the year ended December 31, 2019.

 

Other income (expenses). Other income (expenses) includes gain from forgiveness of debts, interest expenses, government grants and other income (expenses). For the year ended December 31, 2019, total net other income amounted to $720,534 as compared to total net other expense of $149,739 for the year ended December 31, 2018, an increase of $870,273, or 581%. The increase in other income was primarily attributable to an increase in gain from forgiveness of debts of $678,219, a decrease in interest expense of $272,897, and an increase in other income of $71,788, offset by a decrease in government grant of $152,631.

 

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Gain from forgiveness of debts incurred in the year ended December 31, 2019 primarily due to a supplier forgave partial payment owed by the Company in an aggregate amount of RMB 4,607,916 (approximately $667,000) after mediation from the court. Interest expenses incurred in the year ended December 31, 2018 was related to RMB 20,000,000 (approximately $2,960,000) loan borrowed from Tai’an Zhongtai Jinqiao, a related party. The loan was fully repaid during the year ended December 31, 2018 and thus no such expense incurred during the year ended December 31, 2019. The decrease in government grant was primarily due to the entrepreneurship demonstration reward granted by local government in the amount of RMB 1,000,000 (approximately $151,000) in October 2018, which was a one-time reward. There was no such government grant in the year ended December 31, 2019.

 

Income taxes. We incurred income tax expenses of $13,731 and $46 for the years ended December 31, 2019 and 2018, respectively. The enterprise income tax rate in China is 25%. In the year ended December 31, 2019, Jinqiao United Business was recognized as a small low-profit enterprise and received a preferential income tax rate of approximately 5% based on its current taxable income for the year then ended.

 

Tai’an Tony Fun, Beijing Tony Fun, Zibo Tony Fun, Shanghai Tony Fun, Nanjing Tony Fun, Jinan Tony Fun, and Glory Han incurred net loss for the years ended December 31, 2019 and 2018. Wuhan Tony Fun and Rongyaohan Tai’an incurred net loss for the year ended December 31, 2019 and they did not have any operations for the year ended December 31, 2018. Hubei Rongzhida incurred net income for the year ended December 31, 2019 and incurred net loss for the year ended December 31, 2018. Jinqiao United Business incurred net income for the years ended December 31, 2019 and 2018.

 

Net loss. Our net loss was $2,676,500 and $3,686,001 for the years ended December 31, 2019 and 2018, respectively, representing a decrease of $1,009,501, or 27%. The decrease in net loss was primarily due to decreased gross loss, decreased selling expenses, decreased interest expenses and increased other income with a gain from forgiveness of debts, offset by increased our general and administrative expenses as discussed above.

 

Liquidity and Capital Resources

 

Liquidity

 

For the years ended December 31, 2019 and 2018

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. As of December 31, 2019, we had a working capital deficit of $5,669,752, compared to a working capital deficit of $8,788,414 as of December 31, 2018. As a result, we believe that our current cash to be generated from our operations will not be sufficient to meet our working capital needs for at least the next twelve months. Accordingly, we are dependent upon the ability to borrow funds from our related parties, and dependent upon this offering to meet our liquidity needs for the next twelve months. In addition, we are planning to shift our focus to the segment of operating management service, which segment proved to be more profitable compared to the leasing segment. We expect that the shift of our business focus will bring in increased cash flow from operations in the near future. 

 

The following table sets forth a summary of changes in our working capital from December 31, 2018 to December 31, 2019:

 

   December 31,
2019
   December 31,
2018
   Change   Percentage
Change
 
Working capital:                
Total current assets  $894,132   $1,034,294   $(140,162)   (14)%
Total current liabilities   6,563,884    9,822,708    (3,258,824)   (33)%
Working capital deficit  $(5,669,752)  $(8,788,414)  $3,118,662    (35)%

 

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Our working capital increased by $3,118,662 to a deficit of $5,669,752 at December 31, 2019 from a deficit of $8,788,414 at December 31, 2018. This increase in working capital was primarily attributable to:

 

  An increase in tenants receivable from related parties of $94,315;
     
  An increase in due from related parties of $200,155;
     
 

A decrease in accounts payable of $5,580,913; and

     
  A decrease in sublease liabilities of $246,566;
     
  Offset by:
     
  A decrease in cash of $233,906;
     
  A decrease in net tenants receivable of $13,094;
     
  A decrease in prepaid expenses and other current assets of $187,632;
     
  An increase in due to related parties of $231,208;
     
  An increase in accrued liabilities and other payable of $262,818;
     
  An increase in advances from tenants and advances from tenants - related parties of $426,496; and
     
  An increase in current operating lease liabilities of $1,642,616.

 

 Because the exchange rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the changes in assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the consolidated balance sheets.

 

Cash Flow Summary

 

Years Ended December 31, 2019 and 2018

 

  

For the Years Ended

December 31,

 
   2019   2018 
Net cash provided by (used in) operating activities  $96,613   $(406,934)
Net cash used in investing activities   (66,739)   (180,611)
Net cash provided by (used in) financing activities   (263,238)   766,592 
Effect of exchange rate changes on cash   (542)   (7,255)
Net increase (decrease) in cash  $(233,906)  $171,792 
Cash, beginning of the year   676,254    504,462 
Cash, end of the year  $442,348   $676,254 

 

Net cash provided by operating activities for the year ended December 31, 2019 totaled $96,613. The activities were mainly comprised of depreciation expense of $844,593, allowance for doubtful accounts of $20,490, noncash lease expense of $858,171, a decrease in prepaid expenses and other current assets of $166,614, an increase in due to related parties of $246,526, an increase in accrued liabilities and other payables of $622,105, and an increase in advances from tenants of $408,780, an increase in advances from tenants – related parties of $12,936, an increase in operating lease liabilities of $755,551, offset by our net loss of $2,676,500, a gain from forgiveness of debts of $678,219, an increase in tenants receivable from related parties of $95,864, a decrease in accounts payable of $338,595, and a decrease in deposits received from tenants of $41,841.

 

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Net cash used in operating activities for the year ended December 31, 2018 totaled $406,934. The activities were mainly comprised of our net loss of $3,686,001, a decrease in sublease liabilities of $200,151, an increase in prepaid expenses and other current assets of $234,552, a decrease in advances from tenants of $32,018, a decrease in advances from tenants – related parties of $37,331, offset by a decrease in tenants receivable from related parties of $58,777, an increase in accounts payable of $1,614,607, an increase in deposits received from tenants of $72,754, an increase in due to related parties of $202,288, an increase in accrued liabilities and other payables of $887,813, depreciation expense of $894,990, and allowance for doubtful accounts of $36,610. 

 

The increase in cash inflows from our operating activities for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from the significant decrease in our net loss in the year ended December 31, 2019. For the year ended December 31, 2019, our net loss totaled $2,676,500 adjusted by noncash lease expense of $858,171 and a gain from forgiveness of debts of $678,219, compared to net loss of $3,686,001 in 2018.

 

Net cash used in investing activities for the year ended December 31, 2019 totaled $66,739. The activities were primarily comprised of $64,760 spent on purchases of property and equipment, and $1,979 advances to related parties.

 

Net cash used in investing activities for the year ended December 31, 2018 totaled $180,611. The activities were primarily comprised of $179,977 spent on purchases of property and equipment, and $4,525 advances to related parties offset by $3,891 repayments from related parties.

 

One of our primary uses of cash in our investing activities for each period was for our purchase of property and equipment. We spent $115,217 less than the year of 2018 in purchasing property and equipment for the year ended December 31, 2019. We paid $2,546 less than the year of 2018 in advances to related parties for the year ended December 31, 2019. We also obtained $3,891 less than the year of 2018 of repayment from related parties for the year ended December 31, 2019.

 

For the year ended December 31, 2019, net cash used in financing activities was $263,238. We made repayments to related parties of $998,139, offset by borrowings from related parties of $734,901.

 

For the year ended December 31, 2018, net cash provided by financing activities was $766,592. We received these funds from capital contribution of $155,930, issuance of common shares of $780,014 and borrowings from related parties of $931,628, offset by capital distribution to the prior owner of subsidiary of $221,959 and repayments to related parties of $879,021.

 

We received $1,029,830 less than the year of 2018 from financing activities for the year ended December 31, 2019. During the year ended December 31, 2019, we received proceeds of $196,727 less than 2018 in borrowings from related parties but we paid $119,118 more than the year of 2018 in repayments to related parties. We received capital contribution of $155,930 less than in 2018, and we also received proceeds of $780,014 less than 2018 in issuance of common shares, and we distributed capital to the prior owner of subsidiary, Jing Ma, spouse of our CEO, of $221,959 less than in 2018.

  

We expect to incur additional costs associated with becoming a public company in the United States, primarily due to increased expenses related to accounting and tax services, directors and officer insurance, legal expenses and investor and stockholder-related expenses. These additional long-term expenses may require us to seek other sources of financing, such as additional borrowings or public or private equity or debt capital. The availability of these other sources of financing will depend upon our financial condition and results of operations as well as prevailing market conditions and may not be available on terms reasonably acceptable to us or at all.

 

53

 

 

Regulatory Restrictions on Capital Injections

 

We plan to use proceeds from this offering to fund our business. In order to do so, we will be required to comply with the following Chinese regulations regarding capital injections to foreign-invested enterprises.

 

Chinese regulations relating to investments in offshore companies by Chinese residents. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Financing and Round trip Investment through Offshore Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014. SAFE Circular 37 requires Chinese residents to register and update certain investments in companies incorporated outside of China with their local SAFE branch. SAFE also subsequently issued various guidance and rules regarding the implementation of SAFE Circular 37, which imposed obligations on Chinese subsidiaries of offshore companies to coordinate with and supervise any Chinese-resident beneficial owners of offshore entities in relation to the SAFE registration process.

 

We may not be aware of the identities of all of our beneficial owners who are Chinese residents. We do not have control over our beneficial owners and cannot assure you that all of our Chinese -resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial owners who are Chinese residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our Company who are Chinese residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our Chinese subsidiaries to fines and legal sanctions, which may be substantial. Failure to register may also limit our ability to contribute additional capital to our Chinese subsidiaries and limit our Chinese subsidiaries’ ability to distribute dividends to our Company. These risks may have a material adverse effect on our business, financial condition and results of operations.

 

China regulates loans to and direct investment in Chinese entities by offshore holding companies and there is governmental control of currency conversion. We are an offshore holding company conducting our operations in China through our wholly owned subsidiaries. As an offshore holding company, we may make loans and additional contributions to subsidiaries subject to certain government authorities’ registration and/or approvals, including MOFCOM, SAIC and SAFE, or their local counterparts.

 

Any loan to subsidiaries, which is treated as a foreign-invested enterprise under Chinese law, is subject to Chinese regulations and foreign exchange loan registrations. In January 2003, the China State Development and Reform Commission, SAFE and Ministry of Finance jointly promulgated the Circular on The Interim Provisions on the Management of Foreign Debts, or the Circular 28, limiting the total amount of foreign debt a foreign-invested enterprise may incur to the difference between the amount of total investment approved by the Ministry of Commerce or its local counterpart for such enterprise and the amount of registered capital of such enterprise, and requiring registration of any such loans with SAFE. On January 11, 2017, the People’s Bank of China (the “PBOC”), promulgated the Circular on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or the PBOC Circular 9. Pursuant to PBOC Circular 9, the foreign debt upper limit for both foreign-invested companies and domestic-invested companies is calculated as twice the net asset of such companies. As to net assets, the companies shall take the net assets value stated in their latest audited financial statement. The PBOC Circular 9 does not supersede the Circular 28. It provides a one-year transitional period from its promulgation date for foreign-invested companies, during which foreign-invested companies, such as our WFOE, could choose their calculation method of foreign debt upper limit based on either the Foreign Debts Provisions or the PBOC Circular 9. The transitional period ended on January 11, 2018. Upon its expiry, pursuant to the PBOC Circular 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Circular 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries.

   

We may choose to finance subsidiaries by means of capital contributions. These capital contributions must be registered with the Ministry of Commerce or its local counterpart. In March 2015, SAFE issued the Circular Concerning the Reform of the Administration of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular No.19, which became effective in June 2015. SAFE Circular No.19 regulates the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. Furthermore, SAFE promulgated a circular in June 2016, SAFE Circular No.16, which further revises some clauses in the SAFE Circular No.19. SAFE Circular No. 19 and No.16 provide that the capital-account foreign exchange incomes of a domestic enterprise shall not be used for expenditures that are forbidden by relevant laws and regulations, for purposes that are not included in the business scope approved by the applicable government authority, shall not be used for direct or indirect equity investments within China or for any other kind of investment except principal-guaranteed wealth-management products, unless otherwise prescribed by other laws and regulations, shall not be used for issuing RMB entrusted loans (except included in the business scope approved by the applicable government authority or issuing RMB entrusted loans to affiliated enterprises), repaying inter-enterprise loans, repaying bank loans which has been refinanced to third parties, issuing RMB loans to non-affiliated enterprises unless expressly permitted in the business scope and shall not be used to purchase real estate that is not for personal use except if the company is a real estate enterprise. In addition, SAFE supervises the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company by further focusing on ex post facto supervision and violations. Previously, for FIEs the increase of capital contribution shall be approved by MOFCOM. In 2016, the approval was changed to registration. Currently, China is holding more open and tolerate attitude toward FIEs. Even with more and more open policy toward FDI and FIEs, Circulars mentioned above may still have some limit on our ability to use the net proceeds from this offering to invest in or acquire any other Chinese companies in China, which may adversely affect our liquidity and our ability to fund and expand our business in China. 

