(Name, Telephone, E-mail and/or Facsimile number
and Address of Company Contact Person)
Securities registered or to be registered pursuant
to Section 12(g) of the Act.
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each
of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
An aggregate of 3,060,000 Class A ordinary shares,
par value $0.001 per share, and 5,940,000 Class B ordinary shares, par value $0.001 per share, as of December 31, 2022.
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report,
indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large
accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
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 13(a) of the Exchange
Act. ☒
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive
officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If this is an annual report, indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
In this annual report on Form 20-F, unless the
context otherwise requires, references to:
The functional currency of Xinjiang United Family,
our wholly owned indirect subsidiary in the PRC, and the VIEs, is Renminbi (“RMB”), the currency of China, and the functional
currency of Chanson 23rd Street, Chanson Greenwich, Chanson 3rd Ave, and Chanson Broadway, our wholly owned indirect subsidiaries in New
York City, is U.S. dollars. Our consolidated financial statements are presented in U.S. dollars. In this annual report, we refer to assets,
obligations, commitments, and liabilities in our consolidated financial statements in U.S. dollars. These dollar references are based
on exchange rates of RMB to U.S. dollars, determined as of a specific date or for a specific period. Changes in the exchange rate will
affect the amount of our obligations and the value of our assets in terms of U.S. dollars which may result in an increase or decrease
in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).
Part I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
Item 3. KEY INFORMATION
Our Corporate Structure
Corporate Structure
We are a holding company incorporated in the Cayman
Islands and not a Chinese operating company. As a holding company with no material operations of our own, we currently conduct our business
through:
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(i) |
an association between Xinjiang United Family and the VIEs known as the “United Family Group” or “UFG”: 28 of the entities that comprise UFG (each a “UFG Entity” and, collectively, the “UFG Entities”) are owned independently by our Chairman, Mr. Gang Li, and one of the entities is owned independently by Ms. Hui Wang, the Marketing Director of Xinjiang United Family. Mr. Gang Li and Ms. Hui Wang are referred herein individually as a “UFG Operator” and collectively as the “UFG Operators.” For accounting purposes, we control and receive the economic benefits of the UFG Entities through the VIE Agreements, which enable us to consolidate the financial results of the VIEs in our consolidated financial statements under U.S. GAAP, and the structure involves unique risks to investors. For more details on the United Family Group, please see “—The United Family Group.” Our Class A Ordinary Shares are shares of Chanson International, the offshore holding company in the Cayman Islands, instead of shares of Xinjiang United Family or the UFG Entities. The VIE structure provides contractual exposure to foreign investment in China-based companies. Chinese law, however, does not prohibit direct foreign investment in the VIEs. As a result of our use of the VIE structure, investors may never directly hold equity interests in the UFG Entities; |
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(ii) |
Xinjiang United Family and its three branch offices; and |
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(iii) |
Chanson 23rd Street, Chanson Greenwich, Chanson 3rd Ave, and Chanson Broadway (currently under renovation for an opening planned in May 2023). |
The following diagram illustrates our corporate
structure as of the date of this annual report:
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_001.jpg)
Notes: All percentages
reflect the voting ownership interests instead of the equity interests held by each of our shareholders given that each holder of Class
B Ordinary Shares will be entitled to 10 votes per one Class B Ordinary Share and each holder of Class A Ordinary Shares will be entitled
to one vote per one Class A Ordinary Share.
(1) |
Represents 2,700,000 Class A Ordinary Shares and 5,670,000 Class B Ordinary Shares held by Gang Li, the 100% owner of Danton Global Limited, as of the date of this annual report. |
(2) |
Represents 270,000 Class B Ordinary Shares held by Jihong Cai, the 100% owner of Haily Global Limited, as of the date of this annual report. |
(3) | Represents an aggregate of
360,000 Class A Ordinary Shares held equally by two corporate shareholders, each one of which holds less than 5% of our voting ownership
interests, as of the date of this annual report. |
The following is a complete list of the stores
of Xinjiang United Family and UFG as of the date of this annual report, together with their recognized commercial name and relationship
to Xinjiang United Family.
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Legal Name of Entity |
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Commercial Name |
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Nature of Entity |
1 |
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Urumqi Midong District George Chanson Bakery |
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Midong |
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Part of UFG – owned 100% by Mr. Gang Li and operated under the VIE Agreements among Mr. Gang Li, this entity, and Xinjiang United Family |
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2 |
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Shayibake District Yining Rd. George Chanson Bakery |
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Dehui Wanda |
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Same as above |
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3 |
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Changji George Chanson Youhao Supermarket Bakery |
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Changji Youhao |
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Same as above |
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4 |
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Changji George Chanson Bakery |
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Changji Huijia |
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Same as above |
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5 |
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Tianshan District Xinhua North Rd. George Chanson Bakery |
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Hongshan |
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Same as above |
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6 |
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Tianshan District Xinmin Rd. George Chanson Bakery |
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Beimen |
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Same as above |
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7 |
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Tianshan District Minzhu Rd. George Chanson Bakery |
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Minzhu |
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Same as above |
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8 |
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Tianshan District Jianquan No.3 Rd. George Chanson Bakery |
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Riyue Xingguang |
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Same as above |
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9 |
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Tianshan District Jiefang North Rd. George Chanson Bakery |
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Wanyancheng |
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Same as above |
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10 |
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Urumqi Economics and Technology Development District George Chanson Bakery on Kashi West Rd. |
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Huarun Wanjia |
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Same as above |
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11 |
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Xinshi District Liyushan South Rd. George Chanson Bakery |
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Medical College |
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Same as above |
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12 |
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Xinshi District Changchun South Rd. George Chanson Bakery |
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Changchun |
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Same as above |
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13 |
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Xinshi District Beijing Middle Rd. United Family Chanson Bakery |
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Huijia Third Floor |
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Same as above |
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14 |
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Xinshi District Suzhou East Rd. Chanson Bakery |
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Baishang |
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Same as above |
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15 |
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Xinshi District Suzhou Rd. Xiaoxigou Chanson Bakery |
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Xiaoxigou |
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Same as above |
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16 |
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Xinshi District South No.3 Rd. Chanson Bakery |
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Railway Bureau |
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Same as above |
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17 |
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Urumqi Economics and Technology Development District George Chanson Bakery on Xuanwuhu Rd. |
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Economics Development Wanda |
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Same as above |
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18 |
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Shayibake District Youhao South Rd. Chanson Bakery |
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Hongshan Lifestyle Store |
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Same as above |
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19 |
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Shuimogou District South Nanhu Rd. George Chanson Bakery |
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Nanhu |
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Same as above |
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20 |
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Xinshi District Hebei East Rd. George Chanson Bakery |
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Hebei Road Huarun |
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Same as above |
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21 |
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Urumqi Toutunhe District George Chanson Bakery on Zhongya South Rd. |
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Degang Wanda |
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Same as above |
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22 |
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Shayibake District Karamay West Rd. Chanson Bakery |
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Xinbei Yuanchun |
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Same as above |
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23 |
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Shayibake District Qitai Rd. Hemeijia Chanson Bakery |
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Dehui Wangda Fourth Floor |
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Same as above |
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Legal Name of Entity |
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Commercial Name |
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Nature of Entity |
24 |
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Tianshan District Qingnian Rd. Chanson Bakery |
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Qingnian Road Haojiaxiang |
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Same as above |
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25 |
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Xinshi District Liyushan North Rd. Hemeijia Bakery |
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Vanke Jincheng Huafu |
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Same as above |
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26 |
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Xinshi District Changchun North Rd. Chanson Bakery |
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Gaoxin Wanda |
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Same as above |
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27 |
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Tianshan District Guangming Rd. Chanson Coffee Bakery |
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Shidai Guangchang |
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Same as above |
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28 |
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Shayibake District Youhao North Rd. Chanson Coffee Bakery |
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Meimei No. 2 |
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Same as above |
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29 |
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Shihezi Hemeijia Bakery No.1 |
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Shihezi |
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Part of UFG – owned 100% by Ms. Hui Wang and operated under agreements among Ms. Hui Wang, this entity, and Xinjiang United Family |
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30 |
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Xinjiang United Family Trading Co., Ltd. Tianshan District Chanson Bakery |
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Tianbai |
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A branch office of Xinjiang United Family |
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31 |
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Xinjiang United Family Trading Co., Ltd. Chanson Bakery Urumqi Branch |
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Wenhua |
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A branch office of Xinjiang United Family |
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32 |
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Xinjiang United Family Trading Co., Ltd. Urumqi Meimei Chanson Bakery |
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Meimei |
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A branch office of Xinjiang United Family |
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33 |
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Xinjiang United Family Trading Co., Ltd. Ruitai Chanson Bakery |
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Ruitai |
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A store operated by Xinjiang United Family, not a separate legal entity |
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34 |
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Chanson 23rd Street LLC |
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Chanson 23rd Street |
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A wholly owned indirect subsidiary of Xinjiang United Family |
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35 |
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Chanson 355 Greenwich LLC |
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Chanson Greenwich |
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Same as above |
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36 |
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Chanson 1293 3rd Ave LLC |
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Chanson 3rd Ave |
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Same as above. |
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37 |
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Chanson 2040 Broadway LLC |
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Chanson Broadway |
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Same as above. We expect Chanson Broadway to open in May 2023. |
For ease of reference, unless it is necessary
to the understanding of the context to differentiate, throughout this annual report we will refer to all of the above entities collectively
as our “stores” and, to the extent we refer to a specific entity listed in the table above, we refer to such entity by its
commercial name.
The United Family Group
Each UFG Entity was established as an individually-owned
business and, for accounting purposes, Xinjiang United Family controls the UFG Entities through the VIE Agreements, which enables us to
consolidate the financial results of the UFG Entities in our consolidated financial statements. The VIE Agreements are designed so that
the operations of the VIEs are solely for the benefit of Xinjiang United Family and ultimately, the Company, as a result of our direct
ownership in Xinjiang United family. As such, under U.S. GAAP, the Company is deemed to have a controlling financial interest in, and
be the primary beneficiary of, the VIEs for accounting purposes only and must consolidate the VIEs because it met the conditions under
U.S. GAAP to consolidate the VIEs.
UFG’s revenue accounted for 39%, 56%, and 76% of our total revenue
for the years ended December 31, 2022, 2021, and 2020, respectively. UFG consists of 29 VIEs. Our Chairman, Mr. Gang Li, is the sole owner
of 28 UFG Entities, and Ms. Hui Wang, the Marketing Director of Xinjiang United Family, is the sole owner of one UFG Entity.
Each of the VIE Agreements is described below:
Exclusive Service Agreement
Pursuant to the Exclusive Service Agreement between
Xinjiang United Family and the applicable UFG Operator, who is the sole operator of the UFG Entity, Xinjiang United Family is in charge
of all aspects of the UFG Entity’s operation, manages all matters and funds of UFG Entity, and enjoys all the other responsibilities
and rights enjoyed by the UFG Operator in accordance with the applicable law, on an exclusive basis. For services rendered to the UFG
Entity by Xinjiang United Family under the Exclusive Service Agreement, Xinjiang United Family is entitled to collect a service fee equal
to the net profit after tax of the UFG Entity.
The term of the Exclusive Service Agreement is
10 years, unless terminated earlier by Xinjiang United Family with a 30-day prior notice. The UFG Entity does not have the right to terminate
that agreement unilaterally. The agreement would renew automatically by 10 years after expiration, with no limit on times of renewal.
Xinjiang United Family has absolute authority
over the management of the UFG Entity, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring,
firing, and other operational functions. The Exclusive Service Agreement does not prohibit related party transactions. The audit committee
of Chanson International is required to review and approve in advance any related party transactions, including transactions involving
the UFG Entity.
Pledge Agreement
Under the Pledge Agreement between Xinjiang United
Family and the UFG Operator, the UFG Operator pledged all of his or her assets for the business of the UFG Entity to Xinjiang United Family
to guarantee the performance of the UFG Operator’s obligations under the Exclusive Service Agreement, Call Option Agreement, and
Operating Rights Proxy Agreement (collectively, the “Transaction Agreements”). Under the terms of the Pledge Agreement, in
the event that the UFG Entity or the UFG Operator breaches their respective contractual obligations under the Transaction Agreements,
Xinjiang United Family, as pledgee, will be entitled to certain rights, including, but not limited to, the right to dispose of the pledged
assets in accordance with applicable PRC laws. The UFG Operator further agreed not to dispose of the pledged assets or take any actions
that would prejudice Xinjiang United Family’s interest.
The Pledge Agreement is effective until the latest
date of the following: (1) the secured debt in the scope of pledge is cleared off; (2) Xinjiang United Family, as pledgee, exercise its
pledge rights pursuant to provisions and conditions of the Pledge Agreement; and (3) the UFG Operator, as pledger, transfer all the pledged
assets to Xinjiang United Family according to the Call Option Agreement, or other entity or individual designated by it.
The purposes of the Pledge Agreement are to (1)
guarantee the performance of the UFG Operator’s obligations under the Exclusive Service Agreement, (2) make sure the UFG Operator
does not transfer or assign the pledged assets, or create or allow any encumbrance that would prejudice Xinjiang United Family’s
interests without Xinjiang United Family’s prior written consent, and (3) provide Xinjiang United Family control over the UFG Entity
for accounting purposes. In the event the UFG Entity or UFG Operator breaches its contractual obligations under the Transaction Agreements,
Xinjiang United Family will be entitled to foreclose on the UFG Operator’s assets in the UFG Entity and may (1) exercise its option
to purchase or designate third parties to purchase part or all of the UFG Operator’s assets in the UFG Entity and in this situation,
Xinjiang United Family may terminate the Pledge Agreement and the other VIE agreements after acquisition of all assets in the UFG Entity
or form a new VIE structure with any third party designated by Xinjiang United Family, or (2) dispose of the pledged assets and be paid
in priority out of proceeds from the disposal in which case the existing VIE structure will be terminated.
Call Option Agreement
Under the Call Option Agreement, the UFG Operator
irrevocably granted Xinjiang United Family an exclusive option to require the UFG Operator to transfer, to the extent permitted under
PRC law, once or at multiple times, at any time, part or all of his or her assets in the UFG Entity to Xinjiang United Family (or its
designee). The option price is the minimum amount to the extent permitted under PRC law.
Under the Call Option Agreement, Xinjiang United
Family may at any time under any circumstances, require the UFG Operator to transfer, at its discretion, to the extent permitted under
PRC law, all or part of the UFG Operator’s assets in the UFG Entity to Xinjiang United Family (or its designee).
The Call Option Agreement remains effective until
all the equity or assets of the UFG Entity is legally transferred under the name of Xinjiang United Family and/or other entity or individual
designated by it.
Operating Rights Proxy Agreement and Powers of Attorney
Under the Operating Rights Proxy Agreement and
the Powers of Attorney, the UFG Operator entrusted Xinjiang United Family or the personnel designated by it then to act as his or her
proxy and exercise his or her rights as the sole operator of the UFG Entity, including but not limited to: (a) exercising operating rights;
(b) getting access to financial information of the UFG Entity; (c) making resolutions about the disposition of the assets of the UFG Entity;
(d) approving annual budgets of the UFG Entity or announcing dividends; (e) making resolutions about dissolution or liquidation of the
UFG Entity, forming the liquidating committee, and exercising the authorities in the course of liquidation; (f) filing any required document
to the company registration agency or any other relevant agency; and (g) signing any resolution.
The Operating Rights Proxy Agreement and the Powers
of Attorney shall be retrospectively effective from their date of execution and maintain the effectiveness so long as the UFG Operator
holds the operating rights of the UFG Entity.
Spousal Consents
The spouses of the UFG Operators, agreed, via
spousal consents, to the execution of the “Transaction Documents” including: (a) Exclusive Service Agreement entered into
with Xinjiang United Family; (b) Call Option Agreement entered into with Xinjiang United Family; (c) Operating Rights Proxy Agreement
entered into with Xinjiang United Family; (d) Pledge Agreement entered into with Xinjiang United Family; and (e) Powers of Attorney executed
by the UFG Operators, and the disposal of the operating rights or the assets for the business of the UFG Entity held by the UFG Operators
and registered in their names.
The spouses of the UFG Operators further undertake
not to make any assertions in connection with the operating rights and assets of the UFG Entity which are held by the UFG Operators. The
spouses of the UFG Operators confirm that the UFG Operators can perform their obligations under the Transaction Documents and further
amend or terminate the Transaction Documents without their authorization or consent. The spouses of the UFG Operators undertake to execute
all necessary documents and take all necessary actions to ensure appropriate performance of the Transaction Documents.
The spouses of the UFG Operators also undertake
that if they obtain any operating rights and assets of the UFG Entity which are held by the UFG Operators for any reasons, they shall
be bound by the Transaction Documents entered into between the UFG Operators and Xinjiang United Family (as amended time to time) and
comply with the obligations thereunder as an operator of the UFG Entity. For this purpose, upon Xinjiang United Family’s request,
they shall sign a series of written documents in substantially the same format and content as the Transaction Documents (as amended from
time to time).
Although each UFG Entity has its own set of agreements
with Xinjiang United Family, the terms and conditions of their agreements with Xinjiang United Family are identical. As a result of the
understandings and agreements, for accounting purposes, we control and receive the economic benefits of the UFG Entities through the VIE
Agreements, which enable us to consolidate the financial results of the VIEs in our consolidated financial statements under U.S. GAAP.
Except as set forth in these agreements, the UFG Operators are not entitled to any other compensation in connection with their ownership
of all the UFG Entities.