  

54

 

 

Capital Resources 

 

As of December 31, 2019 and 2018 

 

The following table provides selected balance sheets comparisons as of December 31, 2019 and 2018: 

 

   December 31,   Increase     
   2019   2018   (Decrease)   % 
   $   $   $     
Current assets                    
Cash   442,348    676,254    (233,906)   (35)%
Tenants receivable, net   1,621    14,715    (13,094)   (89)%
Tenants receivable from related parties   150,471    56,156    94,315    168%
Prepaid expenses and other current assets   99,160    286,792    (187,632)   (65)%
Due from related parties   200,532    377    200,155    53,092%
Total current assets   894,132    1,034,294    (140,162)   (14)%
Prepaid expense, non-current   5,277    5,775    (498)   (9)%
Property and equipment, net   4,506,096    5,317,457    (811,361)   (15)%
Operating lease right-of-use assets   12,620,575    -    12,620,575    100%
Operating lease right-of-use asset – related party   567    -    567    100%
Total assets   18,026,647    6,357,526    11,669,121    184%
Current liabilities                    
Accounts payable   1,672,910    7,253,823    (5,580,913)   (77)%
Accrued liabilities and other payables   1,500,035    1,237,217    262,818    21%
Income tax payable   3,572    -    3,572    100%
Sublease liabilities   -    246,566    (246,566)   (100)%
Due to related parties   764,773    533,565    231,208    43%
Advances from tenants   962,839    549,137    413,702    75%
Advances from tenants – related parties   15,194    2,400    12,794    533%
Operating lease liabilities, current   1,642,616    -    1,642,616    100%
Operating lease liability – related party, current   1,945    -    1,945    100%
Total current liabilities   6,563,884    9,822,708    (3,258,824)   (33)%
Deposits received from tenants   112,677    156,186    (43,509)   (28)%
Sublease liabilities, non-current   -    324,494    (324,494)   (100)%
Advances from tenants, non-current   361,080    93,114    267,966    288%
Deferred income   21,507    26,070    (4,563)   (18)%
Operating lease liabilities, non-current   16,195,868    -    16,195,868    100%
Total liabilities   23,255,016    10,422,572    12,832,444    123%

  

Cash

 

We maintain cash in mainland China and Hong Kong. At December 31, 2019 and 2018, bank deposits were as follows:

 

Country:  December 31,
2019
   December 31,
2018
 
China (Hong Kong)  $289,472    65%  $592,489    88%
China (Mainland)   152,876    35%   83,765    12%
Total cash  $442,348    100%  $676,254    100%

 

55

 

  

A portion of our cash balances at December 31, 2019 and 2018 are in the form of RMB and held in bank accounts at financial institutions located in China. Cash held in banks in China is not insured. In 1996, the Chinese government introduced regulations relaxing restrictions on the conversion of the RMB; however restrictions still remain, including restrictions on foreign-invested entities. Foreign-invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including direct investments and loans, is subject to Chinese government approval. Chinese entities are required to establish and maintain separate foreign exchange accounts for capital account items. We cannot be certain whether Chinese regulatory authorities will impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly, cash on deposit in banks in China is not readily deployable by us for use outside of China. 

 

Tenants receivable, net 

 

Net tenants receivable as of December 31, 2019 was $1,621, a decrease of $13,094, or 89%, compared to $14,715 as of December 31, 2018. This decrease resulted primarily from our effort on collection, while our revenues decreased by 5% for the year ended December 31, 2019 compared to revenues for the year ended December 31, 2018. 

   

The Company did not record bad debt allowance for tenant receivables from related parties for the years ended December 31, 2019 and 2018, because the entire balance from related parties was collected as of this filing date. Bad debt expense in the amount of $20,490 and $36,610 for the years ended December 31, 2019 and 2018, respectively, was related to servicing fees and particular customers due to uncollectability of individual receivable balances.

 

Tenants receivable from related parties

 

Tenants receivables from related parties as of December 31, 2019 was $150,471, an increase of $94,315 compared to $56,156 as of December 31, 2018. The increase was mainly due to our revenue from related parties increased by 53%, from $350,935 to $535,986, for the year ended December 31, 2019 compared to revenue for the year ended December 31, 2018. 

 

Tenants receivable from related parties consisted of the following: 

 

   December 31,
2019
   December 31,
2018
 
Tai’an Haima  $28,725   $1,454 
Shandong Tony Fun   10,302    27,594 
Shandong Haoke   53,986    27,108 
Chunying Qu   5,062    - 
Jintou Qiangjing   52,396    - 
Total tenants receivable from related parties  $150,471   $56,156 

  

For the years ended December 31, 2019 and 2018, the Company recorded bad debt expenses of tenant receivables from related parties amounting to $0 and $15, respectively. Since Tai’an Kuwang did not renew lease agreement with the Company in October 2018, the Company wrote-off $15 of outstanding balance of management service fee due from Tai’an Kuwang and recorded $15 as bad debt expenses at December 31, 2018.

  

The Company requires related parties to pay rents and management service fees in advance, either at the beginning of quarter or at the inception of the contract. However, certain related parties did not make payments to the Company on a timely basis and the Company sends bills on a periodic basis to collect the outstanding balance. There is no difference in collections between leasing and servicing for related parties. All the tenants receivables from related parties as of December 31, 2019 was collected in full as of this filing date.

 

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Prepaid expenses and other current assets

 

As of December 31, 2019, balances of prepaid expenses and other current assets were $99,160, a decrease of $187,632, or 65%, compared to $286,792 as of December 31, 2018. Balance of prepaid expenses decreased by $52,701, and balance of other current assets decreased by $134,931 as of December 31, 2019, as shown in the following table.

  

   December 31,
2019
   December 31,
2018
 
Prepaid expenses  $35,029   $87,730 
Other current assets   64,131    199,062 
Total prepaid expenses and other current assets  $99,160   $286,792 

   

 Other current assets mainly include personal income tax and social security paid in advances on behalf of employees and other miscellaneous receivables such as deposits, which include guarantee deposits and rent deposits. 

 

Due from related parties

 

Balance of due from related parties increased from $377 to $200,532 for the year ended December 31, 2019 compared to the year ended December 31, 2018. Such balances represent expenses paid by the Company on behalf of related parties, advances to related parties and advances from tenants collected by related parties on behalf of the Company, as shown in the following table.

 

  

December 31,

2019

  

December 31,

2018

 
Shandong Zhongtai Jinqiao  $372   $377 
Tai’an Jinqiaocheng   181,635    - 
Zibo Haima   18,525    - 
Total due from related parties  $200,532   $377 

 

Current assets

 

Current assets as of December 31, 2019 totaled $894,132, a decrease of $140,162, or 14% from our December 31, 2018 balance. This decrease primarily resulted from a $233,906 decrease in cash and a $187,632 decrease in prepaid expenses and other current assets, offset by a $200,155 increase in due from related parties and a $94,315 increase in tenants receivable from related parties.

 

57

 

 

Property and equipment, net

 

Net property and equipment as of December 31, 2019 was $4,506,096, a decrease of $811,361 compared to $5,317,457 as of December 31, 2018. The decrease was mainly due to the depreciation.

 

   December 31,
2019
   December 31,
2018
   Variance   % 
   $   $   $     
Office equipment and furniture   247,987    228,769    19,218    8%
Electronic devices   177,346    168,897    8,449    5%
Computer software   268,080    266,822    1,258    0%
Service facilities   348,797    353,383    (4,586)   (1)%
Motor vehicles   215    -    215    100%
Leasehold improvements   6,602,091    6,640,716    (38,625)   (1)%
Construction in progress   9,699    -    9,699    100%
Total property and equipment   7,654,215    7,658,587    (4,372)   0%
Less: accumulated depreciation   (3,148,119)   (2,341,130)   (806,989)   34%
Property and equipment, net   4,506,096    5,317,457    (811,361)   (15)%

  

Sublease liabilities

 

We recognized sublease liabilities under ASC 840, including current and non-current in the amount of $571,060 as of December 31, 2018. Upon adoption of ASC 842 on January 1, 2019, the right-of-use assets recognized at transaction was reduced by the carrying amount of the sublease liability in the total amount of $571,060 as a transition adjustment. As of December 31, 2019, the Company recognized operating lease liabilities, including both current and noncurrent portions, in the amount of $17,840,429 and the corresponding net operating lease right-of-use assets of $12,621,142.

 

Due to related parties

 

The balance of due to related parties represents operating expenses and prepayment paid by related parties, payments of property and equipment made by related parties on behalf of the Company as well as advances the Company obtained from related parties. As of December 31, 2019 and 2018, due to related parties consisted of the following:

 

  

December 31,
2019

  

December 31,
2018

 
Tai’an Kuwang  $3   $3 
Tai’an Zhongtai Jinqiao   10,745    7,722 
Tai’an Jinqiaocheng   -    589 
Shandong Tony Fun   779    26,521 
Tai’an Chuangcheng   10,606    10,544 
Jing Ma   4,290    4,346 
Zhiqiang Han   291,499    233,310 
Shandong Haoke   320,267    117,053 
Tai’an Haima   3,113    158 
Zibo Haima   -    36,375 
Junhao Real Estate Company   115,275    96,944 
Wutianshiji   8,196    - 
Total due to related parties  $764,773   $533,565 

 

58

 

 

Accrued liabilities and other payables

 

Accrued liabilities and other payables mainly included wages payable, VAT payable, deposit payables and other payable at the year end. Accrued liabilities and other payables as of December 31, 2019 were $1,500,035, an increase of $262,818, compared to $1,237,217 as of December 31, 2018. The increase was mainly due to the increase of security deposits paid by tenants and wages payable.

 

Tabular Disclosure of Contractual Obligations

 

We have certain potential commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors that may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments.

 

The following table summarizes our contractual obligations as of December 31, 2019, and the effect these obligations are expected to have on our liquidity and cash flows in future periods:

 

Contractual
obligations
  Total   2020   2021   2022   2023   2024   Thereafter 
Operating leases payment  $28,679,608   $1,679,540   $1,381,387   $1,457,515   $1,457,946   $1,607,574   $21,095,646 
Total  $28,679,608   $1,679,540   $1,381,387   $1,457,515   $1,457,946   $1,607,574   $21,095,646 

 

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Comparison of Six Months Ended June 30, 2020 and 2019

 

The following table presents an overview of our results of operations for the six months ended June 30, 2020 and 2019;

 

   For the Six Months Ended
June 30,
   Change 
   2020   2019   Amount   % 
Revenues  $741,539   $677,395   $64,144    9%
Revenues from related parties   66,505    135,885    (69,380)   (51)%
Total revenues   808,044    813,280    (5,236)   (1)%
Cost of revenues   1,464,691    1,373,089    91,602    7%
Gross loss   (656,647)   (559,809)   (96,838)   17%
                     
Operating expenses:                    
Selling expenses   115,696    318,784    (203,088)   (64)%
General and administrative expenses   533,077    1,061,787    (528,710)   (50)%
Gain on disposal of subsidiary   (58,601)   -    (58,601)   100%
Total operating expenses   590,172    1,380,571    (790,399)   (57)%
                     
Loss from operations   (1,246,819)   (1,940,380)   693,561    (36)%
                     
Gain from forgiveness of related party debts   37,490    -    37,490    100%
Government grants   2,093    2,170    (77)   (4)%
Other income (expenses)   (1,031)   5,286    (6,317)   (120)%
Total other income   38,552    7,456    31,096    417%
                     
Loss before income tax   (1,208,267)   (1,932,924)   724,657    (37)%
                     
Income tax expenses   (2,445)   (369)   (2,076)   563%
                     
Net loss  $(1,210,712)  $(1,933,293)  $722,581    (37)%

 

Revenues. For the six months ended June 30, 2020 and 2019, the Company operated in two reportable business segments: (1) leasing segment, consisting of leasing space to the tenants, providing property management service to tenants, recoveries from tenants and others (2) operating management segment, providing operating management service to tenants, such as the retail-aimed training and the incubation-training program, marketing and operations in order to increase the reputation and customer traffic of the shopping malls. Our reportable segments are strategic business units that offer different services and are managed separately based on the fundamental differences in their operations. All of our operations are conducted in the PRC. 

 

Information with respect to these reportable business segments for the six months ended June 30, 2020 and 2019 were as follows:

 

  

For the Six Months Ended

June 30,

         
   2020   2019   Variance   % 
Revenues:                
Leasing  $423,145   $479,815   $(56,670)   (12)%
Operating management   384,899    333,465    51,434    15%
Total revenues  $808,044   $813,280   $(5,236)   (1)%

 

60

 

 

Our total revenues were $808,044 and $813,280 for the six months ended June 30, 2020 and 2019, respectively, a decrease of $5,236, or 1%, which was primarily due to the decrease in our revenue from leasing segment by $56,670, offset by the increase in our revenue from operating management segment by $51,434, as compared to the six months ended June 30, 2019. The decrease in leasing revenue was primarily due to the termination of rental contracts with two related parties, Shandong Tony Fun and Wutianshiji, in April 2019 and in February 2020, respectively, with no renewal. As a result, revenues from related parties decreased from 17% to 8% of total revenue, but our revenues from third parties slightly increased from 83% to 92% of our total revenue in the six months ended June 30, 2020, as compared to the same period in 2019, which was mainly due to the increase in revenue from operating management service.

 

Since 2018 the Company has shifted its focus to operating management service, our revenue from operating management service gradually increased. Our revenue from the operating management service segment increased by $51,434, or 15%, in the six months ended June 30, 2020 compared to that in the same period in 2019, which was primarily due to the increase in revenue from operating management service we provided and recognized from Tai’an Jinqiaocheng Shopping Mall, managed on behalf of the property owners, resulting from the increase in number of tenants in the Tai’an Jinqiaocheng Shopping Mall.

 

Cost of revenues. Our cost of revenues increased by $91,602, or 7%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

 

Information with respect to cost of revenues by reportable business segments for the six months ended June 30, 2020 and 2019 were as follows:

 

  

For the Six Months Ended

June 30,

         
   2020   2019   Variance   % 
Cost of revenues:                
Leasing  $1,304,666   $1,241,083   $65,583    5%
Operating management   160,025    132,006    28,019    21%
Total cost of revenues  $1,464,691   $1,373,089   $91,602    7%

 

Our cost of revenues increased to $1,464,691 for the six months ended June 30, 2020 from $1,373,089 for the six months ended June 30, 2019. Our cost of leasing was $1,304,666 and $1,241,083 for the six months ended June 30, 2020 and 2019, respectively, an increase of $65,583 or 5%. The increase in cost of leasing segment was mainly due to the increase in property management service fee provided by a related party. With an increase in operating management revenue, our cost of operating management service increased to $160,025 for the six months ended June 30, 2020 from $132,006 for the six months ended June 30, 2019. The increase in cost of operating management segment was in line with the increase in revenue of operating management segment.  

 

Gross loss. Our gross loss increased from $559,809 for the six months ended June 30, 2019 to $656,647 for the six months ended June 30, 2020. This increase was primarily due to the decrease in revenues and the increase in cost of revenues as discussed above.

 

Selling expenses. Selling expenses were $115,696 for the six months ended June 30, 2020, and $318,784 for the six months ended June 30, 2019, a decrease of $203,088 or 64%. The decrease in selling expenses was primarily attributable to a decrease in payroll and benefits for sales personnel and a decrease in advertising and promotion expenses.

 

Payroll and benefits for sales personnel decreased by $83,304 or 96% and advertising and promotion expenses decreased by $118,991 or 90% in the six months ended June 30, 2020, as compared to the same period in 2019. The Company reduced the salary of employees based on different job title during the six months ended June 30, 2020. As a result, the average payroll expense decreased in the six months ended June 30. 2020 compared with that in the six months ended June 30, 2019. 

 

General and administrative expenses. General and administrative expenses were $533,077 for the six months ended June 30, 2020, and $1,061,787 for the six months ended June 30, 2019, a decrease of $528,710, or 50%. The decrease in general and administrative expenses was mainly due to a decrease in rent expenses, a decrease in professional service fees and a decrease in travel and entertainment expenses.

 

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Rent expenses decreased by $46,888 or 56%, from $83,583 in the six months ended June 30, 2019 to $36,695 in the six months ended June 30, 2020, primarily related to expiration of several lease agreements in early 2020 and there was no renewal of such leases.

 

Professional service fees decreased by $376,236 or 92%, from $407,938 in the six months ended June 30, 2019 to $31,702 in the six months ended June 30, 2020, primarily due to decrease in IPO related expenses in the six months ended June 30, 2020.

 

Travel and entertainment expenses were $13,414 for the six months ended June 30, 2020, as compared to $60,537 for the six months ended June 30, 2019, a $47,123 or 78% decrease in travel and entertainment expenses. This decrease was due to the Company’s travel restrictions in place resulting from the COVID-19 pandemic.

 

Loss from operations. Our loss from operations was $1,246,819 for the six months ended June 30, 2020 and $1,940,380 for the six months ended June 30, 2019. Our operating loss as a percentage of total revenues was 154% for the six months ended June 30, 2020 and 239% for the six months ended June 30, 2019. The decrease in our loss from operations resulted from both a lower selling expenses and a lower general and administrative expenses as we have discussed above, offset by a gain on disposal of Wuhan Tony Fun in the amount of $58,601 and a higher gross loss for the six months ended June 30, 2020.

 

Other income. Other income includes a gain from forgiveness of related party debts, government grants and other income. For the six months ended June 30, 2020, total other income amounted to $38,552 as compared to total other income of $7,456 for the same period in 2019, an increase of $31,096, or 417%. The increase in other income was primarily attributable to a gain from forgiveness of related party debts of $37,490 in connection with the liabilities waived by four related parties who made the advances to Wuhan Tony Fun. There were no such gains incurred in the six months ended June 30, 2019.

 

Income taxes. The Company incurred income tax expenses of $2,445 and $369 for the six months ended June 30, 2020 and 2019. The enterprise income tax rate in China is 25%. In the six months ended June 30, 2020, Jinqiao United Business was recognized as a small low-profit enterprise and received a preferential income tax rate of approximately 5% based on its current taxable income for the period then ended.

 

Tai’an Tony Fun, Beijing Tony Fun, Shanghai Tony Fun, Zibo Tony Fun, Jinan Tony Fun, Nanjing Tony Fun and Glory Han incurred net losses for the six months ended June 30, 2020 and 2019. Jinqiao United Business incurred net income for the six months ended June 30, 2020 and 2019. Rongyaohan Tai’an incurred net income for the six months ended June 30, 2020 and it did not have any operations for the six months ended June 30, 2019.

 

Net loss. Our net loss was $1,210,712 and $1,933,293 for the six months ended June 30, 2020 and 2019, representing a decrease of $722,581, or 37%. The decrease in net loss was primarily due to a lower selling expense, a lower general and administrative expenses, offset by a higher gross loss as discussed above.

 

Liquidity and Capital Resources

 

Liquidity

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. As of December 31, 2019, we had a working capital deficit of $5,669,752, compared to a working capital deficit of $6,269,016 as of June 30, 2020. The following table sets forth a summary of changes in our working capital from December 31, 2019 to June 30, 2020:

 

    June 30,
2020
    December 31,
2019
    Change     Percentage
Change
 
Working capital:                        
Total current assets   $ 773,381     $ 894,132     $ (120,751     (14 )%
Total current liabilities     7,042,397       6,563,884       478,513       7 %
Working capital deficit   $ (6,269,016 )   $ (5,669,752 )   $ (599,264     11 %

 

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Our working capital deficit increased by $599,264 to $6,269,016 at June 30, 2020 from $5,669,752 at December 31, 2019. This decrease in working capital was primarily attributable to:

 

  A decrease in cash of $138,417;
     
  A decrease in tenants receivable from related parties of $17,350;
     
  A decrease in due from related parties of $14,561;
     
  A decrease in prepaid expenses and other current assets of $26,004;
     
  An increase in accrued liabilities and other payables of $72,608;
     
  An increase in advances from tenants of $77,540; and
     
  An increase in operating liabilities of $534,690.

 

Offset by:

 

  An increase in restricted cash of $61,141;
     
  An increase in net tenants receivable of $14,440;
     
  A decrease in accounts payables of $159,363;
     
  A decrease in income tax payable of $2,811;
     
  A decrease in due to related parties of $33,273; and
     
  A decrease in advances from tenants of related parties of $10,860.

  

Because the exchange rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the changes in assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the consolidated balance sheets.

 

Cash Flow Summary

 

Six Months Ended June 30, 2020 and 2019

 

  

For the Six Months Ended

June 30,

 
   2020   2019 
Net cash provided by (used in) operating activities  $300,588   $(30,058)
Net cash used in investing activities   (1,144)   (66,362)
Net cash provided by (used in) financing activities   (374,876)   192,620 
Effect of exchange rate changes on cash and restricted cash   (1,844)   (3,486)
Net increase (decrease) in cash and restricted cash  $(77,276)  $92,714 
Cash and restricted cash, beginning of the period   442,348    676,254 
Cash and restricted cash, end of the period  $365,072   $768,968 

 

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Net cash provided by operating activities for the six months ended June 30, 2020 totaled $300,588. The activities were mainly comprised of depreciation expense of $401,028, a non-cash lease expense of $393,718, a loss from termination of operating lease of $13,026, a loss from disposal of property and equipment of $3,602, a decrease in tenants receivable from related parties of $15,268, a decrease in prepaid expenses and other current assets of $14,618, an increase in due to related parties of $244,443, an increase in accrued liabilities and other payables of $256,770, and an increase in operating lease liabilities of $500,639, offset by a net loss of $1,210,712, allowance for doubtful accounts of $7,110, a gain form disposal subsidiary of $58,601, a gain from forgiveness of related party debts of $37,490, an increase in net tenants receivable of $7,427, a decrease in accounts payable of $78,000, a decrease in income tax payable of $2,774, a decrease in advances from tenants of $121,933, a decrease in advances from related party tenants of $10,696, a decrease in deposits received from tenants of $5,688, and a decrease in deferred income of $2,093. 

 

Net cash used in operating activities for the six months ended June 30, 2019 totaled $30,058. The activities were mainly comprised of our net loss of $1,933,293, an increase in net tenants receivable of $37,695, an increase in tenants receivable from related parties of $47,094, a decrease in accounts payable of $82,060, a decrease in deposits received from customers of $16,664, and a decrease in deferred income of $2,170, offset by depreciation expense of $431,177, allowance for doubtful accounts of $19,580, a non-cash lease expense of $498,688, a decrease in prepaid expenses and other current assets of $140,206, an increase in due to related parties of $83,358, an increase in accrued liabilities and other payables of $242,374, an increase in advances from tenants of $354,971, an increase in advances from related party tenants of $2,659, and an increase in operating lease liabilities of $315,905. 

  

Net cash used in investing activities for the six months ended June 30, 2020 totaled $1,144. The activities were primarily comprised of $1,144 spent on purchases of property and equipment.

 

Net cash used in investing activities for the six months ended June 30, 2019 totaled $66,362. The activities were primarily comprised of $64,457 spent on purchases of property and equipment and $1,905 advances to related parties. 

 

One of our primary uses of cash in our investing activities for each period was for our purchase of property and equipment. We spent $63,313 less than the six months ended June 30, 2019 in purchasing property and equipment for the six months ended June 30, 2020. In addition, during the six months ended June 30, 2020, we paid $1,905 less than the six months ended June 30, 2019 in advance to our related parties.

 

For the six months ended June 30, 2020, net cash used in financing activities was $374,876. We made repayment to related parties of $464,092, offset by the funds from borrowings from related parties of $89,216.

 

For the six months ended June 30, 2019, net cash provided by financing activities was $192,620. We received funds from borrowings from related parties of $456,094, offset by repayment to related parties of $263,474.

 

We received $567,496 less in six months ended June 30, 2020 from financing activities than in the six months ended June 30, 2020. During the six months ended June 30, 2020, we repaid $200,618 more than the same period in 2019 to related parties, and we received proceeds of $366,878 less than the same period in 2019 in borrowings from related parties.

  

We expect to incur additional costs associated with becoming a public company in the United States, primarily due to increased expenses related to accounting and tax services, directors and officer insurance, legal expenses and investor and stock-based compensation expenses. These additional expenses may require us to seek other sources of financing, such as additional borrowings or public or private equity or debt capital. The availability of these other sources of financing will depend upon our financial condition and results of operations as well as prevailing market conditions, and may not be available on terms reasonably acceptable to us or at all.

 

We have not had any foreign currency investments hedged by currency borrowings or other hedging instruments. We manage our price risks through productivity improvements and cost-containment measures.

  

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Off-Balance Sheet Arrangements

 

Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

 

  Any obligation under certain guarantee contracts,

 

  Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,

 

  Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and

 

  Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

 

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

 

Trend Information

 

Based on our experience and observations of the business in which we operate, we believe the following trends are likely to affect our industry and, as a result, our Company, if they continue in the future.

  

  While we continue to target significant market opportunities that we believe are still available in Northern and Eastern China, we are also looking for opportunities in other regions of China. Presently, we intend to expand our business to customers located in Shandong Province, Jiangsu Province and Beijing City. We expect to benefit from rising demand for lifestyle shopping centers as a result of increasing income levels of consumers and growing populations in these cities due to urbanization.

 

  Currently, our incubation training can help young entrepreneurs negotiate the hurdles that often lead to the failing of new businesses, and help them overcome the isolation and stress of starting a new business.  In addition, we provide continued training for our tenants while they remain a tenant with us.  We believe tenants choose us because they believe incubation training will provide them and their business access to benefits that will help start, maintain and accelerate their business.