Risks Associated with our Corporate Structure and the VIE Agreements
Because we do not directly hold equity interests
in the VIEs, we are subject to risks and uncertainties of the interpretations and applications of PRC laws and regulations, including
but not limited to, regulatory review of overseas listing of PRC companies through special purpose vehicles and the validity and enforcement
of the VIE Agreements. We are also subject to the risks and uncertainties about any future actions of the PRC government in this regard
that could disallow the VIE structure, which would likely result in a material change in our operations, and the value of our Class A
Ordinary Shares may depreciate significantly or become worthless. The VIE Agreements have not been tested in a court of law in China as
of the date of this annual report. See “—D. Risk Factors—Risks Relating to Our Corporate Structure,” “—D.
Risk Factors—Risks Relating to Doing Business in the PRC,” and “—D. Risk Factors—Risks Relating to Our Class
A Ordinary Shares and the Trading Market.”
The VIE Agreements may not be as effective as
direct ownership in providing operational control. For instance, the UFG Entities and the UFG Operators could breach their contractual
arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that
are detrimental to our interests. The UFG Operators may not act in the best interests of our Company or may not perform their obligations
under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the
VIE Agreements. In the event that the UFG Entities or the UFG Operators fail to perform their respective obligations under the VIE Agreements,
we may have to incur substantial costs and expend additional resources to enforce such arrangements. In addition, even if legal actions
are taken to enforce such arrangements, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments
of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the U.S. or any state.
See “—D. Risk Factors—Risks Relating to Our Corporate Structure—The VIE Agreements with the UFG Entities and the
UFG Operators may not be effective in providing control over the UFG Entities” and “—D. Risk Factors—Risks Relating
to Our Corporate Structure—The VIE Agreements with the UFG Entities are governed by the laws of the PRC and we may have difficulty
in enforcing any rights we may have under the VIE Agreements.”
Risks Associated with being based in the
PRC
We are subject to certain legal and operational
risks associated with having the majority of our operations in China, which could cause the value of our securities to significantly decline
or become worthless. PRC laws and regulations governing our current business operations are sometimes vague and uncertain, and as a result
these risks may result in material changes in the operations of the VIEs, significant depreciation or a complete loss of the value of
our Class A Ordinary Shares, or a complete hindrance of our ability to offer, or continue to offer, our securities to investors. Recently,
the PRC government adopted a series of regulatory actions and issued statements to regulate business operations in China with little advance
notice, including cracking down on illegal activities in the securities market, adopting new measures to extend the scope of cybersecurity
reviews, and expanding the efforts in anti-monopoly enforcement. As of the date of this annual report, we, our PRC subsidiary, and the
VIEs have not been involved in any investigations on cybersecurity review initiated by any PRC regulatory authority, nor has any of them
received any inquiry, notice, or sanction. As confirmed by our PRC counsel, Dentons Law Offices, LLP (Guangzhou) (“Dentons”),
we are not subject to cybersecurity review with the Cyberspace Administration of China (the “CAC”) under the Cybersecurity
Review Measures that became effective on February 15, 2022, since we currently do not have over one million users’ personal information
and do not anticipate that we will be collecting over one million users’ personal information in the foreseeable future, which we
understand might otherwise subject us to the Cybersecurity Review Measures; we are also not subject to network data security review by
the CAC if the Draft Regulations on the Network Data Security Administration (Draft for Comments) (the “Security Administration
Draft”) is enacted as proposed, since we currently do not have over one million users’ personal information and do not collect
data that affects or may affect national security and we do not anticipate that we will be collecting over one million users’ personal
information or data that affects or may affect national security in the foreseeable future, which we understand might otherwise subject
us to the Security Administration Draft. See “—D. Risk Factors—Risks Relating to Doing Business in the PRC—Recent
greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact
our business and our offerings.”
Since 2021, the Chinese government has strengthened
its anti-monopoly supervision, mainly in three aspects: (i) establishing the National Anti-Monopoly Bureau; (ii) revising and promulgating
anti-monopoly laws and regulations, including: the Anti-Monopoly Law of the PRC (amended on June 24, 2022 and effective on August 1, 2022),
the anti-monopoly guidelines for various industries, and the Detailed Rules for the Implementation of the Fair Competition Review System;
and (iii) expanding the anti-monopoly law enforcement targeting Internet companies and large enterprises. As of the date of this annual
report, the Chinese government’s recent statements and regulatory actions related to anti-monopoly concerns have not impacted our
or the PRC operating entities’ ability to conduct business or our ability to accept foreign investments or issue our securities
to foreign investors because neither we and our subsidiaries, nor our PRC subsidiary and the VIEs engage in monopolistic behaviors that
are subject to these statements or regulatory actions.
On February 17, 2023, the China Securities Regulatory Commission (the
“CSRC”) promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the
“Trial Measures”) and five supporting guidelines, which came into effect on March 31, 2023. As our registration statement
on Form F-1 was declared effective on March 29, 2023 and we have completed our initial public offering and listing prior to September
30, 2023, we are currently not required to complete the filing procedures pursuant to the Trial Measures. However, in the event that we
undertake new offerings or fundraising activities in the future, we may be required to complete the filing procedures. See “—D.
Risk Factors—Risks Relating to Doing Business in the PRC—The Opinions, the Trial Measures, and the revised Provisions recently
issued by the PRC authorities may subject us to additional compliance requirements in the future.” Other than the foregoing, as
of the date of this annual report, according to Dentons, no relevant PRC laws or regulations in effect require that we obtain permission
from any PRC authorities to issue securities to foreign investors, and we have not received any inquiry, notice, warning, sanction, or
any regulatory objection to our offerings from the CSRC, the CAC, or any other PRC authorities that have jurisdiction over our operations.
Since these statements and regulatory actions are newly published, however, official guidance and related implementation rules have not
been issued. It is highly uncertain what the potential impact such modified or new laws and regulations will have on the daily business
operations of our subsidiaries and the VIEs, our ability to accept foreign investments, and our listing on a U.S. exchange. The Standing
Committee of the National People’s Congress (the “SCNPC”) or PRC regulatory authorities may in the future promulgate
additional laws, regulations, or implementing rules that require us, our subsidiaries, or the VIEs to obtain regulatory approval from
Chinese authorities before listing in the U.S. If we do not receive or maintain such approval, or inadvertently conclude that such approval
is not required, or applicable laws, regulations, or interpretations change such that we are required to obtain approval in the future,
we may be subject to an investigation by competent regulators, fines or penalties, or an order prohibiting us from conducting an offering,
and these risks could result in a material adverse change in our operations and the value of our Class A Ordinary Shares, significantly
limit or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly
decline in value or become worthless.
In addition, our Class A Ordinary Shares may be
prohibited from trading on a national exchange or over-the-counter under the Holding Foreign Companies Accountable Act (the “HFCA
Act”) if the Public Company Accounting Oversight Board (United States) (the “PCAOB”) is unable to inspect our auditors
for three consecutive years beginning in 2021. Our auditor prior to September 29, 2022, Friedman LLP (“Friedman”), had been
inspected by the PCAOB on a regular basis in the audit period, and our new auditor, Marcum Asia CPAs LLP (“Marcum Asia”),
has been inspected by the PCAOB on a regular basis, with the last inspection in 2020. Neither Friedman nor Marcum Asia is subject to the
determinations announced by the PCAOB on December 16, 2021. If trading in our Class A Ordinary Shares is prohibited under the HFCA Act
in the future because the PCAOB determines that it cannot inspect or fully investigate our auditor at such future time, Nasdaq may determine
to delist our Class A Ordinary Shares and trading in our Class A Ordinary Shares could be prohibited. On June 22, 2021, the U.S. Senate
passed the Accelerating Holding Foreign Companies Accountable Act, and on December 29, 2022, legislation entitled “Consolidated
Appropriations Act, 2023” (the “Consolidated Appropriations Act”) was signed into law by President Biden, which contained,
among other things, an identical provision to the Accelerating Holding Foreign Companies Accountable Act and amended the HFCA Act by requiring
the U.S. Securities and Exchange Commission (the “SEC”) to prohibit an issuer’s securities from trading on any U.S.
stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three, thus reducing the time
period for triggering the prohibition on trading. On August 26, 2022, the CSRC, the Ministry of Finance of the PRC (the “MOF”),
and the PCAOB signed a Statement of Protocol (the “Protocol”) governing inspections and investigations of audit firms based
in mainland China and Hong Kong, taking the first step toward opening access for the PCAOB to inspect and investigate registered public
accounting firms headquartered in mainland China and Hong Kong. Pursuant to the fact sheet with respect to the Protocol disclosed by the
SEC, the PCAOB shall have independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability
to transfer information to the SEC. On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access
to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous
determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the
future, the PCAOB Board will consider the need to issue a new determination. See “—D. Risk Factors—Risks Relating to
Doing Business in the PRC—Recent joint statement by the SEC and the PCAOB, rule changes by Nasdaq, and the HFCA Act all call for
additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors,
especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offerings.”
Permission Required from PRC Authorities
The General Office of the Central Committee of the Communist Party
of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities
Activities According to Law,” or the “Opinions,” which were made available to the public on July 6, 2021. The Opinions
emphasized the need to strengthen the administration over illegal securities activities and the need to strengthen the supervision over
overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems, will be
taken to deal with the risks and incidents of China-concept overseas listed companies, cybersecurity, data privacy protection requirements,
and similar matters. The Opinions and any related implementing rules to be enacted may subject us to compliance requirements in the future.
On February 17, 2023, the CSRC promulgated the
Trial Measures and five supporting guidelines, which came into effect on March 31, 2023. Pursuant to the Trial Measures, domestic companies
that seek to offer or list securities overseas, both directly and indirectly, shall complete filing procedures with the CSRC pursuant
to the requirements of the Trial Measures within three working days following its submission of initial public offerings or listing application.
If a domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its
filing documents, such domestic company may be subject to administrative penalties, such as an order to rectify, warnings, fines, and
its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject
to administrative penalties, such as warnings and fines. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations
on Mergers & Acquisitions and Overseas Listings.”
According to the Notice on the Administrative
Arrangements for the Filing of the Overseas Securities Offering and Listing by Domestic Companies from the CSRC, or “the CSRC Notice,”
the domestic companies that have already been listed overseas before the effective date of the Trial Measures (namely, March 31, 2023)
shall be deemed as existing issuers (the “Existing Issuers”). Existing Issuers are not required to complete the filing procedures
immediately, and they shall be required to file with the CSRC for any subsequent offerings. Further, according to the CSRC Notice, domestic
companies that have obtained approval from overseas regulatory authorities or securities exchanges (for example, the effectiveness of
a registration statement for offering and listing in the U.S. has been obtained) for their indirect overseas offering and listing prior
to March 31, 2023 but have not yet completed their indirect overseas issuance and listing, are granted a six-month transition period from
March 31, 2023 to September 30, 2023. Those that complete their indirect overseas offering and listing within such six-month period are
deemed as Existing Issuers and are not required to file with the CSRC for their indirect overseas offerings and listings. Within such
six-month transition period, however, if such domestic companies fail to complete their indirect overseas issuance and listing, they shall
complete the filing procedures with the CSRC.
Based on the foregoing, as our registration statement on Form F-1 was
declared effective on March 29, 2023 and we have completed our initial public offering and listing prior to September 30, 2023, we are
currently not required to complete the filing procedures pursuant to the Trial Measures. However, in the event that we undertake new offerings
or fundraising activities in the future, we may be required to complete the filing procedures.
On February 24, 2023, the CSRC, together with
the MOF, National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions on
Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing, which were issued by the CSRC
and National Administration of State Secrets Protection and National Archives Administration of China in 2009, or the “Provisions.”
The revised Provisions were issued under the title the “Provisions on Strengthening Confidentiality and Archives Administration
of Overseas Securities Offering and Listing by Domestic Companies,” and came into effect on March 31, 2023 together with the Trial
Measures. One of the major revisions to the revised Provisions is expanding their application to cover indirect overseas offering and
listing, as is consistent with the Trial Measures. The revised Provisions require that, among other things, (a) a domestic company that
plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities,
including securities companies, securities service providers, and overseas regulators, any documents and materials that contain state
secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with
the secrecy administrative department at the same level; and (b) a domestic company that plans to, either directly or indirectly through
its overseas listed entity, publicly disclose or provide to relevant individuals and entities, including securities companies, securities
service providers, and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security
or public interest, shall strictly fulfill relevant procedures stipulated by applicable national regulations. Any failure or perceived
failure by our Company, our subsidiaries, or the VIEs to comply with the above confidentiality and archives administration requirements
under the revised Provisions and other PRC laws and regulations may result in the relevant entities being held legally liable by competent
authorities, and referred to the judicial organ to be investigated for criminal liability if suspected of committing a crime.
As there are still uncertainties regarding the
interpretation and implementation of such regulatory guidance, we cannot assure you that we will be able to comply with new regulatory
requirements relating to our future overseas capital-raising activities and we may become subject to more stringent requirements with
respect to matters such as cross-border investigation, data privacy, and enforcement of legal claims. See “—D. Risk Factors—Risks
Relating to Doing Business in the PRC—The Opinions, the Trial Measures, and the revised Provisions recently issued by the PRC authorities
may subject us to additional compliance requirements in the future.”
Other than the foregoing, as of the date of this annual report, we
are not aware of any PRC laws or regulations in effect requiring that we obtain permission or approval from any PRC authorities for our
subsidiaries or the VIEs’ operations and to issue securities to foreign investors, and we have not received any inquiry, notice,
warning, sanction, or any regulatory objection to our offerings from the CSRC, the CAC, or any other PRC authorities that have jurisdiction
over our operations.
Asset Transfers Between Our Company, Our
Subsidiaries, and the VIEs
As of the date of this annual report, our Company,
our subsidiaries, and the VIEs have not distributed any earnings or settled any amounts owed under the VIE Agreements. Our Company, our
subsidiaries, and the VIEs do not have any plan to distribute earnings or settle amounts owed under the VIE Agreements in the foreseeable
future.
Our management is directly supervising cash management.
Our finance department is responsible for establishing the cash management policies and procedures among our departments and the operating
entities. Each department or operating entity initiates a cash request by putting forward a cash demand plan, which explains the specific
amount and timing of cash requested, and submitting it to designated management members of our Company, based on the amount and the use
of cash requested. The designated management member examines and approves the allocation of cash based on the sources of cash and the
priorities of the needs, and submit it to the cashier specialists of our finance department for a second review. Other than the above,
we currently do not have other cash management policies or procedures that dictate how funds are transferred nor a written policy that
addresses how we will handle any limitations on cash transfers due to PRC law.
During the years ended December 31, 2022, 2021,
and 2020, cash transfers and transfers of other assets between our Company, our subsidiaries, and the VIEs were as follows:
For the Year Ended December 31, 2022 |
No. | |
Transfer From | |
Transfer To | |
Approximate Value ($) | | |
Note |
1 | |
VIEs | |
Xinjiang United Family | |
| 414,920 | | |
Cash (as working capital) borrowed by the VIEs from Xinjiang United Family |
2 | |
VIEs | |
Xinjiang United Family | |
| 1,292,682 | | |
Raw materials purchased by the stores under the VIEs on behalf of Xinjiang United Family |
3 | |
Xinjiang United Family | |
VIEs | |
| 1,419,306 | | |
Raw Materials from the central factory under Xinjiang United Family to the stores under the VIEs |
4 | |
Xinjiang United Family | |
VIEs | |
| 2,163,465 | | |
Products from the central factory under Xinjiang United Family to the stores under the VIEs |
For the Year Ended December 31, 2021 |
No. | |
Transfer From | |
Transfer To | |
Approximate Value ($) | | |
Note |
1 | |
VIEs | |
Xinjiang United Family | |
| 159,715 | | |
Cash (as working capital) borrowed by the VIEs from Xinjiang United Family |
2 | |
VIEs | |
Xinjiang United Family | |
| 1,953,748 | | |
Raw materials purchased by the stores under the VIEs on behalf of Xinjiang United Family |
3 | |
Xinjiang United Family | |
VIEs | |
| 1,766,804 | | |
Raw Materials from the central factory under Xinjiang United Family to the stores under the VIEs |
4 | |
Xinjiang United Family | |
VIEs | |
| 2,855,345 | | |
Products from the central factory under Xinjiang United Family to the stores under the VIEs |
For the Year Ended December 31, 2020 |
No. | |
Transfer From | |
Transfer To | |
Approximate Value ($) | | |
Note |
1 | |
VIEs | |
Xinjiang United Family | |
| 423,344 | | |
Cash (as working capital) borrowed by the VIEs from Xinjiang United Family |
2 | |
VIEs | |
Xinjiang United Family | |
| 1,371,090 | | |
Raw materials purchased by the stores under the VIEs on behalf of Xinjiang United Family |
3 | |
Xinjiang United Family | |
VIEs | |
| 1,127,716 | | |
Raw Materials from the central factory under Xinjiang United Family to the stores under the VIEs |
4 | |
Xinjiang United Family | |
VIEs | |
| 1,840,367 | | |
Products from the central factory under Xinjiang United Family to the stores under the VIEs |
Dividends or Distributions Made to our Company
and U.S. Investors and Tax Consequences
As of the date of this annual report, none of
our subsidiaries or VIEs have made any dividends or distributions to our Company and our Company has not made any dividends or distributions
to our shareholders. We intend to keep any future earnings to finance the expansion of our business, and we do not anticipate that any
cash dividends will be paid in the foreseeable future. Subject to the passive foreign investment company (“PFIC”) rules, the
gross amount of distributions we make to investors with respect to our Class A Ordinary Shares (including the amount of any taxes withheld
therefrom) will be taxable as a dividend, to the extent that the distribution is paid out of our current or accumulated earnings and profits,
as determined under U.S. federal income tax principles.