 

  Our leasing strategy involves assembling a diverse and unique mix of retail shopping tenants to attract customers, thereby generating higher sales by retail shopping center tenants. We endeavor to increase overall tenants’ sales by leasing space to a constantly changing mix of tenants, thereby increasing rents over time.

 

  We face significant competition in the leasing market, which may decrease or prevent increases of the occupancy and rental rates of our properties; In addition, any economic downturn may adversely affect the businesses of many of our tenants. As a result, we may see increases in bankruptcies of our tenants and increased defaults by tenants, and we may experience higher vacancy rates and delays in re-leasing vacant space, which could negatively impact our business and results of operations.

 

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Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these audited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates on an ongoing basis, including those related to revenue recognition and income taxes. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.

 

The critical accounting policies summarized in this section are discussed in further detail in the notes to the audited consolidated financial statements appearing elsewhere in this prospectus. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.

 

Revenue Recognition

 

The Company is an intermediate lessor, which is an entity that is both a lessee and a lessor of the same underlying asset, accounts for the head lease and the sublease as two separate contracts unless specified contract combination criteria are met. The Company accounts for the head lease in accordance with lessee accounting, and accounts for the sublease in accordance with lessor accounting. The Company does not offset lease income and lease expense.

 

The Company’s lease revenue is recognized under ASC Topic 842, Leases, (“ASC 842”), which was adopted on January 1, 2019. Prior to the adoption of Topic 842, the Company recognized lease revenue under ASC Topic 840, Leases, (“ASC 840”). The Company’s revenues determined to be non-lease related are recognized under ASC Topic 606, Revenue from Contracts with Customers, (“ASC 606”). For the contracts determined to have both a lease component and nonlease component, which are accounted for separately, the Company allocates the consideration in the contracts on a relative standalone selling price basis.

  

The Company engages in certain nonmonetary transaction. The transaction price of the nonmonetary consideration is measured at fair value at contract inception. If fair value cannot be reasonably estimated, the Company measures the consideration indirectly by reference to the standalone selling price of the services promised to the customer in exchange for the consideration.

 

The following addresses our primary revenue types based on the accounting standard used to determine the accounting.

 

Lease Revenue Under ASC 842

 

In general, the Company commences rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. The Company’s leases have been accounted for as operating leases. Contractual rental revenue is recognized on a straight-line basis over the terms of the respective leases. Therefore, actual amounts billed in accordance with the lease during any given period may have been higher or lower than the amount of rental revenue recognized for the period. The difference by which straight-line rental revenue exceeded rents billed in accordance with lease agreements is recorded as “tenants receivable”. The difference by which rents billed in accordance with lease agreements exceeded straight-line rental revenue is recorded as “advances from tenants”. Variable lease payments are recognized as lease revenue in the period when the changes in facts and circumstances on which the variable lease payments are based occur. Sales tax charged to lessees are reported on a net basis and are excluded from revenue. 

 

Non-lease Revenues Under ASC 606

 

In accordance with ASC 606, the Company recognized non-lease revenues in the period when control of the promised services is transferred, in an amount that reflects the consideration that the Company expects to be entitled to receive in exchange for those services. Value-added tax that the Company collects concurrent with revenue-producing activities is excluded from revenue.

 

The Company drives revenues from contracts with customers from the following sources: property management services, operating management services, recoveries from tenants and other services.

 

Operating management services mainly consist of retail-aimed training and unique incubation-training program for small retailers and new founders of detail stores, marketing and operations in order to increase the reputation and customer traffic of the shopping malls. The Company recognizes property management and operating management service revenues as the performance obligations are satisfied over time over the service period.

 

Other service revenue mainly derives from miscellaneous services provided to tenants, including decoration design service, food court cleaning service, etc. The Company recognizes other service revenue at a point in time when services are provided.

 

Recoveries from tenants, consisting of amounts due from tenants for water and electricity utilities, are recognized as revenue in the period during which the expenses are incurred. Prior to November 1, 2018, operating management service and recoveries from tenants were recognized and presented on a gross basis, as the Company obtained control of the goods and services before they were transferred to tenants. Beginning on November 1, 2018, the Company has outsourced property management service and the collection of recoveries from tenants to a related party, Northern Region of Commercial Asset Management Department of Junhao Chains Real Estate Management Co., Ltd. (“Junhao Real Estate Company”). The Company acts as an agent to recognize net revenue regarding the two revenue streams since then.

 

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Revenue Disaggregation

 

Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Revenue under the segment reporting standard is measured on the same basis as under the revenue standard, so management did not repeat the disaggregation of revenue under both standards.

 

Contract Liabilities

 

Contract liabilities are mainly receipts in advance from tenants. As of December 31, 2019 and 2018, the Company recorded contract liabilities under ASC 606 of $652,337 and $193,160, respectively, which were presented as advances from tenants and advances from tenants – related parties in the accompanying consolidated balance sheets. During the years ended December 31, 2019 and 2018, the Company recognized $123,743 and $198,459, of contract liabilities as revenue, respectively.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances, including but not limited to the potential impacts arising from the recent novel coronavirus (COVID-19). Estimates and assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Significant estimates and assumptions by management include, among others, useful lives and impairment of long-lived assets, allowance for doubtful accounts and income taxes including the valuation allowance for deferred tax assets. As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary.

 

Fair Value of Financial Instruments

 

The carrying values of financial instruments included in current assets and current liabilities except for due from related parties, advances from tenants – related parties, operating lease liability – related party, and due to related parties, approximate their respective fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.

 

Foreign Currency Translation

 

Our consolidated financial statements are presented in United States dollar, which is our reporting currency. The functional currency of Tony Fun and Glory Han is United States dollar. The functional currency of Tai’an Tony Fun, Beijing Tony Fun, Zibo Tony Fun, Shanghai Tony Fun, Nanjing Tony Fun, Hubei Rongzhida, Jinan Tony Fun, Jinqiao United Business, Wuhan Tony Fun, and Rongyaohan Tai’an are RMB. For the subsidiaries whose functional currencies are RMB, results of operations and cash flows are translated at average exchange rates during the year, assets and liabilities are translated at the exchange rate at the end of the year, and equity is translated at historical exchange rates. The resulting translation adjustments are included in determining other comprehensive income. Transaction gains and losses are reflected in the consolidated statements of operations and comprehensive loss.

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”). Beginning January 1, 2018, the Company was required to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and has included additional disclosure requirements. Certain contracts with customers, principally lease contracts, are not within the scope of the new guidance. The Company’s revenue determined to be non-lease related are accounted for in accordance with ASC 606. The Company adopted this standard on January 1, 2018 using the full retrospective method, which required the Company to adjust each prior reporting period presented. The adoption of ASC 606 did not have a material impact on the Company’s previously reported consolidated financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842”) and issued subsequent amendments to the initial guidance or implementation guidance including ASU2017-13, 2018-10, 2018-11, 2018-20 and 2019-01 (collectively, including ASU 2016-02, “ASC 842”), which supersedes the lease accounting requirements in ASC Topic 840, Leases. ASC 842 provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. Accounting guidance for lessors is largely unchanged, however, certain refinements were made to conform with the recently issued revenue recognition guidance in ASC 606, specifically related to sales taxes and other similar taxes collected from lessees, certain lessor costs paid directly by lessees and the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Under ASC 842 as a lessor, lease components will be recognized on a straight-line basis, while non-lease components will be recognized in accordance with the new revenue standard.

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On January 1, 2019, the Company adopted ASC Topic 842, using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, previously reported financial information has not been restated to reflect the application of the new standard to the comparative periods presented. The Company elected the practical expedient package permitted under the transition guidance within ASC 842 that allows for not reassessing: (a) whether any expired or existing contracts entered into prior to January 1, 2019 are or contain leases, (b) the lease classification for any expired or existing leases entered into prior to January 1, 2019 and (c) initial direct costs for any expired or existing leases entered into prior to January 1, 2019. In addition, the Company elected not to record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such leases on a straight-line basis over the lease term.

 

The primary impact of applying ASC Topic 842 is the initial recognition of $17.0 million of lease liabilities and $13.4 million of right-of-use assets, net of sublease liabilities, on the Company’s consolidated balance sheet as of January 1, 2019, for leases classified as operating leases under ASC Topic 840, as well as enhanced disclosure of the Company’s leasing arrangements. There is no cumulative effect to retained earnings or other components of equity recognized as of January 1, 2019 and the adoption of this standard did not impact the consolidated statement of operations and comprehensive loss or consolidated statement of cash flows of the Company. The Company does not have finance lease arrangements as of June 30, 2020.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses”. The standard, including subsequently issued amendments (ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11), requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and requires the modified retrospective approach. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-13 will have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The amendments in this Update modify the disclosure requirements on fair value measurements based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of ASU 2018-13 will have a material impact on its consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. ASU 2019-12 simplifies the accounting for income taxes by removing exceptions within the general principles of Topic 740 regarding the calculation of deferred tax liabilities, the incremental approach for intraperiod tax allocation, and calculating income taxes in an interim period. In addition, the ASU adds clarifications to the accounting for franchise tax (or similar tax), which is partially based on income, evaluating tax basis of goodwill recognized from a business combination, and reflecting the effect of any enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The ASU is effective for fiscal years beginning after December 15, 2020, and will be applied either retrospectively or prospectively based upon the applicable amendments. Early adoption is permitted. The Company is currently evaluating the potential impacts of ASU 2019-12 on its consolidated financial statements.

 

In October 2020, the FASB issued ASU 2020-10, “Codification Improvements”. This ASU affects a wide variety of Topics in the Codification. They apply to all reporting entities within the scope of the affected accounting guidance. More specifically, this ASU, among other things, contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the amendments arose because the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option only was included in the Other Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure Section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). Those amendments are not expected to change current practice. The ASU is effective for annual periods beginning after December 15, 2020 and will be applied retrospectively. Early application is permitted. The Company is currently evaluating the potential impacts of ASU 2020-10 on its consolidated financial statements.

 

Impact of Inflation

 

We do not believe the impact of inflation on our Company is material. Our operations are in China and China’s inflation rates have been relatively stable in the last three years: 2.9% in 2019, 2.1% in 2018, and 1.8% in 2017.

 

Impact of Foreign Currency Fluctuations

 

We do not believe the impact of foreign currency fluctuations on our Company is material. Regarding rental price, we are subject to rental price risks arising from price fluctuations in the market prices of the rentals. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China.

 

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CORPORATE HISTORY AND STRUCTURE

 

Our Corporate Structure

 

Overview

 

Our main business is to lease space in retail properties, and to provide operation management services and retail-aimed training for small retailers and new founders of retail stores. We mainly conduct our operations in China through our wholly owned subsidiary, Shanghai Tony Fun and its subsidiaries in China. We incorporated Tony Fun, Inc. on October 18, 2017 in the British Virgin Islands as a holding company to develop business opportunities in China. Tony Fun, Inc. owns all of the outstanding capital stock of Glory Han, our wholly owned Hong Kong subsidiary incorporated on November 16, 2017. Glory Han, in turn owns 100% of the equity interest in Shanghai Tony Fun, our operating subsidiary based in Shanghai, China. Further, Shanghai Tony Fun owns 100% of the equity interest in Beijing Tony Fun, which has five wholly owned subsidiaries based in different cities throughout China as of July 31, 2019.

 

Ownership and Purpose

 

Tony Fun, Inc. – Tony Fun, Inc. is our British Virgin Islands holding company. 

 

Glory Han – Glory Han is our wholly owned Hong Kong subsidiary.

 

Shanghai Tony Fun – Shanghai Tony Fun is a company incorporated in China and a wholly owned subsidiary of Glory Han. It is the parent company of Beijing Tony Fun and Wuhan Tony Fun and has no other operations at this time.

 

Rongyaohan Tai’an – Rongyaohan Tai’an is a company incorporated in China and a wholly owned subsidiary of Glory Han. Its planned business scope includes operating and management of incubators and commercial real estate leasing.

 

Beijing Tony Fun – Beijing Tony Fun is a company incorporated in China and a wholly owned subsidiary of Shanghai Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management. It has limited operations at this time.

 

Wuhan Tony Fun – Wuhan Tony Fun is a company incorporated in China and a wholly owned subsidiary of Shanghai Tony Fun. Its planned business scope includes operating management and property management and corporate marketing planning. Wuhan Tony Fun ceased its operation in November 2019 and Shanghai Tony Fun transferred 100% of its equity interest in Wuhan Tony Fun to two third-party companies on June 4, 2020.

  

Nanjing Tony Fun – Nanjing Tony Fun is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management. It has limited operations at this time.

 

Hubei Rongzhida – Hubei Rongzhida is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management. The Company ceased the operation of Hubei Rongzhida in July 2019.

 

Tai’an Tony Fun – Tai’an Tony Fun is an operating company in China and a wholly owned subsidiary of Beijing Tony Fun. Its business scope includes commercial real estate leasing, operating management and property management.

 

Zibo Tony Fun – Zibo Tony Fun is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management.

 

Jinqiao United Business – Jinqiao United Business is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management. It has limited operations at this time.

 

Jinan Tony Fun – Jinan Tony Fun is a company incorporated in China and a wholly owned subsidiary of Beijing Tony Fun. Its planned business scope includes commercial real estate leasing, operating management and property management.

 

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Corporate Organizational Chart

 

 

Corporate History

 

Beijing Tony Fun was established on February 28, 2012 under the laws of China. Its original shareholders were Mr. Zhiqiang Han and Ms. Jing Ma, who is the spouse of Zhiqiang Han, which owned 60% and 40% respectively.

 

Shanghai Tony Fun was established on January 9, 2018 under the laws of China. Since its formation, Shanghai Tony Fun has been registered as a Wholly Foreign-Owned Enterprise (“WFOE”) in the State Administration for Industry and Commerce (“SAIC”).

 

Rongyaohan Tai’an was established on August 16, 2019 under the laws of China. Since its formation, Rongyaohan Tai’an has been registered as a WFOE in the SAIC.

 

On March 16, 2018, Jing Ma, who is the spouse of Zhiqiang Han, entered into an equity transfer agreement with Shanghai Tony Fun, pursuant to which she agreed to transfer all of her equity interests in Beijing Tony Fun to Shanghai Tony Fun. On April 3, 2018, Zhiqiang Han, the other original shareholder of Beijing Tony Fun, entered into an equity transfer agreement with Shanghai Tony Fun, pursuant to which he agreed to transfer all of his equity interests in Beijing Tony Fun to Shanghai Tony Fun for no consideration. After these equity transfers, Beijing Tony Fun became a wholly owned subsidiary of Shanghai Tony Fun.

 

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On June 4, 2019, Wuhan Tony Fun was established in Wuhan, Hubei Province, as a wholly-owned subsidiary of Shanghai Tony Fun. Wuhan Tony Fun ceased its operation in November 2019 and Shanghai Tony Fun transferred 100% of its equity interest in Wuhan Tony Fun to two third-party companies on June 4, 2020.

 

Tai’an Tony Fun, was incorporated in Tai’an, Shandong Province, China, on July 28, 2014. Its original shareholders were Beijing Tony Fun, which owned 60% of the equity interests, and two individuals, Zhiqiang Han and Jing Ma, who is the spouse of Zhiqiang Han, which owned 30% and 10% respectively. On April 27, 2016, Zhiqiang Han increased his equity ownership to 58%, Jing Ma increased her equity ownership to 30% and Beijing Tony Fun’s equity ownership decreased to 12%. On March 15, 2018, Zhiqiang Han and Jing Ma entered into an equity transfer agreement, pursuant to which Jing Ma agreed to transfer all of her equity interests in Tai’an Tony Fun to Zhiqiang Han for no consideration. As a result, Mr. Zhiqiang Han, owned 88% of the equity interests, and Beijing Tony Fun owned 12% of the equity interests. On April 8, 2018, Zhiqiang Han and Beijing Tony Fun entered into an equity transfer agreement, pursuant to which Zhiqiang Han agreed to transfer all of his equity interests in Tai’an Tony Fun to Beijing Tony Fun for no consideration. After this equity transfer, Tai’an Tony Fun became a wholly owned subsidiary of Beijing Tony Fun.

 

Since its formation in 2012, Beijing Tony Fun has established several other wholly owned subsidiaries:

 

  Zibo Tony Fun incorporated on December 1, 2017;

 

  Nanjing Tony Fun incorporated on December 14, 2017;

 

  Jinqiao United Business incorporated on February 23, 2018;

 

 

 

Hubei Rongzhida incorporated on April 24, 2018; and

 

  Jinan Tony Fun incorporated on May 14, 2018.

 

On December 1, 2017, Zibo Tony Fun was established in Zibo, Shandong Province, as a wholly owned subsidiary of Beijing Tony Fun.

 

On December 14, 2017, Nanjing Tony Fun was established in Nanjing, Jiangsu Province, as a wholly owned subsidiary of Beijing Tony Fun.

 

On February 23, 2018, Jinqiao United Business was established in Tai’an, Shandong Province, as a wholly owned subsidiary of Beijing Tony Fun.

 

On April 24, 2018, Hubei Rongzhida was established in Jingmen, Hubei Province, as a wholly owned subsidiary of Beijing Tony Fun. The Company ceased the operation of Hubei Rongzhida in July 2019.

 

On May 14, 2018, Jinan Tony Fun was established in Jinan, Shandong Province, as a wholly owned subsidiary of Beijing Tony Fun.

 

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OUR BUSINESS

 

Overview

 

We are a retail shopping mall operator in China that seeks to form a joint business and collaborative relationship with and amongst our tenants. Our strategy is to lease, redevelop and manage well-located, retail shopping malls in Tier 2, Tier 3 and Tier 4 cities, with a primary focus on Tier 3 and 4 cities that generate attractive risk-adjusted returns. We renovate these commercial retail shopping malls that have generally been poorly managed, and redevelop and design them to enhance their architectural style and image through interior and exterior improvements. We then lease spaces in these properties to tenants.

 

We are redeveloping properties into innovative retail shopping malls that strategically rethink the types of stores to which consumers will respond. We believe that when consumers visit shopping centers and malls, they are looking for experiences that go well beyond traditional shopping. We focus our tenant mix to emphasize consumer experiences. Our retail shopping malls focus on non-designer stores and independent specialty retailers. While we believe anchor tenants, such as supermarkets that drive traffic are still key, we also see a new emphasis on a curated mix of smaller and independent specialty stores that add a sense of novelty to the shopping experience. We incorporate value-added elements that attempt to recast the mall as a life-style center, including, arts centers, arcades, cosplays, ghost houses, childcare, multi-beauty shops, education learning, food courts, marketplace and fashion spas. These services provide an experience of leisure and entertainment that online shopping cannot provide. Additionally, we make greater use of temporary, flexible spaces that can accommodate different stores over time. Pop-up stores, showroom spaces and kiosks provide customers with a sense of the unexpected and give them a reason to treasure hunt. We believe shopping malls in China are transitioning from consumer places that only sell things to platforms that provide experiences.

 

Competition for tenants in malls has caused us to find new ways to attract and retain tenants. Our main tenant targets are young entrepreneurs and small retails shop owners that have sound business ideas, but lack experience and are in need of training and consulting services to improve their operational viability. To help offset this issue, we have initiated a program to train tenants, a program that we refer to as incubation training. We have dedicated employees that train and teach classes and workshops to our tenants. We believe the benefits of incubation training are two folds: it enables our tenants to attract more customers and increases sales; and it helps us attract quality tenants that develop loyalty to us. In addition, many of our successful tenants become internal trainers and share their practical experiences and strategies with other tenants. Further, our successful clients are awarded network study tours of potential supply markets for their products in larger cities such as Beijing, Shanghai and Hangzhou and in other Asian countries such as Thailand, Japan and Korea. We provide incubation training to our tenants at no charge, as one of our all-around services. We train our tenants in such disciplines as customer service, sales, store display, procurements, management and marketing. Incubation training is available at any time during the term of a tenant’s lease.

 

Our management focuses on expanding our business in Tier 2, Tier 3 and Tier 4 cities in China that we strategically select based on population and urbanization growth rates, general economic conditions, income and purchasing power of resident consumers, anticipated demand for lifestyle shopping malls, availability of commercial properties and commercial property prices, and governmental urban planning and development policies. Currently, we have strategically selected expansion projects in Tier 2, Tier 3 and Tier 4 cities in Wuhan, Hubei, Jiangsu, and Shandong Provinces and the city of Beijing. We expect to benefit from rising demand for lifestyle shopping centers as a result of increasing income levels of consumers and growing populations in these cities due to urbanization.

 

Shopping malls will never be able to compete with the endless product selection, price comparisons and always-on nature of online shopping. We believe our retail shopping malls, however, provide a valuable shared platform of entrepreneurship for tenants and value to the consumer by developing a different direction, away from commoditized shopping experiences and toward a broadened value proposition for consumers.

 

We have received several industry awards and have been invited to participate in several industry activities. Notable awards and activities include:

 

Tai’an Tony Fun was appraised as “Innovation and Entrepreneurship Advanced Unit of 2016” by Communist Party of China Work Councils of Caiyuan Street, Taishan District in Tai’an City and its office in 2017;

 

Tai’an Tony Fun was appraised as “Peace Street Construction Advanced Unit of 2016” by Communist Party of China Work Councils of Caiyuan Street, Taishan District in Tai’an City and its office in 2017;

 

Tai’an Tony Fun was appraised as “Advanced Unit of Year of Enhanced Responsibility Activity” by Municipal Production Safety Committee in Tai’an City in 2017;

 

Tai’an Tony Fun became a member of Greater China Shopping Mall Alliance;

 

Tai’an Tony Fun became a member of Development Committee of National Real Estate Managers Association (NREMA);

 

Tai’an Tony Fun became a member of Jinan Teaching Base of NREMA Business School;

 

Tai’an Tony Fun became a member of Commercial Real Estate Committee of NREMA;

 

Tai’an Tony Fun became a member of ZHisland Community;

 

Tai’an Tony Fun became a member of Business Operations Branch of China Commerce Association for General Merchandise (CCAGM);

 

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Tai’an Tony Fun became a member of Standing Director Member of China Shopping Center Development Association of Mall China;

 

Tai’an Tony Fun was appraised as “Innovation and Entrepreneurship Advanced Unit” by Communist Party of China Work Councils of Caiyuan Street, Taishan District in Tai’an City and its office in 2018; and

 

Tai’an Tony Fun was appraised as “Production Safety Advanced Unit” by Communist Party of China Work Councils of Caiyuan Street, Taishan District in Tai’an City and its office in 2018.

 

Our property management philosophy is focused on providing the best-quality management to our clients, creating a win-win relationship and environment. Many shopping mall owners or developers face difficulties with properly managing or operating retail shopping centers or malls. Many problems can arise during the initial stages of operation, such as the need for large capital investments, and difficulties in leasing and operations, which causes low capital returns. In addition, many property management companies prefer to manage larger shopping malls in Tier 1 and 2 cities and are unwilling to do business in smaller Tier 3 and 4 cites.

 

We started with managing commercial properties with square footage under fifty thousand square meters in the Tier 3 and Tier 4 cities that are situated along China’s high-speed rail lines. We focus on attracting tenants of original brand manufactures and local brands instead of large chain retailers. Further, once we are engaged by shopping mall owners, we negotiate to have our brand name “Tony Fun” on signage on the managed properties, to further enhance our brand image and awareness of our brand.

 

Our property management business model allows shopping mall owners to have lower capital investments. In order to attract many large retailers, shopping mall owners incentivize these retailers with large capital investment outlays for tenant improvements, and it is often difficult to recoup this capital investment. Our strategy is to focus on tenants that sell unique local brands and focus the atmosphere of the shopping centers on lifestyle, leisure, and entertainment, which is different from traditional shopping malls. This in turn reduces competitive pressure and the capital investment required because in our experience smaller boutique retailers do not require large capital investments. We believe shopping mall owners are more willing to engage us to assist them in managing and reinventing the shopping experience at their properties because our model promotes a lower capital investment.

 

Our property management leasing strategy is focused on obtaining a long-term lease with the shopping mall owner at a discounted price and short-term leases with tenants. We believe signing a long-term lease with the owner creates a greater sense of trust and security between us and the owner and allows us to obtain leases for them over lengthier periods of time. Once we enter into the lease with the owner, we subdivide the shopping mall into smaller spaces, which we attempt to sublease for shorter terms at a premium price. Because each of our sublessees rent smaller spaces for shorter lease terms, it is easier for us to raise rents, and reduce our exposure to significant lease defaults, which increases our return on investment.

 

We charge owners of the managed properties a onetime set up fee and a pro-rata share of the rents we receive. In addition, if we can increase rents to our sublessees, we share a portion of the rental increase with the owner. For example, for one managed property our share of the rents we receive is 0.8 RMB per square meter per day of the sub-leased premises. Beginning in the second year of the lease term, we are entitled to receive 20% of any rental increase from the first year of the lease. Under this arrangement, we have the ability to cover our operating costs and still have the ability to make a profit within the first three years of operating the shopping mall. We believe the first three years after taking over management of a shopping mall is the most challenging time. After the first three years of managing a shopping mall, we generally are able to stabilize the property, increase rents, and make additional profits by filtering out unsuccessful tenants, and attracting the more established tenants.

 

This is an attractive business relationship for us and our landlord because it incentivizes us to manage and operate the properties as productively as possible, so we are able to maintain tenants and ultimately increase their rents, which we share in. Further, it promotes a long-term relationship with the owner since they benefit from our production by sharing the increased rents we obtain.

 

Recently we found some opportunities in Tier 2 cites, with some larger well-decorated shopping malls where we will provide leasing management services. Unlike vacant shopping malls which need to be designed, rebuilt and decorated, these opportunities are not only larger, beyond fifty thousand square meters, but also have upgraded renovations and improvements, reducing expenses of early-stage preparations for us, such as design and maintenance fees. For these properties we expect to provide leasing management and operation services and receive a management fee and a portion of any rental increase.