Under Cayman Islands law, a Cayman Islands company may pay a dividend
on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result
in the company being unable to pay its debts due in the ordinary course of business.
If we determine to pay dividends on any of our
Class A Ordinary Shares or Class B Ordinary Shares in the future, as a holding company, we will depend on receipt of funds from our PRC
subsidiary and from the VIEs to our PRC subsidiary in accordance with the VIE Agreements. Pursuant to the PRC Enterprise Income Tax Law
(the “EIT Law”) and its implementation rules, any dividends paid by Xinjiang United Family to Jenyd will be subject to a withholding
tax rate of 10%. However, if Jenyd is determined by the relevant PRC tax authority to have satisfied the relevant conditions and requirements
under the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation
and Tax Evasion on Income (“Double Tax Avoidance Arrangement”) and other applicable laws, the 10% withholding tax on the dividends
Jenyd receives from Xinjiang United Family may be reduced to 5%. See “—D. Risk Factors—Risks Relating to Doing Business
in the PRC—There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary,
and dividends payable by our PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”
Current PRC regulations permit our indirect PRC
subsidiary to pay dividends to Jenyd only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards
and regulations. In addition, our PRC subsidiary 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. Each of such entity in the PRC is 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. Furthermore, if our subsidiaries and affiliates in the PRC incur debt on their own
in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries
are unable to receive all of the revenue from our operations, we may be unable to pay dividends on our Class A Ordinary Shares or Class
B Ordinary Shares.
Under existing PRC 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 State Administration of Foreign Exchange (“SAFE”), by complying
with certain procedural requirements. Specifically, without prior approval of SAFE, cash generated from the operations in PRC may be used
to pay dividends to our Company. As of the date of this annual report, our PRC subsidiary, Xinjiang United Family, has conducted the foreign
exchange registration related to our Company under the existing PRC foreign exchange regulations, which enables our PRC subsidiary to
legally distribute their earnings to our Company.
Our Company’s ability to settle amounts
owed under the VIE Agreements relies upon payments made from the VIEs to Xinjiang United Family in accordance with the VIE Agreements.
For services rendered to the UFG Entity by Xinjiang United Family under the Exclusive Service Agreement, Xinjiang United Family is entitled
to collect a service fee equal to the net profit after tax of the UFG Entity. Pursuant to the Call Option Agreement, Xinjiang United Family
may at any time and under any circumstances, require the UFG Operator to transfer, at its discretion, to the extent permitted under PRC
law, all or part of the UFG Operator’s assets in the UFG Entity to Xinjiang United Family (or its designee). For restrictions and
limitations on our ability to settle amounts owed under the VIE Agreements, please see “—D. Risk Factors—Risks Relating
to Our Corporate Structure—The VIE Agreements with the UFG Entities and the UFG Operators may not be effective in providing control
over the UFG Entities” and “—D. Risk Factors—Risks Relating to Our Corporate Structure—If the PRC government
determines that the VIE Agreements do not comply with PRC regulations, or if these regulations change or are interpreted differently in
the future, we may be unable to assert our contractual rights over the assets of the VIEs, and our Class A Ordinary Shares may decline
in value or become worthless.”
Selected Condensed Consolidating Financial
Schedule of Chanson International and Its Subsidiaries and the VIEs
The following tables present selected condensed
consolidating financial data of Chanson International and its subsidiaries and the VIEs for the years ended December 31, 2022, 2021, and
2020. Chanson International records its investments in its subsidiaries under the equity method. Such investments are presented in the
selected condensed consolidating balance sheets of Chanson International as “Investments in subsidiaries” and the profit of
the subsidiaries is presented as “Income for equity method investment” in the selected condensed consolidating statements
of operations. Pursuant to the VIE Agreements, Chanson International’s wholly owned subsidiary, Xinjiang United Family, has the
exclusive right to provide the VIEs services related to business operations, including operational and management consulting services
and is entitled to consulting fees, which equal to 100% of the consolidated net income of the VIEs. Accordingly, for the years ended December
31, 2022, 2021, and 2020, Xinjiang United Family recognized the income from VIEs representing net income of the VIEs and financial interest
in VIEs since the commencement of the VIE Agreements.
SELECTED CONDENSED CONSOLIDATING STATEMENTS
OF OPERATIONS
| |
For the Year Ended December 31, 2022 | |
| |
Chanson
International (Cayman Islands) | | |
Subsidiaries (British
Virgin
Islands/Hong
Kong) | | |
Xinjiang United
Family (PRC) | | |
Xinjiang United
Family’s
Subsidiaries (USA) | | |
VIEs (PRC) | | |
Eliminations | | |
Consolidated
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | - | | |
$ | 4,292,218 | | |
$ | 3,780,867 | | |
$ | 5,198,990 | | |
$ | - | | |
$ | 13,272,075 | |
Cost of revenue | |
$ | - | | |
$ | - | | |
$ | 2,598,039 | | |
$ | 2,088,788 | | |
$ | 2,482,577 | | |
$ | - | | |
$ | 7,169,404 | |
Income from VIEs | |
$ | - | | |
$ | - | | |
$ | 829,557 | | |
$ | - | | |
$ | - | | |
$ | (829,557 | ) | |
$ | - | |
Loss for equity method investment | |
$ | (1,288,205 | ) | |
$ | (1,288,205 | ) | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 2,576,410 | | |
$ | - | |
Net income (loss) | |
$ | (1,288,205 | ) | |
$ | (1,288,205 | ) | |
$ | 924,321 | | |
$ | (2,212,526 | ) | |
$ | 829,557 | | |
$ | 1,746,853 | | |
$ | (1,288,205 | ) |
Comprehensive income (loss) | |
$ | (1,288,205 | ) | |
$ | (841,074 | ) | |
$ | 1,439,330 | | |
$ | (2,280,404 | ) | |
$ | 12,721 | | |
$ | 1,299,722 | | |
$ | (1,657,910 | ) |
| |
For the Year Ended December 31, 2021 | |
| |
Chanson
International
(Cayman Islands) | | |
Subsidiaries (British
Virgin
Islands/Hong
Kong) | | |
Xinjiang United
Family (PRC) | | |
Xinjiang United
Family’s
Subsidiaries (USA) | | |
VIEs (PRC) | | |
Eliminations | | |
Consolidated
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | - | | |
$ | 4,544,478 | | |
$ | 1,894,207 | | |
$ | 8,251,610 | | |
$ | - | | |
$ | 14,690,295 | |
Cost of revenue | |
$ | - | | |
$ | - | | |
$ | 2,516,966 | | |
$ | 1,177,410 | | |
$ | 4,065,496 | | |
$ | - | | |
$ | 7,759,872 | |
Income from VIEs | |
$ | - | | |
$ | - | | |
$ | 1,875,684 | | |
$ | - | | |
$ | - | | |
$ | (1,875,684 | ) | |
$ | - | |
Income for equity method investment | |
$ | 506,769 | | |
$ | 506,769 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | (1,013,538 | ) | |
$ | - | |
Net income (loss) | |
$ | 506,769 | | |
$ | 506,769 | | |
$ | 2,027,809 | | |
$ | (1,521,040 | ) | |
$ | 1,875,684 | | |
$ | (2,889,222 | ) | |
$ | 506,769 | |
Comprehensive income (loss) | |
$ | 506,769 | | |
$ | 328,920 | | |
$ | 1,849,960 | | |
$ | (1,521,040 | ) | |
$ | 2,142,485 | | |
$ | (2,711,373 | ) | |
$ | 595,721 | |
| |
For the Year Ended December 31, 2020 | |
| |
Chanson
International
(Cayman Islands) | | |
Subsidiaries (British
Virgin
Islands/Hong
Kong) | | |
Xinjiang United
Family (PRC) | | |
Xinjiang United
Family’s
Subsidiaries (USA) | | |
VIEs (PRC) | | |
Eliminations | | |
Consolidated
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | - | | |
$ | 1,141,748 | | |
$ | 1,339,770 | | |
$ | 7,831,994 | | |
$ | - | | |
$ | 10,313,512 | |
Cost of revenue | |
$ | - | | |
$ | - | | |
$ | 559,844 | | |
$ | 753,890 | | |
$ | 3,850,444 | | |
$ | - | | |
$ | 5,164,178 | |
Income from VIEs | |
$ | - | | |
$ | - | | |
$ | 1,005,508 | | |
$ | - | | |
$ | - | | |
$ | (1,005,508 | ) | |
$ | - | |
Loss for equity method investment | |
$ | (447,151 | ) | |
$ | (447,151 | ) | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 894,302 | | |
$ | - | |
Net income (loss) | |
$ | (447,151 | ) | |
$ | (447,151 | ) | |
$ | 1,194,255 | | |
$ | (1,641,406 | ) | |
$ | 1,288,630 | | |
$ | (111,206 | ) | |
$ | (164,029 | ) |
Comprehensive income (loss) | |
$ | (447,151 | ) | |
$ | (470,574 | ) | |
$ | 1,170,832 | | |
$ | (1,641,406 | ) | |
$ | 1,444,260 | | |
$ | (87,783 | ) | |
$ | (31,822 | ) |
SELECTED CONDENSED CONSOLIDATING BALANCE SHEETS
| |
As of December 31, 2022 | |
| |
Chanson International (Cayman Islands) | | |
Subsidiaries (British Virgin Islands/ Hong Kong) | | |
Xinjiang United Family (PRC) | | |
Xinjiang United Family’s Subsidiaries (USA) | | |
VIEs (PRC) | | |
Eliminations | | |
Consolidated Total | |
Cash and cash equivalents | |
$ | - | | |
$ | - | | |
$ | 499,696 | | |
$ | 121,719 | | |
$ | 2,294,055 | | |
$ | - | | |
$ | 2,915,470 | |
Intercompany receivable | |
$ | 9,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 6,371,993 | | |
$ | (6,380,993 | ) | |
$ | - | |
Total current assets | |
$ | 9,000 | | |
$ | - | | |
$ | 1,692,294 | | |
$ | 741,891 | | |
$ | 13,495,628 | | |
$ | (9,472,535 | ) | |
$ | 6,466,278 | |
Investments in subsidiaries | |
$ | (5,634,277 | ) | |
$ | (5,388,418 | ) | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 11,022,695 | | |
$ | - | |
Financial interest in VIEs | |
$ | - | | |
$ | - | | |
$ | 3,710,749 | | |
$ | - | | |
$ | - | | |
$ | (3,710,749 | ) | |
$ | - | |
Total non-current assets | |
$ | (5,634,277 | ) | |
$ | (5,388,418 | ) | |
$ | 5,612,115 | | |
$ | 14,882,563 | | |
$ | 4,078,979 | | |
$ | 7,311,946 | | |
$ | 20,862,908 | |
Total Assets | |
$ | (5,625,277 | ) | |
$ | (5,388,418 | ) | |
$ | 7,304,409 | | |
$ | 15,624,454 | | |
$ | 17,574,607 | | |
$ | (2,160,589 | ) | |
$ | 27,329,186 | |
Intercompany payable | |
$ | - | | |
$ | - | | |
$ | 6,380,993 | | |
$ | - | | |
$ | - | | |
$ | (6,380,993 | ) | |
$ | - | |
Total Liabilities | |
$ | - | | |
$ | - | | |
$ | 8,778,443 | | |
$ | 19,538,838 | | |
$ | 7,307,391 | | |
$ | (9,472,535 | ) | |
$ | 26,152,137 | |
Total Shareholders’ Equity (Deficit) | |
$ | (5,625,277 | ) | |
$ | (5,388,418 | ) | |
$ | (1,474,034 | ) | |
$ | (3,914,384 | ) | |
$ | 10,267,216 | | |
$ | 7,311,946 | | |
$ | 1,177,049 | |
Total Liabilities and Shareholders’ Equity (Deficit) | |
$ | (5,625,277 | ) | |
$ | (5,388,418 | ) | |
$ | 7,304,409 | | |
$ | 15,624,454 | | |
$ | 17,574,607 | | |
$ | (2,160,589 | ) | |
$ | 27,329,186 | |
| |
As of December 31, 2021 | |
| |
Chanson International (Cayman Islands) | | |
Subsidiaries (British Virgin Islands/ Hong Kong) | | |
Xinjiang United Family (PRC) | | |
Xinjiang United Family’s Subsidiaries (USA) | | |
VIEs (PRC) | | |
Eliminations | | |
Consolidated Total | |
Cash and cash equivalents | |
$ | - | | |
$ | - | | |
$ | 203,587 | | |
$ | 167,684 | | |
$ | 3,525,541 | | |
$ | - | | |
$ | 3,896,812 | |
Intercompany receivable | |
$ | 9,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 6,469,788 | | |
$ | (6,478,788 | ) | |
$ | - | |
Total current assets | |
$ | 9,000 | | |
$ | - | | |
$ | 1,168,029 | | |
$ | 887,802 | | |
$ | 13,044,182 | | |
$ | (8,363,157 | ) | |
$ | 6,745,856 | |
Investments in subsidiaries | |
$ | (4,346,072 | ) | |
$ | (4,547,344 | ) | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 8,893,416 | | |
$ | - | |
Financial interest in VIEs | |
$ | - | | |
$ | - | | |
$ | 2,881,192 | | |
$ | - | | |
$ | - | | |
$ | (2,881,192 | ) | |
$ | - | |
Total non-current assets | |
$ | (4,346,072 | ) | |
$ | (4,547,344 | ) | |
$ | 3,457,117 | | |
$ | 11,482,509 | | |
$ | 6,191,804 | | |
$ | 6,012,224 | | |
$ | 18,250,238 | |
Total Assets | |
$ | (4,337,072 | ) | |
$ | (4,547,344 | ) | |
$ | 4,625,146 | | |
$ | 12,370,311 | | |
$ | 19,235,986 | | |
$ | (2,350,933 | ) | |
$ | 24,996,094 | |
Intercompany payable | |
$ | - | | |
$ | - | | |
$ | 6,478,788 | | |
$ | - | | |
$ | - | | |
$ | (6,478,788 | ) | |
$ | - | |
Total Liabilities | |
$ | - | | |
$ | - | | |
$ | 7,538,510 | | |
$ | 14,004,291 | | |
$ | 8,981,491 | | |
$ | (8,363,157 | ) | |
$ | 22,161,135 | |
Total Shareholders’ Equity (Deficit) | |
$ | (4,337,072 | ) | |
$ | (4,547,344 | ) | |
$ | (2,913,364 | ) | |
$ | (1,633,980 | ) | |
$ | 10,254,495 | | |
$ | 6,012,224 | | |
$ | 2,834,959 | |
Total Liabilities and Shareholders’ Equity (Deficit) | |
$ | (4,337,072 | ) | |
$ | (4,547,344 | ) | |
$ | 4,625,146 | | |
$ | 12,370,311 | | |
$ | 19,235,986 | | |
$ | (2,350,933 | ) | |
$ | 24,996,094 | |
SELECTED CONDENSED CONSOLIDATING STATEMENTS
OF CASH FLOWS
| |
For the Year Ended December 31, 2022 | |
| |
Chanson International (Cayman Islands) | | |
Subsidiaries (British Virgin Islands/ Hong Kong) | | |
Xinjiang United Family (PRC) | | |
Xinjiang United Family’s Subsidiaries (USA) | | |
VIEs (PRC) | | |
Eliminations | | |
Consolidated Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Net cash provided by (used in) operating activities | |
$ | - | | |
$ | - | | |
$ | (243,785 | ) | |
$ | (1,349,539 | ) | |
$ | 2,144,672 | | |
$ | - | | |
$ | 551,348 | |
Net cash used in investing activities | |
$ | - | | |
$ | - | | |
$ | (473,486 | ) | |
$ | (188,069 | ) | |
$ | (198,479 | ) | |
$ | - | | |
$ | (860,034 | ) |
Net cash provided by (used in) financing activities | |
$ | - | | |
$ | - | | |
$ | 1,446,025 | | |
$ | 1,491,643 | | |
$ | (2,927,739 | ) | |
$ | - | | |
$ | 9,929 | |
|
|
For the Year Ended December 31, 2021 |
|
|
|
Chanson
International
(Cayman
Islands) |
|
|
Subsidiaries
(British
Virgin
Islands/
Hong Kong) |
|
|
Xinjiang
United
Family
(PRC) |
|
|
Xinjiang
United
Family’s
Subsidiaries
(USA) |
|
|
VIEs
(PRC) |
|
|
Eliminations |
|
|
Consolidated
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(953,910 |
) |
|
$ |
(1,704,654 |
) |
|
$ |
4,436,810 |
|
|
$ |
- |
|
|
$ |
1,778,246 |
|
Net cash used in investing activities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(799,123 |
) |
|
$ |
(942,003 |
) |
|
$ |
(289,795 |
) |
|
$ |
- |
|
|
$ |
(2,030,921 |
) |
Net cash provided by (used in) financing activities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,534,818 |
|
|
$ |
1,965,970 |
|
|
$ |
(3,679,028 |
) |
|
$ |
- |
|
|
$ |
(178,240 |
) |
| |
For the Year Ended December 31, 2020 | |
| |
Chanson International (Cayman Islands) | | |
Subsidiaries (British Virgin Islands/ Hong Kong) | | |
Xinjiang United Family (PRC) | | |
Xinjiang United Family’s Subsidiaries (USA) | | |
VIEs (PRC) | | |
Eliminations | | |
Consolidated Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Net cash provided by (used in) operating activities | |
$ | - | | |
$ | - | | |
$ | 575,362 | | |
$ | (1,586,715 | ) | |
$ | 2,257,030 | | |
$ | - | | |
$ | 1,245,677 | |
Net cash used in investing activities | |
$ | - | | |
$ | - | | |
$ | (33,215 | ) | |
$ | (312,049 | ) | |
$ | (229,069 | ) | |
$ | - | | |
$ | (574,333 | ) |
Net cash provided by (used in) financing activities | |
$ | - | | |
$ | - | | |
$ | (1,990,731 | ) | |
$ | 1,141,352 | | |
$ | - | | |
$ | - | | |
$ | (849,379 | ) |
ROLL-FORWARD OF INVESTMENT IN SUBSIDIARIES AND
VIES
Balance, December 31, 2019 | |
$ | (4,405,690 | ) |
Comprehensive loss for the year | |
| (447,151 | ) |
Balance, December 31, 2020 | |
$ | (4,852,841 | ) |
Comprehensive income for the year | |
| 506,769 | |
Balance, December 31, 2021 | |
$ | (4,346,072 | ) |
Comprehensive loss for the year | |
| (1,288,205 | ) |
Balance, December 31, 2022 | |
$ | (5,634,277 | ) |
A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Relating to Our Corporate Structure
Our corporate structure, in particular the
VIE Agreements, are subject to significant risks, as set forth in the following risk factors.