 

Industry and Market Background

 

2019 and the Impact of COVID-19 on the Chinese Retail Market

 

China is recovering from the recent COVID-19 outbreak, with many provinces slowly returning to normal levels of activity. However, the crisis has had a significant and lingering impact on the shopping habits of Chinese consumers.

 

In-person shopping is slowly recovering, which fell to around 39% of pre-COVID levels. With the loosening of restrictions, shopping levels have increased to around 79% of pre-COVID levels. During the crisis, supermarkets, convenience stores and drugstores saw an increase in demand. However, after the peak of COVID-19, supermarket volumes fell, while convenience stores and drugstores continued to see higher than normal levels of demand. Discretionary categories, such as food service outlets, apparel stores, and department store demand was down close to 80% during the peak of COVID-19. As of May 2020, approximately 80% of apparel stores have reopened, but foot traffic in discretionary categories is still 40-50% below pre-COVID-19 levels.

 

Online shopping has grown considerably during the crisis, which benefitted from, lockdowns, store closures and the reluctance of consumers to engage face-to-face with sales and service staffs. Due to the physical constraints of the crisis, Chinese consumers have been more willing to try new stores and brands. After COVID-19, approximately 14% do not plan to revert back to their pre-COVID store choices and about 6% do plan to return to their previous brands.

 

The data shows that the trend toward healthier lifestyles accelerated during the COVID-19 outbreak. People also shopped local, both in terms of location and products. We believe this trend may benefit our shopping malls in the long-term, which are focused on lifestyle experience in addition to the shopping experience.

 

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Chinese Retail Market and Opportunity

 

In 2018 the total retail sales of consumer goods in China reached approximately $5.61 trillion, up by 9% from the prior year. Despite growing retail sales the impact of e-commerce on China’s traditional retail stores has been significant. China consumers conducted more of their shopping online in 2018 with online retail sales reaching $1.33 trillion in 2018, an increase of 23.9% compared to 2017 according to the National Bureau of Statistics in China.

 

Despite the growing e-commerce industry in China, we believe there is significant market opportunity for us to compete and expand our business. Retail shopping centers will never be able to compete with the endless product selection, price comparisons and always-on nature of online, nor should they try. Instead, retail shopping centers need to move in a different direction, away from commoditized shopping experiences and toward a broadened experience for consumers. The shopping experience in China is no longer about buying things, which people can just do online, it is about spending time, play, dining, health-cultivation, education, and entertainment in the same environment. We believe our lifestyle focused retail shopping centers will be in greater demand, and that we will be able to take advantage of the growing retail market, despite e-commerce competition as shoppers continue to seek a unique shopping experience. Through a diverse tenant mix that provides experiences in addition to retail, we believe our retail shopping centers provide consumers with shoppable entertainment something they cannot find online or at traditional centers and malls.

 

Commercial Property Inventory

 

There are around 4,500 shopping malls in China and another 7,000 are planned for construction. The Ministry of Commerce will encourage cities with populations of 10 million to build at least 10 shopping malls. The planned construction of shopping malls is partly the result of the country’s initiative to transform the economy into one driven by consumption. As a result, we believe there is an oversupply of commercial real estate inventory for us to choose from in the markets we plan to expand into. Accordingly, we believe we will be able to obtain desirable commercial real estate to redevelop into retail shopping centers at below market rates.

 

While many shopping malls are closing in China, another 7,000 are planned for construction. The planned construction of shopping malls is partly the result of the country’s initiative to transform the economy into one driven by consumption. As a result, there is an oversupply of commercial real estate inventory for us to choose from in the markets we plan to expand into. Accordingly, we believe we will be able to obtain desirable commercial real estate to redevelop into retail shopping centers at below market rates.

 

Entrepreneurs

 

Over the past two decades, entrepreneurship in China has grown at an exponential rate. Statistics by the State Administration for Industry and Commerce show that the country saw the registration for more than 13 million new enterprises between March 2014 and February 2017. In 2018, an average of 18,000 new businesses were registered on a daily basis. In addition, in 2000, total revenues earned by Chinese state-owned industrial enterprises and those in non-state-owned Chinese private enterprises were roughly the same at approximately 4 trillion RMB each. By 2013, total revenues in state-owned companies has risen six fold, while revenue in private enterprises has risen by more than 18 times. Profits for the same period demonstrated a larger delta, with state-owned entities showing a sevenfold increase in profits and non-state-owned entities increasing 23 times.

 

China is producing more young entrepreneurs than ever before, and from different socioeconomic backgrounds. The number of college students starting businesses directly after college increased from 1.6% in 2011 to 3% in 2017 or 200,000 out of 7.95 million college graduates became entrepreneurs. The increase in entrepreneurship is linked to both universities and the government. Xidian University, for example, encourages innovation and starting businesses to be integrated into higher education. Xidian University has established spaces where students can put their business ideas into practice. Entrepreneurship and innovation projects, publication and academic competitions are included in the university’s credit point system. In addition, the Ministry of Education issued a guide in 2016 encouraging university teachers to improve their teaching and assessment methods, transform their research into products, or even start their own business.

 

In addition to college educated entrepreneurs, more migrant works are returning home to start businesses. The number of migrant workers returning to home villages to start their own business has increased at a rate of 10% for the last five years. Many factors have driven migrant workers home to start businesses including greater demand for better and safer agricultural products, popularity of tourism, improved infrastructure in rural areas and improved delivery and distribution systems due to the development of information technology.

 

Promotion of entrepreneurship in China has also manifested itself in the government. A guideline was approved at a State Council executive meeting chaired by Premier Li Keqiang to further encourage the support for innovation and entrepreneurship. The push for mass entrepreneurship and innovation was first put forward by the Premier during the annual meeting of the New Champions 2014 in Tianjin. According to the guideline, China will put into place programs that:

 

support Chinese students overseas to return for business startups and innovation;

 

enable overseas Chinese entrepreneurs, including those from Hong Kong and Macao special administrative regions, to enjoy the same public services as local residents; and

 

expand the funding channels for enterprises, including measures to enhance credit support and related services and reform on rules for State capital to take part in venture capital investment.

 

In addition, the development of the industrial Internet and advanced manufacturing and land use for innovation and entrepreneurship purposes will be given priorities.

 

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Statistics by the State Administration for Industry and Commerce show that the country saw the registration of more than 13 million new enterprises between March 2014 and February 2017, 94.6 percent of which are in the private sector.

 

We believe the increase in entrepreneurship in China will cause demand for retail space to increase, which we expect will, in turn, drive demand for tenancy in our retail shopping centers. In addition, we believe retail entrepreneurs will be attracted to our business model and incubation training program, which provides for an instructive, and supportive environment for entrepreneurs during the critical stages of starting up a new business.

 

Our Competitive Strengths

 

We believe the following competitive strengths differentiate us from our competitors and contribute to our ongoing success.

 

Well Positioned to Capture Opportunities in Tier 3 and Tier 4 Cities and Counties. With the increase in consumer disposable income and urbanization rates, and consumers looking for a unique shopping experience, a market has emerged driving demand for lifestyle shopping centers in many cities throughout China. We are primarily focused on redeveloping shopping centers into lifestyle shopping centers for this market segment and have accumulated substantial knowledge and experience about consumers’ preferences and demands of customers in these markets. We believe we can leverage our experience to capture the growth opportunities in these markets.

 

Experienced Management Team and Personnel with a Demonstrated Track Record. Our management team, led by our Chief Executive Officer, Zhiqiang Han, has extensive industry experience and a demonstrated track record of managing costs, adapting to changing market conditions, and redeveloping properties. In addition, Mr. Han has a vast network and understanding of the market. Our workforce is highly skilled with specialized training, designed to address complex and individualized tenant and customer issues.

 

Ability to Attract and Maintain Tenants. We believe our unique incubation-training program attracts young entrepreneurs to our retail shopping centers and helps maintain them as tenants because we offer the training throughout the duration of their tenancy. We believe our training provides tenants with a greater ability to achieve success because they are able to learn a multitude of skill sets to assist them in their business. In addition, we believe our incubation-training program builds loyalty with our tenants because the typical landlord tenant relationship is turned into a cooperative partnership that benefits both parties.

 

Adaptable Business Model to Changing Consumer Demands. The ease of buying and browsing online, price comparisons, and diverse selection has meant physical retailers have had to find a point of difference to be more attractive. Many people are going to shopping centers and malls to buy browse, socialize, and consume experiences that go well beyond traditional shopping. Our retail shopping centers offer a diversity of shopping, dining and entertainment facilities to capture this change in consumer demand.

 

Our Strategies

 

Expanding into Selected Tier 2, Tier 3 and Tier 4 Cities. We believe that Tier 3 and Tier 4 cities and counties present redevelopment opportunities that are well suited for our business model. Furthermore, Tier 3 and Tier 4 cities and counties currently tend to be in an early stage of market maturity and have fewer large national shopping mall owners We believe that the fragmented market and relative abundance of commercial property supply in Tier 3 and Tier 4 cities, as compared to Tier 1 and Tier 2 cities, offer more opportunities for us to generate attractive margins. However, we recently expanded into Tier 2 cities where we found the margins to be attractive. We also believe that our experience affords us the opportunity to emerge as a leading retail shopping center operator in these markets. In the near future, we plan to enter into other Tier 2, Tier 3 and Tier 4 cities that have:

 

Increasing urbanization rates and population growth;

 

High economic growth and increasing individual income; and

 

Sustainable commercial property supply for future leases and redevelopments.

 

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We plan to continue to closely monitor our capital and cash positions and carefully manage our cost for commercial property redevelopment construction costs and operating expenses. We believe that we will be able to use our working capital more efficiently by adhering to prudent cost management, which will help to maintain our profit margins. When selecting a commercial property for development, we will continue to follow our established internal evaluation process, including utilizing the analysis and input of our experienced management team and choosing third-party contractors through a tender process open only to bids which meet our budgeted costs.

 

Market Opportunity. We expect China’s latest guideline on encouraging entrepreneurial spirit and creating a favorable environment for entrepreneurship to boost the start-up for small-to-medium sized enterprises. The guideline stressed that the government will protect the legal rights and interests of entrepreneurs, ensure fair competition and strengthen protection of intellectual property rights (IPR) to encourage innovation. Over the past five years, China has made large strides encouraging innovation and entrepreneurship. Through a simpler approval process, lower corporate fees and technology-based services, the government is transforming its functions to let the market play a larger role in the economy. We believe the country’s encouragement of entrepreneurship will increase retail entrepreneurship in China and will cause demand for retail space to increase, which we expect will, in turn, drive demand for tenancy in our retail shopping centers.

 

Attract and retain quality tenants through incubation training. We believe our business incubation training attracts and retains tenants because it supports the start-up and early stage of new retail ventures by providing them with resources and training and a developmental environment in which they can flourish. Our incubation training can help young entrepreneurs negotiate the hurdles that often lead to the failing of new businesses, and help them overcome the isolation and stress of starting a new business. In addition, we provide continued training for our tenants while they remain a tenant with us. We believe tenants choose us because they believe incubation training will provide them and their business access to benefits that will help start, maintain and accelerate their businesses.

 

Leasing strategy focused on a diverse client mix. Our leasing strategy involves assembling a diverse and unique mix of retail shopping tenants in order to attract customers, thereby generating higher sales by retail shopping center tenants. High sales by retail shopping center tenants make the centers attractive to prospective renewal and new tenants, thereby increasing the rental rates that current and prospective tenants are willing to pay. We have implemented an active leasing strategy to increase the retail shopping centers’ productivity and to set minimum rents at higher levels. Elements of this strategy include seeking clients that provide customers with experiences they cannot find online such as fashion, dining and arts.

 

Large selection of diverse tenants. We offer a large, diverse selection of retail stores, experiences such as fashion, concerts and art, and dining to give customers a broad selection of consumer goods, food, and entertainment and a variety of price ranges. We endeavor to increase overall tenants’ sales by leasing space to a constantly changing mix of tenants, thereby increasing rents over time.

 

Selectively utilize our capital to improve retail properties. We intend to make capital investments where the return on such capital is accretive to our shareholders. We have significant expertise allocating capital to value-added improvements of retail properties to increase rents, extend long-term leases with major tenants and increasing occupancy. We will selectively allocate capital to revenue enhancing projects that we believe will improve the market position of a given retail shopping center property.

 

Selectively utilize our development capabilities for third-party commercial property opportunities. We intend to invest capital in development and re-development opportunities where we believe the return on such capital is accretive to our shareholders. We believe our experience in redevelopment will benefit us by providing opportunities to develop properties for us at higher cap rates that result in positive returns to our operations.

 

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Our Leased Property

  

Tony Fun Shopping Mall

 

 

 

 

Tony Fun Shopping Mall is an approximate 524,554 square feet retail shopping mall built from vacant spaces in 2012, which we redeveloped into a shopping mall in 2015. The 12-acre parcel is made up of 422,210 square feet of retail and 102,343 square feet of underground storage and equipment spaces, as well as parking areas in one building. Tony Fun Shopping Mall represents a life-style shopping experience with themed designs and scenic shopping places. The retail shopping mall features iconic global landscapes and structures, such as the Eiffel Tower and Statute of Liberty to give the shopper a sense of belonging to a global community. Its tenants include independently owned businesses such as non-designer specialty retailers, dining, fashion, entertainment, child development and education. The retail shopping mall also includes play areas for kids, an arcade and an art center. The property is located in Tai’an City. We collect rents and management fees through leasing space to tenants. As of June 30, 2020, December 31, 2019 and 2018, Tony Fun Shopping Mall occupancy rate was 81%, 87% and 72%, respectively.