The VIE Agreements with the UFG Entities
and the UFG Operators may not be effective in providing control over the UFG Entities.
A substantial part of our current revenue and
net income is derived from the UFG Entities. We do not have an ownership interest in any of the UFG Entities. For accounting purposes,
our wholly owned subsidiary directs the activities and receives the economic benefits of the VIEs through the VIE Agreements, which enable
us to consolidate the financial results of the VIEs in our consolidated financial statements under U.S. GAAP. The VIE Agreements, however,
may not be as effective in providing us with the necessary control over each UFG Entity and its operations. Any deficiency in the VIE
Agreements may result in our loss of control over the management and operations of the UFG Entities, which will result in a significant
loss in the value of an investment in our Company. We rely on contractual rights through the VIE Agreements to effect management of the
UFG Entities, which exposes us to the risk of potential breach of contract by the UFG Operators. In addition, since our Chairman, Mr.
Gang Li, and Ms. Hui Wang, the Marketing Director of Xinjiang United Family, currently own 100% of the equity interests in 28 and one
UFG Entities, respectively, it may be difficult for us to change our corporate structure if such UFG Operators refuse to cooperate with
us.
The VIE Agreements with the UFG Entities
are governed by the laws of the PRC and we may have difficulty in enforcing any rights we may have under the VIE Agreements.
As the VIE Agreements are governed by PRC laws
and provide for the resolution of disputes through arbitration in the PRC, they will be interpreted in accordance with PRC law and any
disputes will be resolved in accordance with PRC legal procedures. Disputes arising from the VIE Agreements will be resolved through arbitration
in the PRC, although these disputes do not include claims arising under the U.S. federal securities law and thus do not prevent you from
pursuing claims under the U.S. federal securities law. The legal environment in the PRC is not as developed as in the U.S. As a result,
uncertainties in the PRC legal system could further limit our ability to enforce the VIE Agreements, through arbitration, litigation,
and other legal proceedings remain in the PRC, which could limit our ability to enforce the VIE Agreements, and we may not be deemed to
have a controlling financial interest in, or be the primary beneficiary of, the VIEs for accounting purposes. Furthermore, these contracts
may not be enforceable in the PRC if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations
or are otherwise not enforceable for public policy reasons. In the event we are unable to enforce the VIE Agreements, we may not be able
to exert effective control over the UFG Entities for accounting purposes, and our ability to conduct our business may be materially and
adversely affected.
If the PRC government determines that the
VIE Agreements do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, we may
be unable to assert our contractual rights over the assets of the VIEs, and our Class A Ordinary Shares may decline in value or become
worthless.
Recently, the PRC government adopted a series
of regulatory actions and issued statements to regulate business operations in China, including those related to VIEs. There are currently
no relevant laws or regulations in the PRC that prohibit companies whose entity interests are within the PRC from listing on overseas
stock exchanges. The VIE Agreements have not been tested in a court of law in China as of the date of this annual report. Although we
believe that our corporate structure and the VIE Agreements comply with current applicable PRC laws and regulations, in the event that
PRC government determines that the VIE Agreements do not comply with PRC regulations, or if these regulations change or are interpreted
differently in the future, we may be unable to assert our contractual rights over the assets of the VIEs, and our Class A Ordinary Shares
may decline in value or become worthless.
We may not be able to consolidate the financial
results of some of our affiliated companies or such consolidation could materially adversely affect our operating results and financial
condition.
A substantial part of our business is conducted
through the UFG Entities, which currently are considered for accounting purposes as VIEs, and we are considered the primary beneficiary,
enabling us to consolidate our financial results in our consolidated financial statements. In the event that in the future a company we
hold as a VIE would no longer meet the definition of a VIE, or we are deemed not to be the primary beneficiary, we would not be able to
consolidate line by line that entity’s financial results in our consolidated financial statements for PRC purposes. Also, if in
the future an affiliate company becomes a VIE and we become the primary beneficiary, we would be required to consolidate that entity’s
financial results in our consolidated financial statements for PRC purposes. If such entity’s financial results were negative, this
could have a corresponding negative impact on our operating results for PRC purposes. However, any material variations in the accounting
principles, practices, and methods used in preparing financial statements for PRC purposes from the principles, practices, and methods
generally accepted in the U.S. and in the SEC accounting regulations must be discussed, quantified, and reconciled in financial statements
for the U.S. GAAP and SEC purposes.
The VIE Agreements between Xinjiang United
Family and UFG may result in adverse tax consequences.
PRC laws and regulations emphasize the requirement
of an arm’s length basis for transfer pricing arrangements between related parties. The laws and regulations also require enterprises
with related party transactions to prepare transfer pricing documentation to demonstrate the basis for determining pricing, the computation
methodology, and detailed explanations. Related party arrangements and transactions may be subject to challenge or tax inspection by the
PRC tax authorizes.
Under a tax inspection, if our transfer pricing
arrangements between Xinjiang United Family and UFG are judged as tax avoidance, or related documentation does not meet the requirements,
Xinjiang United Family and UFG may be subject to material adverse tax consequences, such as transfer pricing adjustment. A transfer pricing
adjustment could result in a reduction, for PRC tax purpose, of adjustments recorded by Xinjiang United Family, which could adversely
affect us by (i) increasing UFG’s tax liabilities without reducing our subsidiaries’ tax liabilities, which could further
result in interest being levied to us for unpaid taxes or (ii) limiting the ability of our PRC companies to maintain preferential tax
treatment and other financial incentives.
Our controlling shareholder has potential
conflicts of interest with our Company which may adversely affect our business.
Mr. Gang Li is our controlling shareholder and
Chairman. 28 of the UFG Entities are owned independently by Mr. Li. Given his significant interest in our Company, there is a risk that
when conflicts of interest arise, Mr. Li will not act completely in the best interests of our shareholders (as opposed to his personal
interest) or that conflicts of interests will be resolved in our favor. For example, he may determine that it is in UFG’s interests
to sever the VIE Agreements with us, irrespective of the effect such action may have on us. Mr. Li has acted guarantor to certain loans
of Xinjiang United Family, which may create conflicts of interest with our Company. In addition, he could violate his fiduciary duties
by diverting business opportunities from us to others, thereby affecting the amount of payment UFG is obligated to remit to us under the
consulting services agreements.
Our board of directors is comprised of a majority
of independent directors. These independent directors may be in a position to deter and counteract the actions of our officers or non-independent
directors (including, potentially, Mr. Li) that are against our interests. We cannot, however, give any assurance as to how the independent
directors will act in any given circumstance. Further, if we or the independent directors cannot resolve any conflicts of interest between
us and those of our officers and directors who are management members of our affiliated companies in the PRC, we would have to rely on
legal proceedings, which could result in the disruption of our business.
In the event that you believe that your rights
have been infringed under the securities laws or otherwise as a result of any one of the circumstances described above, it may be difficult
or impossible for you to bring an action against us or our officers or directors who reside within the PRC. Even if you are successful
in bringing an action, the PRC laws may render you unable to enforce a judgment against our assets and management, most of which are located
in the PRC.
We rely on the approval certificates and
business license held by UFG, and any deterioration of the relationship between Xinjiang United Family and UFG could materially and adversely
affect our overall business operations.
Pursuant to the VIE Agreements, a substantial
part of our business in the PRC will be undertaken on the basis of the approvals, certificates, business licenses, and other requisite
licenses held by each UFG Entity. There is no assurance that each UFG Entity will be able to renew its licenses or certificates when their
terms expire with substantially similar terms as the ones they currently hold.
Further, our relationship with each UFG Entity
is governed by the VIE Agreements, which are intended to enable us, through our indirect ownership of Xinjiang United Family, to have
a controlling financial interest in and be the primary beneficiary of each UFG Entity for accounting purposes. However, the VIE Agreements
may not be effective in providing control over the applications for and maintenance of the licenses required for our business operations.
Any UFG Entity could violate the VIE Agreements, go bankrupt, suffer from difficulties in its business, or otherwise become unable to
perform its obligations under the VIE Agreements and, as a result, our operations, reputation, business and stock price could be severely
harmed.
The exercise of our option to purchase part
or all of the assets of any UFG Entity under the Call Option Agreement might be subject to approval by the PRC government. Our failure
to obtain this approval may impair our ability to substantially control the UFG Entities and could result in actions by the UFG Entities
that conflict with our interests.
Our Call Option Agreement with UFG gives Xinjiang
United Family the option to purchase all or part of the assets of UFG. However, the option may not be exercised if the exercise would
violate any applicable laws and regulations in the PRC or cause any license or permit held by, and necessary for the operation of UFG,
to be cancelled or invalidated. If we decide to exercise such a call option and PRC government approval is required and we do not, or
cannot, obtain such approval, we may be unable to purchase the assets that are the subject of such call option.
Because we rely on the Exclusive Service
Agreement with each UFG Entity for our revenue, the termination of these agreements would severely and detrimentally affect our continuing
business viability under our current corporate structure.
We are a holding company and during the years ended December 31, 2022,
2021, and 2020, approximately 39%, 56%, and 76% of our revenue was derived from the UFG Entities, respectively. As a result, we currently
rely for our revenue on dividends payments from Xinjiang United Family after it receives payments from the UFG Entities pursuant to the
exclusive service agreements. The term of the exclusive service agreement is 10 years, unless terminated earlier by Xinjiang United Family
with a 30-day prior notice. UFG does not have the right to terminate that agreement unilaterally. The agreement would renew automatically
by 10 years after expiration, with no limit on times of renewal. Because neither we nor our subsidiaries own equity interests of UFG,
the termination of the exclusive service agreement would sever our ability to continue receiving payments from the UFG Entities under
our current holding company structure. While we are currently not aware of any event or reason that may cause the exclusive service agreement
to terminate, such an event or reason may occur in the future. In the event that the exclusive service agreements are terminated, this
may have a severe and detrimental effect on our continuing business viability under our current corporate structure, which, in turn, may
affect the value of your investment.
Risks Relating to Doing Business in the PRC
Changes in China’s economic, political,
or social conditions or government policies could have a material adverse effect on our business and operations.
Most of our assets are owned and most of our operations
are conducted through our PRC subsidiary and the VIEs located in China. Accordingly, our business, financial condition, results of operations,
and prospects may be influenced to a significant degree by political, economic, and social conditions in China generally. The Chinese
economy differs from the economies of most developed countries in many respects, including the level of government involvement, level
of development, growth rate, control of foreign exchange, and allocation of resources. Although the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform, including the reduction of state ownership of productive assets
and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is
still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development
by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth by allocating
resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment
to particular industries or companies.
While the Chinese economy has experienced significant
growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes
in economic conditions in China, in the policies of the Chinese government, or in the laws and regulations in China could have a material
adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, reduce
demand for the products of our PRC subsidiary and the VIEs, and weaken our competitive position. The Chinese government has implemented
various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese
economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected
by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented
certain measures, including interest rate adjustments, to control the pace of economic growth. These measures may cause decreased economic
activities in China, which may adversely affect our business and operating results.
Uncertainties in the interpretation and
enforcement of PRC laws and regulations and changes in policies, rules, and regulations in China, which may be quick with little advance
notice, could limit the legal protection available to you and us.
The PRC legal system is based on written statutes.
Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the late 1970s, the PRC government
began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The legislation over the past
three decades has significantly increased the protection afforded to various forms of foreign or private-sector investment in China. Our
PRC subsidiary and the VIEs are subject to various PRC laws and regulations generally applicable to companies in China. Since these laws
and regulations are relatively new and the PRC legal system continues to rapidly evolve, however, the interpretations of many laws, regulations,
and rules are not always uniform and enforcement of these laws, regulations, and rules involve uncertainties.
From time to time, we may have to resort to administrative
and court proceedings to enforce our legal rights. Since PRC administrative and court authorities have significant discretion in interpreting
and implementing statutory and contractual terms, however, it may be more difficult to evaluate the outcome of administrative and court
proceedings and the level of legal protection we enjoy in the PRC legal system than in more developed legal systems. Furthermore, the
PRC legal system is based in part on government policies, internal rules, and regulations that may have retroactive effect and may change
quickly with little advance notice. As a result, we may not be aware of our violation of these policies and rules until sometime after
the violation. Such uncertainties, including uncertainties over the scope and effect of our contractual, property (including intellectual
property), and procedural rights, and any failure to respond to changes in the regulatory environment in China could materially and adversely
affect our business and impede our ability to continue our operations.
You may experience difficulties in effecting
service of legal process, enforcing foreign judgments, or bringing actions in China against us or our management based on foreign laws.
It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China.
We are a company incorporated under the laws of
the Cayman Islands, and we conduct most of our operations in China and most of our assets are located in China. In addition, all of our
directors and officers are nationals or residents of the PRC and all or a substantial portion of their assets are located outside the
U.S. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. In addition,
there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against
us or such persons predicated upon the civil liability provisions of U.S. securities laws or those of any U.S. state.
The recognition and enforcement of foreign judgments
are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with
the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made
or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written arrangement with the
U.S. that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures
Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment
violates the basic principles of PRC laws or national sovereignty, security, or public interest. As a result, it is uncertain whether
and on what basis a PRC court would enforce a judgment rendered by a court in the U.S.
It may also be difficult for you or overseas regulators
to conduct investigations or collect evidence within China. For example, in China, there are significant legal and other obstacles to
obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities.
Although the authorities in China may establish a regulatory cooperation mechanism with its counterparts of another country or region
to monitor and oversee cross-border securities activities, such regulatory cooperation with the securities regulatory authorities in the
U.S. may not be efficient in the absence of a practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities
Law (“Article 177”), which became effective in March 2020, no overseas securities regulator is allowed to directly conduct
investigations or evidence collection activities within the territory of the PRC. Article 177 further provides that Chinese entities and
individuals are not allowed to provide documents or materials related to securities business activities to foreign agencies without prior
consent from the securities regulatory authority of the PRC State Council and the competent departments of the PRC State Council. While
detailed interpretation of or implementing rules under Article 177 have yet to be promulgated, the inability for an overseas securities
regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by
you in protecting your interests.
Given the Chinese government’s significant
oversight and discretion over the conduct of the business of our PRC subsidiary and the VIEs, the Chinese government may intervene or
influence their operations at any time, which could result in a material change in the operations of our PRC subsidiary and the VIEs and/or
the value of our Class A Ordinary Shares.
The Chinese government has significant oversight
and discretion over the conduct of our PRC subsidiary and the VIEs and may intervene or influence their operations at any time as the
government deems appropriate to further regulatory, political, and societal goals, which could result in a material change in the operations
of our PRC subsidiary and the VIEs and/or the value of our Class A Ordinary Shares.
The Chinese government has recently published
new policies that significantly affected certain industries such as the education and Internet industries, and we cannot rule out the
possibility that it will in the future release regulations or policies regarding our industry that could adversely affect the business,
financial condition, and results of operations of our PRC subsidiary and the VIEs. Furthermore, if China adopts more stringent standards
with respect to certain areas such as environmental protection or corporate social responsibilities, our PRC subsidiary and the VIEs may
incur increased compliance costs or become subject to additional restrictions in their operations. Certain areas of the law in China,
including intellectual property rights and confidentiality protections, may also not be as effective as in the United States or other
countries. In addition, we cannot predict the effects of future developments in the PRC legal system on the business operations of our
PRC subsidiary and the VIEs, including the promulgation of new laws, or changes to existing laws or the interpretation or enforcement
thereof. These uncertainties could limit the legal protections available to us and our investors, including you.
Any actions by the Chinese government, including
any decision to intervene or influence the operations of our PRC subsidiary or the VIEs or to exert control over any offering of securities
conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to the operations of our PRC
subsidiary or the VIEs, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause
the value of such securities to significantly decline or be worthless.
The Chinese government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. The ability
of our subsidiary and the VIEs to operate in China may be impaired by changes in its laws and regulations, including those relating to
taxation, environmental regulations, land use rights, foreign investment limitations, and other matters. The central or local governments
of China may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and
efforts on our part to ensure our PRC subsidiary and the VIEs’ compliance with such regulations or interpretations. As such, our
PRC subsidiary and the VIEs may be subject to various government and regulatory interference in the provinces in which they operate. They
could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government
sub-divisions. They may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for
any failure to comply.