 

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Tony Fun Shopping Mall benefits from an economy drawing from the city of Tai’an, which has an approximate population of 5.6 million. Tony Fun Shopping Mall is located in the Shandong Tai’an Development Line. The Shandong Tai’an Development Line is the key development area under the local government’s plan, which contains Tai’an Municipal Government buildings, the Convention Center, Central Business District and an entertainment center. It is also located within 4.35 miles of Tai’an railway station, a high-speed railway station with bullet trains to Beijing, Shanghai and other cities. The tenants at Tony Fun Shopping Mall lease directly with us. The below tenants represent the five largest tenants at Tony Fun Shopping Mall measured by gross leasable square feet as of June 30, 2020 and none of the revenues from below tenants accounted for 10% or more of the Company’s total revenues during the six months ended June 30, 2020 or during the year ended December 31, 2019.

 

1.Tai’an ZhitongTianxia (also called as Education Plaza)

 

Education Plaza leases 33,045 square feet, representing 10.30% of the gross leasable square feet of Tony Fun Shopping Mall.

 

Annual revenue, including rental and operating management service, under the lease is approximately $71,000.

 

The lease expires in 2022. Renewal options will be provided to the tenant two months prior to the lease expiration.

 

 

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2. Tai’an Maibo Education (also called as Maibo)

 

Maibo leases 24,133 square feet, representing 7.52% of the gross leasable square feet of Tony Fun Shopping Mall.

  

Annual revenue, including rental and operating management service, under the lease is approximately $85,000.

 

The lease expires in 2024. Renewal options will be provided to the tenant two months prior to the lease expiration.

 

 

3. Jimin Zhang (also called as Haiwei Supermarket)

 

Jimin Zhang leases 20,236 square feet, representing 6.31% of the gross leasable square feet of Tony Fun Shopping Mall.

 

Annual revenue, including rental, property management and operating management service, under the lease is approximately $96,000.

 

The lease expires in 2024. Renewal options will be provided to the tenant two months prior to the lease expiration.

 

 

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4. Tai’an Fresh Food Management Co., Ltd. (also called as “Tai’an Fresh Food”)

 

Tai’an Fresh Food leases 19,171 square feet, representing 5.98% of the gross leasable square feet of Tony Fun Shopping Mall.

 

Annual revenue, including rental and operating management service, under the lease is approximately $93,000.

 

The lease expires in 2020. Renewal options will be provided to the tenant two months prior to the lease expiration.

 

 

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5. Feng Gao (also called as Hutaoli Music Restaurant)

 

Feng Gao leases 10,011 square feet, representing 3.12% of the gross leasable square feet of Tony Fun Shopping Mall.

 

Annual revenue, including rental and operating management service, under the lease is approximately $34,000.

 

The lease expires in 2024. Renewal options will be provided to the tenant two months prior to the lease expiration.

 

 

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Lease Expirations

 

The following table sets forth information with respect to the lease expirations at Tony Fun Shopping Mall as of December 31, 2019.

 

Lease Expiration Period  Number of Expiring Lease   Total Expiring Square Footage   % of Total Expiring Square Footage   Expiring Annualized Base Rent   % of Expiring Annualized Base Rent   Expiring Base Rent Per Occupied Square Footage Per Day 
2020   127    336,962    71.6%  $598,782    53.3%  $0.005 
2021   26    26,641    5.7%   93,684    8.4%   0.010 
2022   11    52,008    11.0%   149,992    13.4%   0.008 
2023   -    -    -    -    -    - 
2024   3    54,378    11.5%   267,385    23.8%   0.013 
2025   -    -    -    -    -    - 
2026   1    743    0.2%   12,618    1.1%   0.047 
2027   -    -    -    -    -    - 
2028 and thereafter   -    -    -    -    -    - 
Total   168    470,732    100.00%  $1,122,461    100.00%  $0.007 

 

As of the filing date, for the leases that expired or will expire in year 2020, the Company has renewed 65% of these leases with its tenants and expects none of the remaining to be renewed after the expiration. The rents for renewed leases are slightly higher than the original rents, which is at the market rents.

 

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Our Managed Properties

 

Zibo Tony Fun Youthful Lifestyle Park

 

 

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Zibo Tony Fun provides business management services for Zibo Tony Fun Youthful Lifestyle Park, whose owner is Shandong Haoke Industrial Co., Ltd., a related party of the Company. The shopping mall consists of four floors, and the total area is approximately 159,084 square feet (14,779.37) square meters. Zibo Tony Fun is responsible for the daily management of the retailer and the tenants, including marketing and operations in order to increase the reputation and customer traffic of the shopping mall. Zibo Tony Fun earns revenue by providing these services. Zibo Tony Fun Youthful Lifestyle Park was open in October 2018.

 

Zibo Tony Fun Youthful Lifestyle Park benefits from an economy drawing from the city of Zibo, which has an approximate population of 4.71 million. Zibo Tony Fun Youthful Lifestyle Park is part of a renovation project of Zibo City, and located in the center of the so-called “Root of Zibo” on Jinjing Avenue next to the city’s core business district.

 

Wuhan Optical Valley International Plaza

 

Wuhan Optical Valley International Plaza is managed by Wuhan Tony Fun Commercial Management Co., Ltd., with a total building area covering approximately 854,655 square feet (79,400 square meters). Wuhan Tony Fun Commercial Management Co., Ltd. is in charge of the daily management and operation of the shopping mall, including increasing its popularity, attracting and retaining tenants and consumers through various methods such as design, decoration, marketing, and earns revenues by providing these services.

 

Wuhan Optical Valley International Plaza relies on the economy drawing from the City of Wuhan, which had an approximate population in excess of 11 million in 2018 according to the National Bureau of Statistics in Wuhan. It is located in Optical Valley, the High-tech Development Zone in Hongshan District. According to the Ministry of Education, there are approximately 83 colleges and universities in Wuhan, and 74 are located in Hongshan District, including main campuses and branch campuses, among which approximately 30 are near Optical Valley. In addition, there are approximately 1.4 million students enrolled in colleges and universities in Wuhan. Further, it is estimated about 13% of the total students, or 182,000 are enrolled in colleges and universities in Optical Valley. We believe the large student population will increase traffic at the mall. In addition, the mall is easily accessible because it is located in a business district supported by public transportation. We were hired to manage this mall in 2019 and accordingly did not generate any revenue from managing this mall in 2018. During the year ended December 31, 2019, Wuhan Tony Fun generated RMB 1,984,629 (approximately $287,000) of revenue. The company ceased its operation in November 2019 and Shanghai Tony Fun transferred 100% of its equity interest in Wuhan Tony Fun to two third-party companies on June 4, 2020.

 

Our Incubation-Training Model

 

Our teaching model is designed to promote all-around growth of our tenants’ business skill sets and knowledge. We believe tenants are unique in their abilities and have developed a holistic approach to training that promotes both business advancement and personal development. We provide subject-based courses in various business subject matters as the medium for our incubation training. Our course lectures are deigned to focus on skills such as sales, marketing, and procurement and cultivate personal attributes such as leadership, management and confidence. In addition, we provide tours and collaborative learning with our successful tenants as a means to share business ideas and strategies. This model allows our tenants to accumulate business subject matter knowledge while also developing their business capabilities and strengthen important personal traits that are necessary to operate a successful business.

 

Our Training Philosophy

 

Our goals are to further the business skills and personal development for each of our tenants to provide them with a greater likelihood to survive the challenges a new business will face and sustain long-term success. We believe the aspects of our model listed below are critical to achieving these goals.

 

Training Methodologies and Philosophies

 

Subject-Based Courses

 

We use a subject-based approach through lectures to teach our tenants business skills. We provide training on a wide array of subject matters to enhance the depth of our tenants’ skills. We provide training courses every month on the following topics:

 

Industry trends – The prior years sales trends are summarized along with and outlook for trends of the new year;

 

Morale and etiquette – Strategies for keeping employees morale up and proper treatment of customers;

 

Sales – Effective sales strategies are taught;

 

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Procurement – Topics include ordering, purchase and inspection of goods;

 

Promotion – Promotional techniques and customizing promotional activities based upon goods sold and the current sales season;

 

Visual Marketing – Focuses on displays such as window displays and display settings based upon store type;

 

Tenant collaboration – Discussions with tenants to focus on any areas for needs and improvements;

 

Management – Focuses on team and staff management and performance evaluations;

 

Marketing – Focuses on promotional materials, including online advertisement;

 

Inventory – Focuses on sales of older inventory driven by new inventory, stocking and destocking;

 

Sales Spring – Focuses on managing the year-end sales sprint and inventory; and

 

Store Diagnosis – Prior year store performance is analyzed, issues are diagnosed and adjustments for the next year are planned.

 

Interactive and Cooperative Learning

 

We use multiple interactive teaching methodologies to facilitate learning. Our teachers, classroom scenarios, teaching tools, and displays are designed to promote tenant interaction with each other and the teacher. In addition, our teachers have abundant practical experience, and provide tenants with real case studies, business suggestions and practical tactics, and seek to solve potential problems encountered by tenants during operation, which effectively enhance learning results. We believe that cooperative and interactive learning is more enjoyable to our tenants and is more effective in conveying important or complicated subjects and skills.

 

Our Value Proposition

 

Our goals are to: 1) decrease the chance that our tenants will fail, shorten the time and reduce the cost of establishing and growing their business and increase the likelihood of their success through our incubator training; and 2) drive customers to our retail shopping malls by incorporating value-added elements that attempt to recast the retail shopping mall as a life-style center.

 

Why tenants choose us:

 

Our training program. There are many obstacles entrepreneurs face when starting a new business such as lack of experience, supply channels, assistance, organization and management skills. Our incubation training program is attractive and important to prospective tenants and current tenants. The benefits are numerous, and among other things, can:

 

-assist entrepreneurs to negotiate the business hurdles that lead to their early downfall;

 

-help entrepreneurs overcome the isolation and stress of starting a new business;

 

-provide access to an array of expertise, teachers, training mentors and advisors;

 

-provide opportunities to capital assistance by introducing tenants to financial institutions;

 

-promote faster sustainable growth and success rates of new and existing businesses; and

 

-provides vital instruction of necessary business skills, such as management, procurement, sales, and space design.

 

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The quality of our instructors. Our instructors possess real world experience and have a thorough understanding of our tenants. Our instructors tailor their courses to our tenants needs so that the tenants are able to apply theory into practice and successfully implement it. Our instructors care about the success of our tenants and form strong relationships with them.

 

  Our business model. We believe providing customers with more shopping options and experiences in addition to retail, extends their total shopping time, leading to higher sales and a more profitable retail shopping mall overall. We believe consumers are more likely to splurge on unintended purchases the longer they shop. We believe our unique mix of smaller and independent specialty stores that add a sense of novelty to the shopping mall offering, and tenants that offer experiences such as fashion and arts will attract tenants to our retail shopping malls because they will benefit from the diverse tenant mix and experiences offered by our retail shopping malls.

 

Why consumers choose us:

 

  Our tenant mix. Through a diverse tenant mix that provides experiences in addition to retail, we believe our retail shopping malls provide consumers with shoppable entertainment something they cannot find online or at traditional malls. We embrace new customer needs, and appeal to a wide range of demographics with our store offerings and experiences. For instance, the millennial crowd may be drawn to our fashion areas of the retail shopping mall where they can get their nails done, whereas our older customers may enjoy the dining and leisure activities of our malls where they can relax with their friends and family.

 

Enjoyable atmosphere. We believe events like musical performances, crafts, arcades and children’s play centers create a delightful shopping experience for our customers. Cheery décor, and sociable and knowledgeable tenants contribute to the enjoyable atmosphere.

 

Well-trained and knowledgeable tenants. We believe our tenants are well trained in sales due to our incubation-training program. The volume of shopping options and opinions is overwhelming, and customers need expert guidance in making a choice. Through our incubation-training program our tenants are experienced in sales and are able to show consumers various options and choices. Our tenants act as curators, helping customers decide what matters most and making the right choice.

 

Growth Strategy

 

Our principal objective is to enhance shareholder value. We seek to maximize the financial results of our properties, while also pursuing a growth strategy that includes redevelopment of existing shopping malls. We plan to use 5 million dollars of the offering proceeds on redevelopment. One of the five million dollars will be used for renovations at the Tai’an Tony Fun Shopping Mall. The remaining four million dollars will be used for new acquisitions, however, we have no current understandings, agreements or commitments at this time. All renovation plans are for leased properties.

 

Leasing, Management and Marketing 

 

Our objective is to maximize cash flows from our existing properties through:

 

aggressive leasing that seeks to increase occupancy and facilitate an optimal merchandise mix;

 

originating and renewing leases at higher gross rents per square foot compared to the previous lease;

 

merchandising, marketing, sponsorship and promotional activities; and

 

actively controlling operating costs.