Furthermore, it is uncertain when and whether
we will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission
is obtained, whether it will be denied or rescinded. Although we believes our Company, our PRC subsidiary, and the VIEs, are currently
not required to obtain permission from any Chinese authorities and have not received any notice of denial of permission to list on the
U.S. exchange, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating
to our business or industry, particularly in the event permission to list on U.S. exchanges may be later required, or withheld or rescinded
once given.
Accordingly, government actions in the future,
including any decision to intervene or influence the operations of our PRC subsidiary or the VIEs at any time or to exert control over
an offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to
the operations of our PRC subsidiary or the VIEs, may limit or completely hinder our ability to offer or continue to offer securities
to investors, and/or may cause the value of such securities to significantly decline or be worthless.
Recent greater oversight by the CAC over
data security, particularly for companies seeking to list on a foreign exchange, could adversely impact our business and our offerings.
On December 28, 2021, the CAC, together with 12
other governmental departments of the PRC, jointly promulgated the Cybersecurity Review Measures, which became effective on February 15,
2022. The Cybersecurity Review Measures provides that, in addition to critical information infrastructure operators (“CIIOs”)
that intend to purchase Internet products and services, data processing operators engaging in data processing activities that affect or
may affect national security must be subject to cybersecurity review by the Cybersecurity Review Office of the PRC. According to the Cybersecurity
Review Measures, a cybersecurity review assesses potential national security risks that may be brought about by any procurement, data
processing, or overseas listing. The Cybersecurity Review Measures further requires that CIIOs and data processing operators that possess
personal data of at least one million users must apply for a review by the Cybersecurity Review Office of the PRC before conducting listings
in foreign countries.
On November 14, 2021, the CAC published the Security
Administration Draft, which provides that data processing operators engaging in data processing activities that affect or may affect national
security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. According to the Security
Administration Draft, data processing operators who possess personal data of at least one million users or collect data that affects or
may affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. The
deadline for public comments on the Security Administration Draft was December 13, 2021.
As of the date of this annual report, we have
not received any notice from any authorities identifying our PRC subsidiary or the VIEs as CIIOs or requiring us to go through cybersecurity
review or network data security review by the CAC. As the Cybersecurity Review Measures became effective and if the Security Administration
Draft is enacted as proposed, we believe that the operations of our PRC subsidiary and the VIEs and our listing will not be affected and
that we are not subject to cybersecurity review and network data security review by the CAC, given that: (i) as companies that mainly
manufacture and sell bakery products, our PRC subsidiary and the VIEs are unlikely to be classified as CIIOs by the PRC regulatory agencies;
(ii) our PRC subsidiary and the VIEs make substantially all of their bakery product sales through physical stores and only a small amount
through online stores, mostly on third-party online food ordering platforms, and they do not collect personal data of customers who use
their membership cards, which function as reloadable prepaid cards, for purchase; as a result, we possess personal data of fewer than
one million individual clients in our business operations as of the date of this annual report; and (iii) since our PRC subsidiary and
the VIEs are in the bakery industry, data processed in our business is unlikely to have a bearing on national security and therefore is
unlikely to be classified as core or important data by the authorities. There remains uncertainty, however, as to how the Cybersecurity
Review Measures and the Security Administration Draft will be interpreted or implemented and whether the PRC regulatory agencies, including
the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Cybersecurity Review Measures
and the Security Administration Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect,
we will take all reasonable measures and actions to comply and to minimize the adverse effect of such laws on us. We cannot guarantee,
however, that we will not be subject to cybersecurity review and network data security review in the future. During such reviews, we may
be required to suspend our operation or experience other disruptions to our operations. Cybersecurity review and network data security
review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which
could materially and adversely affect our business, financial conditions, and results of operations.
The Opinions, the Trial Measures, and the
revised Provisions recently issued by the PRC authorities may subject us to additional compliance requirements in the future.
The General Office of the Central Committee of
the Communist Party of China and the General Office of the State Council jointly issued the Opinions, which were made available to the
public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision
on overseas listings by China-based companies. The Opinions proposed to take effective measures, such as promoting the construction of
relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity
and data privacy protection. The aforementioned policies and any related implementation rules to be enacted may subject us to additional
compliance requirements in the future. On February 17, 2023, the CSRC promulgated the Trial Measures and five supporting guidelines, which
came into effect on March 31, 2023. Pursuant to the Trial Measures, domestic companies that seek to offer or list securities overseas,
both directly and indirectly, shall complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures within
three working days following its submission of initial public offerings or listing application. If a domestic company fails to complete
required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such domestic company
may be subject to administrative penalties, such as an order to rectify, warnings, fines, and its controlling shareholders, actual controllers,
the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and
fines. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Mergers & Acquisitions
and Overseas Listings.”
According to the CSRC Notice, the domestic companies
that have already been listed overseas before the effective date of the Trial Measures (namely, March 31, 2023) shall be deemed as Existing
Issuers. Existing Issuers are not required to complete the filing procedures immediately, and they shall be required to file with the
CSRC for any subsequent offerings. Further, according to the CSRC Notice, domestic companies that have obtained approval from overseas
regulatory authorities or securities exchanges (for example, the effectiveness of a registration statement for offering and listing in
the U.S. has been obtained) for their indirect overseas offering and listing prior to March 31, 2023 but have not yet completed their
indirect overseas issuance and listing, are granted a six-month transition period from March 31, 2023 to September 30, 2023. Those that
complete their indirect overseas offering and listing within such six-month period are deemed as Existing Issuers and are not required
to file with the CSRC for their indirect overseas offerings and listings. Within such six-month transition period, however, if such domestic
companies fail to complete their indirect overseas issuance and listing, they shall complete the filing procedures with the CSRC.
Based on the foregoing, as our registration statement on Form F-1 was
declared effective on March 29, 2023 and we have completed our initial public offering and listing prior to September 30, 2023, we are
currently not required to complete the filing procedures pursuant to the Trial Measures. However, in the event that we undertake new offerings
or fundraising activities in the future, we may be required to complete the filing procedures.
On February 24, 2023, the CSRC, together with
the MOF, National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions issued
by the CSRC and National Administration of State Secrets Protection and National Archives Administration of China in 2009. The revised
Provisions were issued under the title the “Provisions on Strengthening Confidentiality and Archives Administration of Overseas
Securities Offering and Listing by Domestic Companies,” and came into effect on March 31, 2023 together with the Trial Measures.
One of the major revisions to the revised Provisions is expanding their application to cover indirect overseas offering and listing, as
is consistent with the Trial Measures. The revised Provisions require that, among other things, (a) a domestic company that plans to,
either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities, including
securities companies, securities service providers, and overseas regulators, any documents and materials that contain state secrets or
working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy
administrative department at the same level; and (b) a domestic company that plans to, either directly or indirectly through its overseas
listed entity, publicly disclose or provide to relevant individuals and entities, including securities companies, securities service providers,
and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest,
shall strictly fulfill relevant procedures stipulated by applicable national regulations. Any failure or perceived failure by our Company,
our subsidiaries, or the VIEs to comply with the above confidentiality and archives administration requirements under the revised Provisions
and other PRC laws and regulations may result in the relevant entities being held legally liable by competent authorities, and referred
to the judicial organ to be investigated for criminal liability if suspected of committing a crime.
The Opinions, the Trial Measures, the revised
Provisions and any related implementing rules to be enacted may subject us to additional compliance requirements in the future. As there
are still uncertainties regarding the interpretation and implementation of such regulatory guidance, we cannot assure you that we will
be able to comply with all new regulatory requirements of the Opinions, the Trial Measures, the revised Provisions, or any future implementing
rules on a timely basis, or at all.
Recent joint statement by the SEC and the
PCAOB, rule changes by Nasdaq, and the HFCA Act all call for additional and more stringent criteria to be applied to emerging market companies
upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments
could add uncertainties to our offerings.
On April 21, 2020, SEC Chairman Jay Clayton and
PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated
with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized
the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in
emerging markets.
On May 18, 2020, Nasdaq filed three proposals
with the SEC to (i) apply a minimum offering size requirement for companies primarily operating in a “Restrictive Market,”
(ii) adopt a new requirement relating to the qualification of management or the board of directors for Restrictive Market companies, and
(iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s
auditor. On October 4, 2021, the SEC approved Nasdaq’s revised proposal for the rule changes.
On May 20, 2020, the U.S. Senate passed the HFCA
Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified
reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s
auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 2, 2020,
the U.S. House of Representatives approved the HFCA Act. On December 18, 2020, the HFCA Act was signed into law.
On March 24, 2021, the SEC announced the adoption
of interim final amendments to implement the submission and disclosure requirements of the HFCA Act. In the announcement, the SEC clarifies
that before any issuer will have to comply with the interim final amendments, the SEC must implement a process for identifying covered
issuers. The announcement also states that the SEC staff is actively assessing how best to implement the other requirements of the HFCA
Act, including the identification process and the trading prohibition requirements.
On September 22, 2021, the PCAOB adopted a final
rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act,
whether the board of directors of a company is unable to inspect or investigate completely registered public accounting firms located
in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction.
On December 2, 2021, the SEC adopted amendments
to finalize rules implementing the submission and disclosure requirements in the HFCA Act.
On December 16, 2021, the PCAOB issued a report
on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in
mainland China and in Hong Kong because of positions taken by PRC and Hong Kong authorities in those jurisdictions.
On August 26, 2022, the CSRC, the MOF, and the
PCAOB signed the Protocol governing inspections and investigations of audit firms based in mainland China and Hong Kong, taking the first
step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China
and Hong Kong. Pursuant to the fact sheet with respect to the Protocol disclosed by the SEC, the PCAOB shall have independent discretion
to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. On December
15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting
firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, should PRC
authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB Board will consider the need to
issue a new determination.
Our auditor prior to September 29, 2022, Friedman,
was registered with the PCAOB and had been inspected by the PCAOB on a regular basis in the audit period. Our new auditor, Marcum Asia,
as an auditor of companies that are traded publicly in the U.S. and a firm registered with the PCAOB, is subject to laws in the U.S.,
pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Marcum Asia
is headquartered in Manhattan, New York, and has been inspected by the PCAOB on a regular basis, with the last inspection in 2020. Neither
Friedman nor Marcum Asia is subject to the determinations announced by the PCAOB on December 16, 2021. However, the recent developments
would add uncertainties to our offerings and we cannot assure you whether the national securities exchange we apply to for listing or
regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditors’
audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or
experience as it relates to our audit. In addition, the HFCA Act, which requires that the PCAOB be permitted to inspect an issuer’s
public accounting firm within three years, may result in the delisting of our Company or prohibition of trading in our Class A Ordinary
Shares in the future if the PCAOB is unable to inspect our accounting firm at such future time. On June 22, 2021, the U.S. Senate
passed the Accelerating Holding Foreign Companies Accountable Act, and on December 29, 2022, the Consolidated Appropriations Act was signed
into law by President Biden, which contained, among other things, an identical provision to the Accelerating Holding Foreign Companies
Accountable Act and amended the HFCA Act by requiring the SEC to prohibit an issuer’s securities from trading on any U.S. stock
exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three, thus reducing the time period
for triggering the prohibition on trading.
To the extent cash
in the business is in the PRC or a PRC entity, the funds may not be available to fund operations or for other use outside of the PRC due
to interventions in or the imposition of restrictions and limitations on the ability of our Company, our subsidiaries, or the VIEs by
the PRC government to transfer cash.
Relevant PRC laws and regulations permit the companies
in the PRC to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and
regulations. Additionally, each of the companies in the PRC are 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. The companies in the PRC are also required
to further set aside a portion of their after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any,
is determined at their discretion. These reserves are not distributable as cash dividends. Furthermore, in order for us to pay dividends
to our shareholders, we will rely on payments made from the VIEs to Xinjiang United Family, pursuant to the VIE Agreements, and the distribution
of such payments to Jenyd as dividends from Xinjiang United Family, and then to our Company. If Xinjiang United Family and the VIEs incur
debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments
to us.
Our cash dividends, if any, will be paid in U.S.
dollars. If we are considered a tax resident enterprise of the PRC for tax purposes, any dividends we pay to our overseas shareholders
may be regarded as China-sourced income and as a result may be subject to PRC withholding tax. See “—Under the EIT Law, we
may be classified as a PRC ‘resident enterprise’ for PRC enterprise income tax purposes. Such classification would likely
result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations
and the value of your investment.”
The PRC government also imposes controls on the
convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. The majority of our, Xinjiang
United Family’s, and the VIEs’ income is received in RMB and shortages in foreign currencies may restrict our ability to pay
dividends or other payments, or otherwise satisfy our foreign currency denominated obligations, if any. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from SAFE as long as certain procedural requirements are met. Approval
from appropriate government authorities is required if RMB is converted into foreign currency and remitted out of the PRC to pay capital
expenses such as the repayment of loans denominated in foreign currencies. The PRC government may, at its discretion, impose restrictions
on access to foreign currencies for current account transactions and if this occurs in the future, we may not be able to pay dividends
in foreign currencies to our shareholders.
As a result of the above, to the extent cash in
the business is in the PRC or a PRC entity, such funds or assets may not be available to fund operations or for other use outside of the
PRC, due to interventions in or the imposition of restrictions and limitations on the ability of us, our subsidiaries, or the VIEs by
the PRC government to transfer cash.
Failure to obtain requisite approvals, licenses,
or permits or failure to comply with any requirements of PRC laws, regulations, and policies may materially and adversely affect our daily
operations and hinder our growth.
The operations of the PRC Stores are subject to
extensive legal and regulatory requirements. They are required to hold a number of licenses and permits in connection with their operations,
principally including food production permits and food business permits, before commencement of operations. Failure to obtain such permits
or loss of or failure to renew them would be in violation of applicable laws and regulations. If the PRC Stores are found to be in violation
of applicable laws and regulations, they could be subject to administrative punishment, including fines, injunctions, asset seizures as
well as compulsory suspension of business, any of which could have a material adverse effect on their business, financial condition, results
of operations, and prospects. As of the date of this annual report, two UFG Entities are applying for the renewal of their food business
permits; all the remaining UFG Entities have obtained the food business permit, though some of them did not have the food business permits
at the time of opening. The failure of these entities to have the food business permit at the time of opening may subject us to fines
or other penalties such as income confiscation, although we have not received any notice of warning or been subject to penalties or other
penalties from the relevant governmental authorities regarding conducting our business without the above mentioned permits. The UFG Entities
will file renewal requests 30 business days prior to the expiration date of those permits. In general, as long as a business entity operates
legally and is in good standing, its renewal request will be approved. The UFG Entities will make their best effort to renew the permits
described above but we cannot assure you that they will be able to renew such permits or they will not be subject to any penalties in
the future. See “Item 4. Information on the Company—B. Business Overview—Regulations—PRC Regulations—Regulations
on Food Production and Food Business Operation—Food Production Permit and Food Business Permit.”
Article 45 of the Environmental Protection Law
of the People’s Republic of China stipulates that enterprises, institutions, and other producers and operators that implement pollution
discharge permit management in China shall discharge pollutants in accordance with the requirements of the pollution discharge license.
Based on the situation of the central factory of the PRC Stores, as well as their production equipment and production process, at least
a sewage registration is required. As of the date of this annual report, Xinjiang United Family has completed the sewage registration
and obtained the sewage registration receipt. See “Item 4. Information on the Company—B. Business Overview—Regulations—PRC
Regulations—Regulations on Food Production and Food Business Operation—Pollutant Discharge Permit.”
Increases in labor costs in the PRC may
adversely affect our business and our profitability.
China’s economy has experienced increases
in labor costs in recent years. China’s overall economy and the average wage in China are expected to continue to grow. The average
wage level for the employees of the PRC Stores has also increased in recent years. We expect that the labor costs of the PRC Stores, including
wages and employee benefits, will continue to increase. Unless they are able to pass on these increased labor costs to their customers
by increasing prices for their products, our profitability and results of operations may be materially and adversely affected.
In addition, the PRC Stores have been subject
to stricter regulatory requirements in terms of entering into labor contracts with their employees and paying various statutory employee
benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance, and maternity insurance
to designated government agencies for the benefit of their employees. Pursuant to the PRC Labor Contract Law (the “Labor Contract
Law”) that became effective in January 2008 and was amended on December 28, 2012, and its implementing rules that became effective
in September 2008, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration,
determining the term of employees’ probation, and unilaterally terminating labor contracts. In the event that the PRC Stores decide
to terminate some of their employees or otherwise change their employment or labor practices, the Labor Contract Law and its implementation
rules may limit their ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business
and results of operations.
As the interpretation and implementation of labor-related
laws and regulations are still evolving, we cannot assure you that the employment practice of the PRC Stores does not and will not violate
labor-related laws and regulations in China, which may subject them to labor disputes or government investigations. If the PRC Stores
are deemed to have violated relevant labor laws and regulations, they could be required to provide additional compensation to their employees
and our business, financial condition, and results of operations could be materially and adversely affected.
Our PRC subsidiary and the VIEs have not
made adequate social insurance and housing fund contributions for all employees as required by PRC regulations, which may subject us to
penalties.
According to the PRC Social Insurance Law and
the Administrative Regulations on the Housing Funds, companies operating in China are required to participate in pension insurance,
work-related injury insurance, medical insurance, unemployment insurance, maternity insurance (collectively known as “social insurance”),
and housing funds plans, and the employers must pay all or a portion of the social insurance premiums and housing funds for their employees.
For more details, please see “Item 4. Information on the Company—B. Business Overview—Regulations—PRC Regulations—Regulations
on Employment and Social Welfare—Social Insurance and Housing Fund.” Our PRC subsidiary, Xinjiang United Family, and the VIEs
have not made adequate social insurance and housing fund contributions for all employees. Xinjiang United Family and the VIEs may be required
to make up the social insurance contributions as well as to pay late fees at the rate of 0.05% per day of the outstanding amount from
the due date. As of March 2023, we estimate that the amount of outstanding social insurance premiums was approximately $24,268.61 and
the amount of late fees was approximately $1,243.87. If Xinjiang United Family and the VIEs fail to make up for the shortfalls within
the prescribed time limit, the relevant administrative authorities will impose a fine of one to three times the outstanding amount upon
them, which potential fine was in the range of $24,898 and $74,695 as of March 2023. With respect to housing fund plans, Xinjiang United
Family may be required to pay and deposit housing funds in full and on time within the prescribed time limit. As of March 2023, we estimate
that the amount of outstanding housing funds was approximately $53,573.03 and the amount of late fees was approximately $6,200.94. If
Xinjiang United Family fails to do so, relevant authorities could file applications to competent courts for compulsory enforcement of
payment and deposit.
According to our PRC counsel, however, it is unlikely
that Xinjiang United Family and the VIEs would be ordered to pay the overdue social insurance premiums or housing funds, considering that
(i) some of the employees of Xinjiang United Family and the VIEs are over the age limit to be paid social insurance premiums and housing
funds; (ii) some employees chose to not receive social insurance premiums deposited by Xinjiang United Family and the VIEs and decided
to participate in their own voluntary social insurance plans instead, and promised not to ask Xinjiang United Family or the VIEs to make
up the payment; (iii) the requirement of social insurance and housing fund has not been implemented consistently by the local governments
in China given the different levels of economic development in different locations; (iv) pursuant to the Emergency Notice on Practicing
Principles of the State Council Executive Meeting and Stabilizing Work on Collecting Social Insurance Premiums promulgated by the Ministry
of Human Resources and Social Security on September 21, 2018, local authorities are prohibited from recovering unpaid social insurance
premiums from enterprises; (v) as of the date of this annual report, Xinjiang United Family and the VIEs have not received any notice
or order from the relevant government authorities requesting them to pay social insurance premiums or housing funds in full; (vi) as of
the date of this annual report, Xinjiang United Family and the VIEs have not received any complaint or report on outstanding social insurance
premiums or housing funds, nor have them had any labor dispute or lawsuit with their employees on payments of social insurance premiums
or housing funds; and (vii) the relevant local authorities certified in writing that there were no acts of violating human resources regulations
or labor management regulations by Xinjiang United Family. As a result, we did not accrue or record the amounts of outstanding social
insurance premiums or housing funds before December 31, 2020, and the amount was deemed not material. Starting from January 1, 2021, we
have adequately accrued the social premiums and housing funds and the estimated late fees, if applicable, and have not received any notice
or order for payment as of the date of this annual report.
PRC regulations relating to offshore investment
activities by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our
ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute
profits to us, or may otherwise adversely affect us.
On July 4, 2014, SAFE issued the Circular on
Issues Concerning Foreign Exchange Control over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents
via Special Purpose Vehicles (“SAFE Circular 37”). According to SAFE Circular 37, prior registration with the local SAFE
branch is required for PRC residents (including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed
as PRC residents for foreign exchange administration purpose), in connection with their direct or indirect contribution of domestic assets
or interests to offshore special purpose vehicles (“SPVs”). SAFE Circular 37 further requires amendments to the SAFE registrations
in the event of any changes with respect to the basic information of the offshore SPV, such as change of a PRC individual shareholder,
name and operation term, or any significant changes with respect to the offshore SPV, such as an increase or decrease of capital contribution,
share transfer or exchange, or mergers or divisions. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may
be applicable to any offshore acquisitions that we make in the future. In February 2015, SAFE promulgated a Notice on Further Simplifying
and Improving Foreign Exchange Administration Policy on Direct Investment (“SAFE Notice 13”), effective in June 2015.
Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct
investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks
will directly examine the applications and accept registrations under the supervision of SAFE.
In addition to SAFE Circular 37 and SAFE Notice
13, 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 in January 2007 (as amended and supplemented,
the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any PRC 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, the failure of which may subject such PRC individual to warnings, fines, or other liabilities.
As of the date of this annual report, all of our
current shareholders who are subject to the SAFE Circular 37 and Individual Foreign Exchange Rules have completed the initial registrations
with the qualified banks as required by the regulations. We cannot provide any assurance that our future PRC resident beneficial owners
will comply with our request to make or obtain any applicable registrations or continuously comply with all registration procedures set
forth in these SAFE regulations, and it remains unclear how these SAFE regulations will be interpreted and implemented in the future.
Failure or inability of our PRC resident beneficial owners to comply with these SAFE regulations may subject our PRC resident beneficial
owners to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiary’s ability to distribute
dividends to, or obtain foreign-exchange-dominated loans from, our Company, or prevent us from being able to make distributions or pay
dividends, as a result of which our business operations and our ability to distribute profits to you could be materially and adversely
affected.
PRC regulation of parent/subsidiary loans
and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our offerings to
make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.
Under PRC laws and regulations, we are permitted
to utilize the proceeds from our offerings to fund our PRC subsidiary by making loans to or additional capital contributions to our PRC
subsidiary, subject to applicable government registration, statutory limitations on amount, and approval requirements. The amount of capital
contributions that we may make to Xinjiang United Family is RMB6,000,000 (approximately $857,143), without obtaining approvals from SAFE
or other government authorities. Additionally, Xinjiang United Family may increase its registered capital to receive additional capital
contributions from us and currently there is no statutory limit to increasing its registered capital, subject to satisfaction of applicable
government and filing requirements. Pursuant to relevant PRC regulations, we may provide loans to Xinjiang United Family up to the larger
amount of (i) the balance between the registered total investment amount and registered capital of Xinjiang United Family, or (ii) twice
the amount of the net assets of Xinjiang United Family calculated in accordance with the People’s Bank of China Circular 9, subject
to satisfaction of applicable government registration or approval requirements. For any amount of loans that we may extend to Xinjiang
United Family, such loans must be registered with the local counterpart of SAFE. For more details, see “Item 4. Information on the
Company—B. Business Overview—Regulations—PRC Regulations—Regulations on Foreign Exchange.” These PRC laws
and regulations may significantly limit our ability to use RMB converted from the net proceeds of our offerings to fund the establishment
of new entities in China by our PRC subsidiary or to invest in or acquire any other PRC companies through our PRC subsidiary. Moreover,
we cannot assure you that we will be able to complete the necessary registrations or obtain the necessary government approvals on a timely
basis, if at all, with respect to future loans to our PRC subsidiary or future capital contributions by us to our PRC subsidiary. If we
fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received or expect to receive from our
offshore offerings and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely
affect our business, including our liquidity and our ability to fund and expand our business.
Fluctuations in exchange rates could have
a material adverse effect on our results of operations and the value of your investment.
The value of RMB against the U.S. dollar and other
currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China’s
foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of RMB to the U.S.
dollar, and RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this
appreciation halted and the exchange rate between RMB and the U.S. dollar remained within a narrow band. Since June 2010, RMB has fluctuated
against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary
Fund completed the regular five-year review of the basket of currencies that make up the Special Drawing Right and decided that with effect
from October 1, 2016, RMB was determined to be a freely usable currency and would be included in the Special Drawing Right basket as a
fifth currency, along with the U.S. dollar, the Euro, the Japanese yen, and the British pound. In the fourth quarter of 2016, RMB depreciated
significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. This depreciation halted in 2017, and
RMB appreciated approximately 7% against the U.S. dollar during this one-year period. In 2020, RMB appreciated approximately 6.9% against
the U.S. dollar; in 2021, RMB depreciated approximately 2.6% against the U.S. dollar; and in 2022, RMB depreciated approximately 5.5%
against the U.S. dollar. With the development of the foreign exchange market and progress towards interest rate liberalization and RMB
internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure
you that RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict
how market forces or PRC or U.S. government policy may impact the exchange rate between RMB and the U.S. dollar in the future. Since we
own and operate stores both in the PRC and the U.S., the fluctuations in exchange rates would have a negative effect on our business and
results of operations and financial condition.
Most of our business is conducted in the PRC,
and most of our books and records are maintained in RMB, which is the currency of the PRC, and the financial statements that we file with
the SEC and provide to our shareholders are presented in U.S. dollars. Changes in the exchange rates between RMB and U.S. dollar affect
the value of our assets and the results of our operations, when presented in U.S. dollars. The value of RMB against the U.S. dollar and
other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions and
perceived changes in the economy of the PRC and the U.S. Any significant revaluation of RMB may materially and adversely affect our cash
flows, revenue, and financial condition. Further, as our securities in the U.S. are offered in U.S. dollars, we will need to convert part
of the net proceeds we receive into RMB in order to use the funds for our business in the PRC. Changes in the conversion rate between
the U.S. dollar and RMB will affect the amount of proceeds we will have available for our business.
Very limited hedging options are available in
China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to
reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability
and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As
a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Under the EIT Law, we may be classified
as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable
tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations and the value of your
investment.
Under the EIT Law that became effective in January
2008, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident
enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide
income. Under the implementation rules to the EIT Law, a “de facto management body” is defined as a body that has material
and overall management and control over the manufacturing and business operations, personnel and human resources, finances, and properties
of an enterprise. In addition, a circular, known as “SAT Circular 82,” issued in April 2009 by the State Administration of
Taxation (“SAT”) and partially amended by People’s Bank of China Circular 9 promulgated in January 2014, specifies that
certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises
if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production,
operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes
of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Further
to SAT Circular 82, SAT issued a bulletin, known as “SAT Bulletin 45,” which took effect in September 2011 and amended on
June 1, 2015 and October 1, 2016 to provide more guidance on the implementation of SAT Circular 82 and clarify the reporting and filing
obligations of Chinese controlled offshore incorporated resident enterprises, to provide more guidance on the implementation of SAT Circular
82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated resident enterprises.”
SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-determination
matters. Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise
groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth in SAT Circular 82 and SAT
Bulletin 45 may reflect SAT’s general position on how the “de facto management body” test should be applied in determining
the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups,
or by PRC or foreign individuals.
If the PRC tax authorities determine that the
actual management organ of Chanson International is within the territory of China, Chanson International may be deemed to be a PRC resident
enterprise for PRC enterprise income tax purposes and a number of unfavorable PRC tax consequences could follow. First, we will be subject
to the uniform 25% enterprise income tax on our world-wide income, which could materially reduce our net income. In addition, we will
also be subject to PRC enterprise income tax reporting obligations. Finally, dividends payable by us to our investors and gains on the
sale of our shares may become subject to PRC withholding tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of
non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources.
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. Although up to the date of this annual report, Chanson International has not been notified or informed by the
PRC tax authorities that it has been deemed to be a resident enterprise for the purpose of the EIT Law, we cannot assure you that it will
not be deemed to be a resident enterprise in the future.
We face uncertainty with respect to indirect
transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
In February 2015, SAT issued a Public Notice
Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises (“SAT Circular
7”). SAT Circular 7 provides comprehensive guidelines relating to indirect transfers of PRC taxable assets (including equity interests
and real properties of a PRC resident enterprise) by a non-resident enterprise. In addition, in October 2017, SAT issued an Announcement
on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises (“SAT Circular 37”), effective in
December 2017, which, among others, amended certain provisions in SAT Circular 7 and further clarify the tax payable declaration obligation
by non-resident enterprise. Indirect transfer of equity interest and/or real properties in a PRC resident enterprise by their non-PRC
holding companies are subject to SAT Circular 7 and SAT Circular 37.
SAT Circular 7 provides clear criteria for an
assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale
of equity through a public securities market. As stipulated in SAT Circular 7, indirect transfers of PRC taxable assets are considered
as reasonable commercial purposes if the shareholding structure of both transaction parties falls within the following situations: i)
the transferor directly or indirectly owns 80% or above equity interest of the transferee, or vice versa; ii) the transferor and the transferee
are both 80% or above directly or indirectly owned by the same party; iii) the percentages in bullet points i) and ii) shall be 100% if
over 50% the share value of a foreign enterprise is directly or indirectly derived from PRC real properties. Furthermore, SAT Circular
7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable
assets. Where a non-resident enterprise transfers PRC taxable assets indirectly by disposing of the equity interests of an overseas holding
company, which is an indirect transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly
owns the taxable assets, may report such indirect transfer to the relevant tax authority and the PRC tax authority may disregard the existence
of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding,
or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee
or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for
the transfer of equity interests in a PRC resident enterprise.
According to SAT Circular 37, where the non-resident
enterprise fails to declare the tax payable pursuant to Article 39 of the EIT Law, the tax authority may order it to pay the tax due within
required time limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax
authority. If the non-resident enterprise, however, voluntarily declares and pays the tax payable before the tax authority orders it to
do so within required time limits, it shall be deemed that such enterprise has paid the tax in time.
We face uncertainties as to the reporting and
assessment of reasonable commercial purposes and future transactions where PRC taxable assets are involved, such as offshore restructuring,
sale of the shares in our offshore subsidiaries, and investments. In the event of being assessed as having no reasonable commercial purposes
in an indirect transfer transaction, we may be subject to filing obligations or taxed if we are a transferor in such transactions, and
may be subject to withholding obligations (to be specific, a 10% withholding tax for the transfer of equity interests) if we are a transferee
in such transactions, under SAT Circular 7 and SAT Circular 37. For transfer of shares by investors who are non-PRC resident enterprises,
our PRC subsidiary may be requested to assist in the filing under the SAT circulars. As a result, we may be required to expend valuable
resources to comply with the SAT circulars or to request the relevant transferors from whom we purchase taxable assets to comply with
these circulars, or to establish that we should not be taxed under these circulars, which may have a material adverse effect on our financial
condition and results of operations.
Our PRC subsidiary is 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.
We are a holding company incorporated in the Cayman
Islands. We may need dividends and other distributions on equity from our PRC subsidiary, Xinjiang United Family, to satisfy our liquidity
requirements. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of
its respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its
respective registered capital. Our PRC subsidiary may also allocate a portion of its 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 limitation
on the ability of our PRC subsidiary 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.
Governmental control of currency conversion
may affect the value of your investment and our payment of dividends.
The PRC government imposes controls on the convertibility
of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenue
in RMB. Under our current corporate structure, Chanson International may rely on dividend payments from our PRC subsidiary to fund any
cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such
as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval
from SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies
to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with
certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by our shareholders or the ultimate
shareholders of our corporate shareholders who are PRC residents. Approval from or registration with appropriate government authorities
is, however, required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the
repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies
to satisfy our foreign currency demand, we may not be able to pay dividends in foreign currencies to our shareholders.
There are significant uncertainties under
the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our offshore
subsidiaries may not qualify to enjoy certain treaty benefits.
Under the EIT Law and its implementation rules,
the profits of a foreign invested enterprise generated through operations, which are distributed to its immediate holding company outside
the PRC, will be subject to a withholding tax rate of 10%. Pursuant to the Double Tax Avoidance Arrangement, a withholding tax rate of
10% may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise for at least 12 consecutive months prior
to distribution of the dividends and is determined by the relevant PRC tax authority to have satisfied other conditions and requirements
under the Double Tax Avoidance Arrangement and other applicable PRC laws.
However, based on the Circular on Certain Issues
with Respect to the Enforcement of Dividend Provisions in Tax Treaties (the “SAT Circular 81”), which became effective
on February 20, 2009, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income
tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment.
According to Circular on Several Issues regarding the “Beneficial Owner” in Tax Treaties, which became effective as
of April 1, 2018, when determining an applicant’s status as the “beneficial owner” regarding tax treatments in connection
with dividends, interests, or royalties in the tax treaties, several factors will be taken into account. Such factors include whether
the business operated by the applicant constitutes actual business activities, and whether the counterparty country or region to the tax
treaties does not levy any tax, grant tax exemption on relevant incomes, or levy tax at an extremely low rate. This circular further requires
any applicant who intends to be proved of being the “beneficial owner” to file relevant documents with the relevant tax authorities.
Our PRC subsidiary is wholly owned by our Hong Kong subsidiary. However, we cannot assure you that our determination regarding our qualification
to enjoy the preferential tax treatment will not be challenged by the relevant PRC tax authority or we will be able to complete the necessary
filings with the relevant PRC tax authority and enjoy the preferential withholding tax rate of 5% under the Double Tax Avoidance Arrangement
with respect to dividends to be paid by our PRC subsidiary to our Hong Kong subsidiary, in which case, we would be subject to the higher
withdrawing tax rate of 10% on dividends received.
If we become directly subject to the scrutiny,
criticism, and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate
and resolve the matter which could harm our business operations, stock price, and reputation.
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 on financial
and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance
policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism, and negative
publicity, the publicly traded stock of many U.S. listed Chinese companies 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 sector-wide scrutiny, criticism, and negative publicity
will have on us, our business, and the price of our Class A Ordinary Shares. If we become the subject of any unfavorable allegations,
whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations
and/or defend our Company. This situation will be costly and time consuming and distract our management from developing our business.
If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a
significant decline in the value of our Class A Ordinary Shares.
The M&A Rules and certain other PRC
regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult
for us to pursue growth through acquisitions in China.