 

Redevelopments  

 

Redevelopments represent situations where we capitalize on opportunities to increase the productivity of previously occupied space through aesthetic upgrades, retenanting and/or changing the use of the space. Many times, redevelopments can result from acquiring possession of anchor space and subdividing it into multiple spaces.

 

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Renovations

 

Renovations usually include remodeling and upgrading existing facades, uniform signage, new entrances and floor coverings, updating interior décor, resurfacing parking lots and improving the lighting of interiors and parking lots. Renovations can result in attracting new retailers, increased rental rates, sales and occupancy levels and maintaining the property’s market share.

 

Expansions of categories

 

We can also generate additional revenues by expanding a property through the addition of large retail tenants in a new category. A category expansion also protects the property’s competitive position within its market.

 

Sales and Marketing

 

The focus of our sales and marketing efforts are to continue to increase public awareness of our shopping malls, spread the acceptance and influence of our brand, culture, and philosophy and of our unique incubation-training program for potential tenants. We keep a database of customers to track preferences, which allows our marketing department to make precise marketing campaigns. We obtain new customers and tenants by word-of-mouth referrals and have found that satisfied customers and tenants are loyal customers and tenants. We believe our incubation-training program helps us attract tenants we may not have been able to obtain, if we did not have the program. In addition, we encourage our entire staff from senior management to front-line staff to focus on marketing. We believe that this approach is crucial to winning and retaining customers and tenants and increases our ability to withstand competition.

 

In addition to our own marketing department, we use numerous platforms to advertise and promote our business including, radio, we-media and online marketing. Online marketing allows us to efficiently educate prospective customers about our shopping malls and assists us in expanding the reach of our market. We publicize and promote our retail shopping malls through media such as Ganji.com and 58.com. In addition, we rely on our website for advertising.

 

Competition

 

We believe that our independent specialty stores and focus on being a life-style center helps insulate us from general shopping mall competition. The retail real estate industry in China, however, is dynamic and competitive. We compete with numerous merchandise distribution channels, including malls, outlet centers, and community/lifestyle centers. We also compete with Internet retailing sites and catalogs that provide retailers with distribution options beyond existing brick and mortar retail properties. The existence of competitive alternatives could have a material adverse effect on our ability to lease space and on the level of rents we can obtain. This results in competition for both the tenants to occupy the properties and customers. We believe that there are numerous factors that make our commercial properties highly desirable to retailers and customers, including:

 

the quality, location and diversity of our retail shopping malls;

 

our management and operational expertise;

 

our extensive experience and relationships with retailers, partners and suppliers; and

 

our diverse tenant mix.

 

We face significant competition in our market from several large companies and some smaller regional competitors. Large companies like Wanda and Capitaland owns numerous properties all over China. There are barriers to entry in our market limiting the number of qualified competitors. These barriers result from the required capital to opening a shopping mall and requirements for consistent levels of service and support. We believe that our all-around services and incubation training enables us to provide tenants with a differentiated lease experience and customer support.

 

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The principal competitive factors in our markets include:

 

  the ability to provide services and courses attractive to tenants;
     
  pricing for leases and goods sold at our retail shopping malls;
     
  ability to find redevelopment projects and negotiate with local governments;
     
  reputation in the market;
     
  ability to find new tenants;
     
  ability to address unique tenant needs; and
     
  ability to attract customers.

 

Seasonality

 

The shopping center business is, to some extent, seasonal in nature with tenants typically achieving the highest levels of sales during the first quarter due to the Chinese New Year and fourth quarter due to the holiday season, which generally results in higher percentage rent income in the fourth quarter. Results of operations realized in any one quarter may not be indicative of the results likely to be experienced over the course of our fiscal year.

 

Suppliers

 

In China, the government controls the supply of land. Since the early 2000s, the real estate industry in China has been transitioning from an arranged system controlled by the PRC government to a more market-oriented system. At present, although the Chinese government still owns all urban land in China, land use rights with terms of up to 70 years can be granted to, and owned or leased by, private individuals and companies. Currently our leases for our shopping malls have terms of 20 years, which we obtained at lower than market rent with a renewal option for another 20 years at market price.

 

Intellectual Property Rights

 

We do not believe that our business, as a whole, is dependent on, or that its profitability would be materially affected by the revocation, termination, expiration or infringement upon any particular patent. However, we protect our business interests and ensure our unique corporate culture and design. We use a combination of trade secret, copyright, trademark, patent and other rights to protect our intellectual property and our brand. We have completed the registration of two patents with the China State Intellectual Property Office for our logos. We have registered our patents under Beijing Tony Fun. Patents in China are principally protected under the Patent Law of China. The duration of a patent right is 10 years for design patent from the date of application.

 

We have completed the registration of 36 trademarks, with the Trademark Office of the State Administration for Industry and Commerce of the PRC. We have registered all of our trademarks under Beijing Tony Fun. Our trademarks will expire at various dates between October 2022 and December 2029. Generally, these trademarks are for booth leasing, show window decoration, corporate management consulting, and advertisement services.

 

We have completed registration with the National Copyright Administration of the PRC for 1 copyrights, which is for artwork to advertise our business.

 

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Properties

 

We currently have seven facilities. Our facilities are used for sales and marketing, research and development and administrative functions. All of the facilities are leased. We believe our facilities are adequate for our current needs and we do not believe we will encounter any difficulty in extending the terms of the leases by which we occupy our respective premises. A summary description of our facilities locations follows:

 

Office   Address   Rental Term   Space
             
Tai’an Tony Fun office   7/F Office Building, Dongqili Community, Caiyuan Street, Taishan District, Tai’an City, Shandong Province   September 2014 - December 2034   7,534.73 sq. ft.
             
Jinqiao United Business office   No. 67 Caiyuan Avenue, Taishan District, Tai’an City, Shandong Province   January 2021 – December 2021   645.84 sq. ft.
             
Tai’an Tony Fun office   6/F Office Building, Dongqili Community, Caiyuan Street, Taishan District, Tai’an City, Shandong Province   October 2015 - December 2034   2,828.43 sq. ft.
             
Tai’an Tony Fun Shopping Mall   Commercial Building, Baosheng Plaza, Dongqili Community, Caiyuan Street, Taishan District, Tai’an City, Shandong Province   August 2015 - July 2036   257,274.86 sq. ft.
             
Tai’an Tony Fun Shopping Mall   Commercial Building, Baosheng Plaza, Xiqili Community, Caiyuan Street, Taishan District, Tai’an City, Shandong Province   August 2015 - July 2036   269,108.26 sq. ft.
             
Jinan Tony Fun Office   Room 505, 5th Floor, North Side of Daode Shopping Mall Building 1, Huaiyin District, Jinan City, Shandong Province   April 2020 - April 2021   53.82 sq. ft.
             
Zibo Tony Fun Office  

Room 503, 5th Floor, Xinsheng Fortune Plaza, 96 Jinjing Avenue, Zhangdian District, Zibo City, Shandong Province

 

November 2020 – November 2021

 

213.16 sq. ft.

  

Legal Proceedings

 

Shandong Changtai Construction Group Co., Ltd. Lawsuit

 

On December 7, 2018, the Company filed a complaint in the District Court for the District of Tai’an in China (the “Tai’an District Court”) against Shandong Changtai Construction Group Co., Ltd. (“Changtai”), alleging a claim for breach in contract. The complaint seeks damages in the amount of RMB 4,572,500 (approximately $665,000) for a return of payments previously made, compensation of RMB 4,360,000 (approximately $634,000), punitive damage and such other relief as may be appropriate under the circumstances. On January 27, 2019, Changtai asserted a counter-claim for damages of RMB 8,273,600 (approximately $1,227,000), plus interest, for the Company’s failure to pay for certain services provided in the context of the contract in dispute. The case was closed on September 11, 2019 when People’s Court of Taishan District, Tai’an City, Shandong Province issued the Civil Mediation Agreement. According to the agreement, the Company will pay to Changtai a total amount of RMB 3,223,634 (approximately $463,000) before March 30, 2022 by seven installments. The first installment of RMB 1,700,000 (approximately $244,000) will be paid before September 23, 2019 and remaining balance will be paid in amount of RMB 253,939 (approximately $36,000) for each quarter from December 30, 2020 to March 30, 2022. If the Company fails to pay any of the above payment on time, Changtai shall be entitled to apply for enforcement of all the remaining outstanding payment, as well as double interest for the outstanding payment for the period of deferred performance calculated from February 15, 2019. On September 11, 2019, the Company entered into a debt settlement agreement with Changtai and Zhiqiang Han, pursuant to which Changtai agreed to settle the first installment of RMB 1,700,000 (approximately $244,000) due from the Company with four vehicles under the name of Zhiqiang Han. As of the date of the report, remaining outstanding balance due to Changtai is RMB 1,523,634 (approximately $219,000). The claim pertained to liability arose before December 31, 2019 and the Company has included such claim in accounts payable on the consolidated balance sheet as of December 31, 2019.

 

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Shandong Jianrui Construction Co., Ltd. Lawsuit

 

On January 28, 2019, Shandong Jianrui Construction Co., Ltd. (“Jianrui”) filed a complaint in the Tai’an District Court against the Company, alleging a claim for breach in contract. The complaint seeks damages of RMB 1,350,000 (approximately $200,000) for the Company’s failure to pay for certain services provided in the context of the contract in dispute. On April 9, 2019, the Company filed a counter-claim against Jianrui to seek damages of RMB 1,575,500 (approximately $235,000) for delivery of substandard services. The case was closed on September 11, 2019 when People’s Court of Taishan District, Tai’an City, Shandong Province issued the Civil Mediation Agreement. According to the agreement, the Company will pay to Jianrui a total amount of RMB 1,350,000 (approximately $194,000) before September 30, 2020 by five installments. The first installment of RMB 500,000 (approximately $72,000) will be paid before September 21, 2019 and remaining balance of RMB 850,000 (approximately $122,000) will be paid in amount of RMB 212,500 (approximately $31,000) for each quarter from December 31, 2019 to September 30, 2020. If the Company fails to pay any of the above payment on time, Jianrui shall be entitled to apply for enforcement of all the remaining outstanding payment, as well as double interest for the outstanding payment for the period of deferred performance calculated from March 6, 2019. As of the date of the report, the Company has paid RMB 1,112,500 (approximately $160,000) to Jianrui, among which RMB 812,500 (approximately $117,000) was paid by Zhiqiang Han on behalf of the Company, and remaining outstanding balance due to Jianrui is RMB 237,500 (approximately $34,000). The claim pertained to liability arose before December 31, 2019 and the Company has included such claim in accounts payable on the consolidated balance sheet as of December 31, 2019.

 

Jialin Construction Group Co., Ltd. Lawsuit

 

On March 21, 2019, Jialin Construction Group Co., Ltd. (“Jialin”) filed a complaint in the District Court for the District of Zhangdian in China (the “Zhangdian District Court”) against the Company. The complaint asserted a dispute between the price and performance of a construction contract, and seeks compensation of RMB 1,704,340 (approximately $245,000) together with interest, punitive damage and such other relief as may be appropriate under the circumstances. On September 26, 2019, People’s Court of Zhangdian District, Zibo City, Shandong Province made the judgment that the Company shall not assume any responsibility in this case and the Company shall be relieved from the payment claims.

  

Shenzhen Meizhi Decoration Design Engineering Co., Ltd. Lawsuit

 

On January 20, 2020, Shenzhen Meizhi Decoration Design Engineering Co., Ltd. (“Meizhi”) applied for enforcement of property preservation procedure towards the Company at Taishan District Court and on January 22, 2020, the Taishan District Court froze the Company’s bank deposits in the amount of RMB 430,875 (approximately $62,000) pursuant to Meizhi’s application. On March 5, 2020, Meizhi filed a complaint in Taishan District Court against the Company, alleging a claim for breach in three engineering agreements. The complaint seeks damages of RMB 5,719,409 (approximately $821,000). The case was closed on August 10, 2020 when Taishan Court issued the Civil Mediation Agreement. According to the agreement, the Company will pay to Meizhi a total amount of RMB 3,080,000 (approximately $442,000) before August 30, 2021 by six installments. The first five installments of RMB 500,000 (approximately $72,000) will be paid before August 30, 2020, December 30, 2020, March 30, 2021, May 30, 2021 and July 30, 2021, respectively. The last installment of RMB 580,000 (approximately $83,000) will be paid before August 30, 2021. If the Company fails to pay any of the above payments on time, the total outstanding payment shall be RMB 3,280,000 (approximately $471,000), and Meizhi shall be entitled to apply for the enforcement of the remaining outstanding payment, as well as its interest at 24% annual interest rate. As of the date of the report, the Company has paid the first installment of RMB 500,000 (approximately $72,000) to Meizhi, and remaining outstanding balance due to Meizhi is RMB 2,580,000 (approximately $370,000). Additionally, on September 29, 2020, the Taishan District Court decided that the judicial freeze on the Company’s bank deposits shall be released pursuant to the Comp