The Regulations on Mergers and Acquisitions
of Domestic Companies by Foreign Investors (the “M&A Rules”) and recently adopted regulations and rules concerning
mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign
investors more time consuming and complex. For example, the M&A Rules require that the Ministry of Commerce of the PRC (“MOFCOM”)
be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if
(i) any important industry is concerned, (ii) such transaction involves factors that have or may have impact on the national economic
security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored
brand. Mergers or acquisitions that allow one market player to take control of or to exert decisive impact on another market player must
also be notified in advance to MOFCOM when the threshold under the Provisions on Thresholds for Prior Notification of Concentrations of
Undertakings, or the “Prior Notification Rules,” issued by the State Council in August 2008 is triggered. In addition, the
security review rules issued by MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors
that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire
de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by MOFCOM,
and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy
or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the
requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any
required approval processes, including obtaining approval from MOFCOM or its local counterparts may delay or inhibit our ability to complete
such transactions. It is clear that our business would not be deemed to be in an industry that raises “national defense and security”
or “national security” concerns. MOFCOM or other government agencies, however, may publish explanations in the future determining
that our business is in an industry subject to the security review, in which case our future acquisitions in the PRC, including those
by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our ability to
expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.
Risks Relating to Our Business
The operating entities’ business is affected by changes
in consumer preferences and discretionary spending.
The operating entities’ success depends,
in part, upon the popularity of their bakery products and their ability to develop new bakery products that appeal to consumers. Shifts
in consumer preferences away from their bakery stores or their product offerings and mix, their inability to develop new products that
appeal to consumers could harm the operating entities’ business. The operating entities’ success depends in large part on
their customers’ continued belief that food made with high-quality ingredients, including selected proteins raised without antibiotics,
their cakes, pastries, and other bakery treats made without artificial preservatives, flavors, sweeteners, or colors from artificial sources
are worth the prices charged at the operating entities’ bakery stores relative to the lower prices offered by some of their competitors.
The operating entities’ inability to successfully educate customers about the quality of their bakery products or their customers’
rejection of the operating entities’ pricing approach could result in decreased demand for their products or require the operating
entities to change their pricing, marketing, or promotional strategies, which could materially and adversely affect our consolidated financial
results or the brand identity that the operating entities have created. In addition, the operating entities’ success depends to
a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary
income. Accordingly, the operating entities may experience declines in sales during economic downturns or during periods of uncertainty.
Any material decline in the amount of discretionary spending could have a material adverse effect on the operating entities’ sales,
results of operations, business, and financial condition.
The operating entities’ long-term
success depends on their ability to successfully identify and secure appropriate sites and timely develop and expand their operations
in existing and new markets.
One of the key means of achieving the operating entities’ growth
strategies will be through opening and operating new stores on a profitable basis for the foreseeable future. The operating entities opened
one, six, and four new stores in the years ended December 31, 2022, 2021, and 2020, respectively. The operating entities identify target
markets, taking into account numerous factors such as the locations of their current stores, demographics, traffic patterns, and, recently,
whether known consumer patterns will remain at the same level as prior to the COVID-19 pandemic and if they need to modify the layout
of their new stores to minimize contact with customers. The operating entities may not be able to open their planned new stores within
budget or on a timely basis, if at all, given the uncertainty of these factors, which could adversely affect their business, financial
condition, and results of operations. As the operating entities operate more stores, their rate of expansion relative to the size of our
store base will eventually decline.
The number and timing of new stores opened during
any given period may be negatively impacted by a number of factors, including:
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epidemics such as the COVID-19 pandemic; |
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the operating entities’ ability to increase brand awareness and bakery product consumption in areas where they open stores; |
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the identification and availability of sites for store locations with the appropriate size, traffic patterns, local retail and business attractions, and infrastructure that will drive high levels of customer traffic and sales per unit; |
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competition in existing and new markets, including competition for store sites; |
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the negotiation of acceptable lease terms; |
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the operating entities’ ability to obtain all required governmental permits on a timely basis; |
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the operating entities’ ability to control construction and development costs of new stores; |
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the maintenance of adequate distribution capacity, information systems, and other operational system capabilities; |
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integrating new stores into the operating entities’ existing procurement, manufacturing, distribution, and other support operations; |
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the hiring, training, and retention of store management and other qualified personnel; |
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assimilating new store employees into the operating entities’ corporate culture; |
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the effective management of inventory to meet the needs of the operating entities’ stores on a timely basis; and |
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the availability of sufficient levels of cash flow and financing to support the operating entities’ expansion. |
Unavailability of attractive store locations,
delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development due to capital
constraints, difficulties in staffing and operating new store locations, or lack of customer acceptance of stores in new market areas
may negatively impact the operating entities’ new store growth and the costs or the profitability associated with new stores.
Additionally, customer trends, preferences, and
demand may vary significantly by region, and the operating entities’ experience in the markets in which they currently operate may
not be applicable in other parts of the PRC and the U.S. As a result, the operating entities may not be able to leverage their experience
to expand into other parts of the PRC and the U.S. When the operating entities enter new markets, they may face intense competition from
companies with greater experience or an established presence in the targeted geographical areas or from other companies with similar expansion
targets. In addition, the operating entities’ business model may not be successful in new and untested markets and markets with
a different business environment. The operating entities may not be able to grow their revenue in the new cities they enter into, but
they will incur substantial costs in connection with any such expansion. Consequently, we cannot assure you that the operating entities
will achieve their planned growth or, even if the operating entities are able to grow their store base as planned, that any new stores
will be profitable, which could have a material adverse effect on their results of operations.
The operating entities operate in a highly-competitive
market and their failure to compete effectively could adversely affect our results of operations.
The market for bakery products is highly competitive.
The current competitors of the PRC Stores and the U.S. Stores include international and domestic companies that produce and sell bakery
products in Xinjiang and New York City, respectively, and their potential competitors include companies that produce and sell bakery products
in other cities in the U.S. The PRC Stores and the U.S. Stores compete for customers primarily on the basis of the price and quality of
their products, food safety, brand awareness and loyalty, responsiveness to customer demand and market trends, customer experience, the
ability to accurately estimate sales quota and control inventory, production capacity, and operation and management of chain stores. They
may not successfully compete with their existing competitors and new competitors may enter the market.
In addition, we cannot predict the pricing or
promotion actions of competitors of the PRC Stores and the U.S. Stores or their effect on customer perceptions or the success of advertising
and promotional efforts by the PRC Stores and the U.S. Stores. Competitors of the PRC Stores or the U.S. Stores may develop and launch
products targeted to compete directly with their products and some of their competitors may have substantially greater financial, marketing,
and other resources than they do. This creates competitive pressure that could cause the PRC Stores or the U.S. Stores to lose market
share or require them to lower prices, increase advertising expenditures, or increase the use of discounting or promotional campaigns.
These competitive factors may also restrict the ability of the PRC Stores and the U.S. Stores to increase prices, including in response
to commodity and other cost increases. If the PRC Stores and the U.S. Stores are unable to continue to respond effectively to these and
other competitive pressure, their customers may purchase fewer of their products or may insist on prices that erode their margins. These
or other developments could materially and adversely affect sales volumes and margins of the PRC Stores and the U.S. Stores and result
in a decrease in their operating results, which could have a material adverse effect on our business, financial condition, and results
of operations.
Our financial condition, results of operations,
and cash flows have been adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has spread throughout the
world, especially in China, the U.S., and Europe. The pandemic has resulted in the implementation of significant governmental measures,
including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Both the Chinese and U.S. governments
have ordered quarantines, travel restrictions, and the temporary closure of stores and facilities. Companies are also taking precautions,
such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses.
Due to the impact of the COVID-19 pandemic, all but one of the PRC
Stores were temporarily closed between late January and early March of 2020. The PRC Stores resumed their normal activities on March 8,
2020. However, all the PRC Stores were closed again on July 17, 2020 due to the resurgence of COVID-19 cases in Xinjiang. The PRC Stores
resumed their normal activities in September 2020. Due to a resurgence of the COVID-19 pandemic in August 2022 in Xinjiang (the “2022
Outbreak”), which resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines,
and travel bans, the operations of the PRC Stores and the production in the PRC Stores’ central factory were affected starting from
August 10, 2022 and all of the PRC Stores and the central factory were closed between October 5, 2022 and November 30, 2022. The PRC Stores
and the central factory started to reopen in early December 2022 and resumed their normal business activities on December 10, 2022, and
the PRC Stores have fully recovered from the 2022 Outbreak as of the date of this annual report. The PRC Stores took the following measures
during August and September 2022 to mitigate the adverse impact of COVID-19 pandemic and related lockdowns on their business:
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Selecting multiple suppliers in different cities with back-up supply chain plans. This increased the PRC Stores’ ability to produce and deliver products on schedule and their capacity to switch suppliers flexibly and safely in case of lockdowns in some of the cities. |
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Increasing online sales efforts and cooperating with top-tier online food delivery platforms, including Meituan (美团) and Ele.me (饿了么), to facilitate online sales. These online platforms, together with the PRC Stores’ digital platforms, helped the PRC Stores serve more customers when they were not able to serve customers in person because of the COVID-19 pandemic and the related lockdowns. |
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Operating the central factory in a close loop. The PRC Stores operated the central factory in a close loop and kept it fully self-sufficient, which enabled the PRC Stores to continue producing its products normally during a lock-down period. In addition, the PRC Stores were granted the approval from the local government to operate delivery vehicles and deliver food orders. As a result, the PRC Stores’ entire delivery fleet was able complete delivery orders during lockdown periods, while most local companies were not able to because of lockdown policies. |
In addition, consumer demand declines in China
have not had a material impact on the business of the PRC Stores, as consumer demand for bakery and beverage products has not declined
and usually increases for two to three months after governmental pandemic control measures are lifted based on past experiences of the
PRC Stores.
In the U.S., Chanson 23rd Street in New York City
provided only delivery and pickup services between the end of February 2020 and the end of June 2020, and resumed outdoor dining services
at the end of June 2020 and limited indoor dining services at the end of September 2020. Chanson 23rd Street suspended its indoor dining
services again between December 14, 2020 and February 11, 2021 according to an indoor dining ban issued by the Governor of New York State.
In addition, the renovation of Chanson Greenwich was delayed and the store opened in December 2021. Chanson 23rd Street resumed its indoor
dining services on February 12, 2021 at 25 percent capacity, which was increased to 35 percent on February 26, 2021 and further increased
to 50 percent and 75 percent on March 19, 2021 and May 7, 2021, respectively. Starting from May 19, 2021, Chanson 23rd Street has been
allowed to provide indoor dining services at full capacity, provided that either diners are seated at least six feet apart or tables are
separated by physical barriers. The six-feet rule was later lifted for fully vaccinated people and eventually for all people. As of the
date of this annual report, the U.S. Stores are providing indoor dining services at their full capacity.
See “Item 5. Operating and Financial Review
and Prospects—A. Operating Results—COVID-19 Affecting Our Results of Operations.” Consequently, the COVID-19 pandemic
has materially adversely affected our business operations and condition and operating results for 2022, 2021, and 2020, including but
not limited to material negative impact on our total revenue and net income.
The extent to which the COVID-19 pandemic impacts
our results of operations in 2023 will depend on the future developments of the outbreak, including new information concerning the global
severity of and actions taken to contain the outbreak, or the appearance of new or more severe strains of the virus, which are highly
uncertain and unpredictable.
Sales of the operating entities’ products
are subject to changing customer preferences. If the operating entities do not correctly anticipate such changes, their sales and profitability
may decline.
There are a number of trends in customer preferences
which have an impact on the operating entities and the bakery industry as a whole. These include, among others, preferences for ready-to-eat,
natural, and healthy products. Concerns as to the health impacts and nutritional value of certain bakery products may increasingly result
in bakery product manufacturers being encouraged or required to produce products with reduced levels of salt, sugar, and fat and to eliminate
trans-fatty acids and certain other ingredients. Customer preferences are also shaped by concern over the environmental impact of products.
The success of the operating entities’ business depends on both the continued appeal of their products and, given the varied backgrounds
and tastes of their customer base, their ability to offer a sufficient range of products to satisfy a broad spectrum of preferences. Any
shift in customer preferences in the markets in which the operating entities operate could have a material adverse effect on their business.
Customer tastes are also susceptible to change. The operating entities’ competitiveness therefore depends on their ability to predict
and quickly adapt to customer trends, exploiting profitable opportunities for product development without alienating their existing customer
base or focusing excessive resources or attention on unprofitable or short-lived trends. If the operating entities are unable to respond
on a timely and appropriate basis to changes in demand or customer preferences, their sales volumes and margins could be adversely affected.
The operating entities’ future results
and competitive position depend on the successful development of new products and improvement of existing products, which are subject
to a number of difficulties and uncertainties.
The operating entities’ future results and
ability to maintain or improve their competitive position depend on their capacity to anticipate changes in their key markets and to identify,
develop, manufacture, market, and sell new or improved products in these changing markets successfully. The PRC Stores and the U.S. Stores
aim to introduce new products and re-launch and extend existing product lines on a timely basis in order to counteract obsolescence and
decreases in sales of existing products as well as to increase overall sales of their products. The launch and success of new or modified
products are inherently uncertain, especially as to the products’ appeal to customers, and there can be no assurance as to the continuing
ability of the PRC Stores and the U.S. Stores to develop and launch successful new products or variations of existing products. The failure
to launch a product successfully can give rise to inventory write-offs and other costs and can affect customer perception of their other
products. Market factors and the need to develop and provide modified or alternative products may also increase costs. In addition, launching
new or modified products can result in cannibalization of sales of the existing products of the PRC Stores and the U.S. Stores if customers
purchase the new product in place of their existing products. If the PRC Stores and the U.S. Stores are unsuccessful in developing new
products in response to changing customer demand or preferences in an efficient and economical manner, or if their competitors respond
more effectively than they do, demand for their products may decrease, which could materially and adversely affect their business, financial
condition, and results of operations.
The operating entities’ inability
to source raw materials or other inputs of an acceptable type or quality could adversely affect their results of operations.
The PRC Stores and the U.S. Stores use significant
quantities of food ingredients and packaging materials and are therefore vulnerable to fluctuations in the availability and prices of
food ingredients, packaging materials, energy, and other supplies. In particular, raw materials such as milk, butter, eggs, flour, and
sugar have historically represented a significant portion of their cost of revenue, and accordingly, adverse changes in raw material prices
will impact their results of operations.
Specifically, the availability and the prices
of milk, eggs, and other agricultural commodities can be volatile. The PRC Stores and the U.S. Stores are also affected by the availability
of quality raw materials. General economic conditions, unanticipated demand, problems in manufacturing or distribution, natural disasters,
weather conditions during the growing and harvesting seasons, plant and livestock diseases, and local, national, or international quarantines
can also adversely affect availability and prices of commodities in the long and short term.
While the PRC Stores and the U.S. Stores attempt
to negotiate fixed prices for certain materials with their suppliers for periods up to a full year, most of their contracts with suppliers
do not have fix prices, therefore they cannot guarantee that they will be successful in managing input costs if prices increase for extended
periods of time. Moreover, there is no market for hedging against price volatility for certain raw materials and accordingly such materials
are bought at the spot rate in the market.
The ability of the PRC Stores and the U.S. Stores
to avoid the adverse effects of a pronounced and sustained price increase in raw materials is limited. Any increases in prices or scarcity
of ingredients or packaging materials required for their products could increase their costs and disrupt their operations. If the availability
of any of their inputs is constrained for any reason, they may not be able to obtain sufficient supplies or supplies of a suitable quality
on favorable terms or at all. Such shortages could materially and adversely affect our market share, business, financial condition, and
results of operations.
The inability of the PRC Stores and the
U.S. Stores to pass on price increases for materials or other inputs to their customers could adversely affect our results of operations.
The ability of the PRC Stores and the U.S. Stores
to pass through increases in the prices of raw materials to their customers depends, among others, on prevailing competitive conditions
and pricing methods in the markets in which they operate, and they may not be able to pass through such price increases to their customers.
Even if they are able to pass through increases in prices, there is typically a time lag between cost increases impacting their business
and implementation of product price increases, during which time their gross margin may be negatively impacted. During the adjustments
of the PRC Stores and the U.S. Stores to increase their prices to recover cost increases, customers may take actions which exacerbate
the impact of such cost increases, for example, by ceasing to purchase their products or deferring orders until adjustments have ended.
The inability of the PRC Stores and the U.S. Stores to pass through price increases in raw materials and preserve their profit margins
in the future could materially and adversely affect their business, financial condition, and results of operations.
The operating entities rely on their central
factory and a limited number of third-party producers and suppliers. Any interruption in operations at the central factory or in such
third-party producers or suppliers could prevent or limit their ability to meet demand for or fulfill orders of the operating entities’
products.
The PRC Stores operate a central factory located
in Urumqi, which produces all of the packaged bakery products, and the semi-finished products for birthday cakes and made-in-store pastries
for the PRC Stores. Any significant disruption at the central factory for any reason, including regulatory requirements, the loss of certifications
or approvals, technical difficulties, labor disputes, power interruptions or other infrastructure failures, fires, earthquakes, or other
force of nature, or terrorist attacks, could disrupt the supply of the products of the PRC Stores and significantly harm their results
of operations and financial performance.
In addition, the Premises Use Agreement for the
PRC Stores’ central factory expires in 2031, and the PRC Stores may be unable to renew this agreement or find a new facility on
commercially reasonable terms. If the PRC Stores were unable or unwilling to renew at the proposed rates, relocating their manufacturing
facility would involve significant expenses in connection with the movement and installation of key manufacturing equipment and any necessary
recertification with regulatory bodies, and we cannot assure you that such a move would not delay or otherwise adversely affect the PRC
Stores’ manufacturing activities or operating results. If the PRC Stores’ manufacturing capabilities were impaired by their
move, the PRC Stores may not be able to manufacture and ship their products in a timely manner, which would adversely impact their business.
The PRC Stores also depend upon a limited number of third-party producers
to produce all of the seasonal products. During the years ended December 31, 2022, 2021, and 2020, the four largest third-party suppliers
of the PRC Stores represented approximately 46%, 45%, and 59% of raw material purchases of the PRC Stores, respectively, and the three
largest third-party suppliers of the U.S. Stores represented approximately 42%, 49%, and 62% of raw material purchases of the U.S. Stores,
respectively. These third-party producers and suppliers are run by independent entities that are subject to their own unique operational
and financial risks, which are out of the control of the PRC Stores or the U.S. Stores. Certain contracts of the PRC Stores and the U.S.
Stores with key suppliers, such as for the raw materials they used in their products, can be terminated by the supplier upon giving notice
within a certain period. If any of these producers or suppliers breach or terminate their contracts with the PRC Stores or the U.S. Stores
or experience significant disruptions of their operations, the PRC Stores or the U.S. Stores will be required to find and enter into arrangements
with one or more replacement producers or suppliers. Finding alternative producers could involve significant delays and other costs and
these producers may not be available to the PRC Stores or the U.S. Stores on reasonable terms or at all. Any disruption of producing or
packaging could delay delivery of their products, which could harm their business and financial results and result in lost or deferred
revenue.
The operating entities’ geographic
focus makes them particularly vulnerable to economic and other events and trends in Xinjiang and New York City.
The current operations of our PRC subsidiary and the
VIEs are geographically limited to three cities in Xinjiang, and 30 of the 33 PRC Stores are located in Urumqi, the capital city of Xinjiang.
The PRC Stores derived 95%, 95%, and 93% of their revenue from stores in Urumqi in the years ended December 31, 2022, 2021, and 2020,
respectively. In addition, the U.S. Stores’ current operations are limited to New York City. The operating entities’ future
growth will depend on the growth and stability of the economy of Xinjiang, especially in Urumqi, and New York City. An economic downturn
of Xinjiang or New York City, governmental measures implemented in response to the COVID-19 pandemic, or the implementation of provincial
or local policies unfavorable to bakery industry may cause a decrease in the demand for the operating entities’ products and could
have a negative impact on their profitability and business.
The complex ethnic composition of Xinjiang has
given rise to ethnic and other tensions both in Urumqi and elsewhere in Xinjiang. Events such as terrorist and ethnic extremist attacks
as well as riots and the resulting political instability, economy suspension, and concerns over safety in Xinjiang could have a significant
adverse impact on the PRC Stores’ business, financial condition, and results of operation.
The PRC Stores and the U.S. Stores are currently
operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability
due to the ongoing military conflict between Russia and Ukraine. Their business, financial condition, and results of operations may be
materially and adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine
or any other geopolitical tensions.
The U.S. and global markets are experiencing volatility
and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On
February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported, which has since caused significant volatility
in commodity prices, credit and capital markets, as well as supply chain interruptions.
The PRC Stores and the U.S. Stores do not have
any operations outside of mainland China and the U.S. nor any business relationships, connections to, or assets in, Russia, Belarus, or
Ukraine. Although the ongoing military conflict between Russia and Ukraine has not had a material impact on the PRC Stores, the business,
financial condition, and results of operations of the U.S. Stores have been, and could continue to be, indirectly and adversely affected.
Such impact arises from: (i) volatility in the global supply of wheat, corn, barley, sunflower oil, and other agricultural commodities;
(ii) higher food prices due to supply constraints and the general inflationary impact of the war; (iii) increases in energy prices globally,
in particular for electricity and fossil fuels, such as crude oil and natural gas, and related transportation, freight, and warehousing
costs; and (iv) disruptions to logistics and supply chains. If the price of the products and services of the U.S. Stores increases at
a rate that is either unaffordable to their customers or insufficient to compensate for the rise in their costs and expenses, their business,
financial condition, results of operations, and prospects could be materially and adversely affected. In addition, Russian military actions
and the resulting sanctions could adversely affect the global economy and financial markets and lead to increased instability and lack
of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds.
The extent and duration of the military action,
sanctions, and resulting market and supply chain disruptions are highly unpredictable but could be substantial. Any such disruptions may
also magnify the impact of other risks described in this annual report.
Failure to maintain or enhance the operating
entities’ brands or image could have a material adverse effect on their business and results of operations.
We believe the operating entities’ “George●Chanson,”
“Patisserie ChansonTM,” and “Chanson” brands are well-recognized among their customers and other food
industry players such as other bakery product manufacturers and bakery chain stores in the local markets the operating entities operate
in. The operating entities’ brands are integral to their sales and marketing efforts. The operating entities’ continued success
in maintaining and enhancing their brands and image depends to a large extent on their ability to satisfy customer needs by further developing
and maintaining the quality of their products, as well as their ability to respond to competitive pressures. If the operating entities
are unable to satisfy customer needs or if their public image or reputation were otherwise diminished, their business transactions with
their customers may decline, which could in turn adversely affect their results of operations.
Health concerns or adverse developments
with respect to the safety or quality of products of the food industry in general or the operating entities’ products specifically
may damage their reputation, increase their costs of operations, and decrease demand for their products.
Food safety and the public’s perception
that the operating entities’ products are safe and healthy are essential to their image and business. The PRC Stores and the U.S.
Stores sell food products for human consumption, which subjects them to safety risks such as product contamination, spoilage, misbranding,
or product tampering. Product contamination, including the presence of a foreign object, substance, chemical, or other agent or residue
or the introduction of a genetically modified organism, could require product withdrawals or recalls or the destruction of inventory,
and could result in negative publicity, temporary plant closures, and substantial costs of compliance or remediation. The PRC Stores and
the U.S. Stores may also be impacted by publicity concerning any assertion that their products caused illness or injury. In addition,
they could be subject to claims or lawsuits relating to an actual or alleged illness stemming from product contamination or any other
incidents that compromise the safety and quality of their products. Any significant lawsuit or widespread product recall or other events
leading to the loss of customer confidence in the safety and quality of the operating entities’ products could damage their brand,
reputation, and image and negatively impact their sales, profitability, and prospects for growth. In addition, product recalls are difficult
to foresee and prepare for and, in the event that the PRC Stores and the U.S. Stores are required to recall one or more of their products,
such recall may result in loss of sales due to unavailability of their products and may take up a significant amount of their management’s
time and attention. The PRC Stores and the U.S. Stores maintain systems designed to monitor food safety risks and carefully select their
third-party producers and suppliers. These efforts, however, might not be successful and such risks might materialize. In addition, although
the PRC Stores and the U.S. Stores attempt, through contractual relationships and regular inspections, to control the risk of contamination
caused by third parties in relation to the manufacturing processes they outsource, their efforts might not be successful and contamination
of their products by third parties might materialize.
The PRC Stores and the U.S. Stores are also subject
to further risks affecting the food industry generally, including risks posed by widespread contamination and evolving nutritional and
health-related concerns. Regulatory authorities may limit the supply of certain types of food products in response to public health concerns
and customers may perceive certain products to be unsafe or unhealthy. As a result, the PRC Stores and the U.S. Stores or their suppliers
would be required to find alternative supplies or ingredients that may or may not be available at commercially reasonable prices and within
the required time. In addition, governmental regulations may require them to identify replacement products to offer to their customers
or, alternatively, to discontinue certain offerings or limit the range of products they offer. The PRC Stores and the U.S. Stores may
be unable to find substitutes that are as appealing to their customer base, or such substitutes may not be widely available or may be
available only at increased costs. Such substitutions or limitations could also reduce demand for their products.
The PRC Stores and the U.S. Stores could also
be subject to claims or lawsuits relating to an actual or alleged illness or injury or death stemming from the consumption of a misbranded,
altered, contaminated, or spoiled product, which could negatively affect their business. Awards of damages, settlement amounts, and fees
and expenses resulting from such claims and the public relations implications of any such claims could have an adverse effect on their
business. The PRC Stores and the U.S. Stores do not currently have insurance to cover claims for damages, and if they choose to purchase
such insurance, the availability and price of insurance to cover claims for damages are subject to market forces that they do not control,
and such insurance may not cover all the costs of such claims and would not cover damage to their reputation. Even if product liability
claims against them are not successful or fully pursued, these claims could be costly and time consuming and divert our management’s
time and resources towards defending them rather than operating our business. In addition, any adverse publicity concerning such claims,
even if unfounded, could cause customers to lose confidence in the safety and quality of the operating entities’ products and damage
their reputation and brand image.
The operating entities could incur material
costs to address violations of, or liabilities under, health, safety, and environmental regulations.
The operating entities’ facilities and operations
in the PRC are subject to numerous health, safety, and environmental regulations, including local and national laws governing, among other
things, water supply and use, water discharges, air emissions, chemical safety, clean-up of contamination, energy use, noise pollution,
and workplace health and safety. Health, safety, and environmental legislation in the PRC have generally become more comprehensive and
restrictive and more rigid over time and enforcement has become more stringent. Failure to comply with applicable requirements, or the
terms of required permits, can result in penalties or fines, clean-up costs, third-party property damage, and personal injury claims,
which could have a material adverse effect on the operating entities’ brand, business, financial condition, and results of operations.
In addition, if health, safety, and environmental laws and regulations in the PRC and the other countries in which the operating entities
operate or from which they source raw materials and ingredients become more stringent in the future, the extent and timing of investments
required to maintain compliance may exceed their budgets or estimates and may limit the availability of funding for other investments.
Furthermore, under some environmental laws, the
operating entities could be liable for costs incurred in investigating or remediating contamination at properties they own or occupy,
even if the contamination was caused by a party unrelated to them or was not caused by them, and even if the activity which caused the
contamination was legal at the time it occurred. The discovery of previously unknown contamination, or the imposition of new or more burdensome
obligations to investigate or remediate contamination at the operating entities’ properties or at third-party sites, could result
in substantial unanticipated costs which could have a material adverse effect on their business, financial condition, and results of operations.
The U.S. Stores and any future stores we may open
in the U.S. are subject to federal, state, and local laws and regulations concerning waste disposal, pollution, protection of the environment,
and the presence, discharge, storage, handling, release, and disposal of, and exposure to, hazardous or toxic substances. These environmental
laws provide for significant fines and penalties for noncompliance and liabilities for remediation, sometimes without regard to whether
the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous toxic substances. Third parties
may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of,
or actual or alleged exposure to, such hazardous or toxic substances at, on or from our stores. Environmental conditions relating to releases
of hazardous substances at prior, existing, or future store sites could materially adversely affect the U.S. Stores’ business, financial
condition, or results of operations. Further, environmental laws, and the administration, interpretation, and enforcement thereof, are
subject to change and may become more stringent in the future, each of which could materially adversely affect the U.S. Stores’
business, financial condition, or results of operations.
Increased distribution costs or disruption
of product transportation could adversely affect the operating entities’ business and financial results.
Distribution costs have historically fluctuated
significantly over time, particularly in connection with oil prices, and increases in such costs could result in reduced profits. In addition,
certain factors affecting distribution costs are controlled by third-party carriers. To the extent that the market price for fuel or freight
or the number or availability of carriers fluctuates, the operating entities’ distribution costs could be affected. In addition,
temporary or long-term disruption of product transportation due to weather-related problems, strikes, lockouts, or other events could
impair the operating entities’ ability to supply products affordably and in a timely manner or at all. Failure to deliver the operating
entities’ perishable food products promptly could also result in inventory spoilage and the inability to satisfy the demand of their
customers at their stores. Any increases in the cost of transportation, and any disruption in transportation, could have a material adverse
effect on the operating entities’ business, financial condition, and results of operations.
Failure to obtain and maintain required
licenses and permits or to comply with alcoholic beverage or food control regulations could lead to the loss of the U.S. Stores’
liquor and food service licenses and, thereby, harm their business, financial condition, or results of operations.
The food retail industry is subject to various
federal, state, and local government regulations, including those relating to the sale of food and alcoholic beverages. Such regulations
are subject to change from time to time. The failure to obtain and maintain licenses, permits, and approvals relating to such regulations
could adversely affect the business, financial condition, or results of operations of the U.S. Stores. Typically, licenses must be renewed
annually and may be revoked, suspended, or denied renewal for cause at any time if governmental authorities determine that the U.S. Stores’
conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses and approvals could adversely
affect the U.S. Stores and delay or result in their decision to cancel the opening of new stores, which would adversely affect their business,
financial condition, or results of operations.
Alcoholic beverage control regulations generally
require the U.S. Stores to apply to a state authority and, in certain locations, county, or municipal authorities for a license that must
be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects
of daily operations of the U.S. Stores, including minimum age of patrons and employees, hours of operation, advertising, trade practices,
wholesale purchasing, other relationships with alcohol manufacturers, wholesalers, and distributors, inventory control, and handling,
storage, and dispensing of alcoholic beverages. Any future failure to comply with these regulations and obtain or retain liquor licenses
could adversely affect the business, financial condition, or results of operations of the U.S. Stores.
Any disruption of our information technology
system would harm the operating entities’ business and reduce their profitability.
The operating entities rely on their information
technology systems, in particular the Enterprise Resource Planning management information system (the “ERP System”) in the
PRC Stores, for various services related to inventory management, production, product transportation, point of sales, and accounting and
financial management. The operating entities’ performance depends on the availability of accurate and timely data and other information
from key software applications to aid day-to-day business and decision-making processes. The operating entities may be adversely affected
if their controls designed to manage information technology operational risks fail to contain such risks. If the operating entities do
not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure and to maintain
the related automated and manual control processes, they could be subject to adverse effects including billing and collection errors,
business disruptions, in particular concerning their manufacturing and logistics functions, and security breaches. Any disruption caused
by failings in their information technology infrastructure equipment or of communication networks, could delay or otherwise impact their
day-to-day business and decision-making processes and negatively impact their performance. In addition, the operating entities are reliant
on third parties to service parts of their IT infrastructure. Failure on their part to provide good and timely service may have an adverse
impact on the operating entities’ information technology network. Furthermore, the operating entities do not control the facilities
or operations of their suppliers. An interruption of operations at any of their facilities or any failure by them to deliver on their
contractual commitments may have an adverse effect on the operating entities’ business, financial condition, and results of operations.
Data security breaches and attempts thereof
could negatively affect the operating entities’ reputation, credibility, and business.
The operating entities collect and store personal
information relating to their customers and employees, including their personally identifiable information, and rely on third parties
for the various social media tools and websites the operating entities use as part of their marketing strategy. Customers are increasingly
concerned over the security of personal information transmitted over the Internet (or through other mechanisms), consumer identity theft,
and user privacy. Any perceived, attempted, or actual unauthorized disclosure of personally identifiable information regarding the operating
entities’ employees, customers, or website visitors could harm their reputation and credibility, reduce their e-commerce sales,
impair their ability to attract website visitors, reduce their ability to attract and retain customers, and could result in litigation
against the operating entities or the imposition of significant fines or penalties. We cannot assure you that any of the operating entities’
third-party service providers with access to such personally identifiable information will maintain policies and practices regarding data
privacy and security in compliance with all applicable laws, or that they will not experience data security breaches or attempts thereof
which could have a corresponding adverse effect on the operating entities’ business.
Recently, data security breaches suffered by well-known
companies and institutions have attracted a substantial amount of media attention, prompting new foreign, national, provincial or state,
and local laws and legislative proposals addressing data privacy and security, as well as increased data protection obligations imposed
on merchants by credit card issuers. As a result, the operating entities may become subject to more extensive requirements to protect
the customer information that they process in connection with the purchase of their products, resulting in increased compliance costs.
A breach of security of confidential customer
information related to the U.S. Stores’ electronic processing of credit and debit card transactions could substantially affect its
reputation, business, financial condition, and results of operations.
A significant portion of the sales in the U.S.
Stores are by credit or debit cards. Other retailers have experienced security breaches in which credit and debit card information has
been stolen. The U.S. Stores may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual
or alleged theft of credit or debit card information, and the U.S. Stores may also be subject to lawsuits or other proceedings relating
to these types of incidents. The U.S. Stores may ultimately be held liable for the unauthorized use of a cardholder’s card number
in an illegal activity and be required by card issuers to pay charge-back fees. In addition, most states have enacted legislation requiring
notification of security breaches involving personal information, including credit and debit card information. Any such claim or proceeding
could cause the U.S. Stores to incur significant unplanned expenses, which could have an adverse impact on its business, financial condition,
or results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on the U.S. Stores
and could substantially affect its reputation and business, financial condition, or results of operations.
Governmental regulation may adversely affect
the operating entities’ ability to open new stores in the U.S. or otherwise adversely affect our business, financial condition,
or results of operations.
The U.S. Stores and any store or stores the operating
entities may open in the U.S. are subject to state and local licensing and regulation by health, alcoholic beverage, sanitation, food
and occupational safety, and other agencies. The operating entities may experience material difficulties or failures in obtaining the
necessary licenses, approvals, or permits for each store, which could delay store openings in the future or affect the operations in the
U.S. In addition, stringent and varied requirements of local regulators with respect to zoning, land use, and environmental factors could
delay or prevent development of new stores in particular locations.
Our subsidiaries in the U.S. are subject to the
U.S. Americans with Disabilities Act and similar state laws that give civil rights protections to individuals with disabilities in the
context of employment, public accommodations and other areas, including the U.S. Stores. The operating entities may in the future have
to modify their stores, for example, by adding access ramps or redesigning certain architectural fixtures, to provide service to or make
reasonable accommodations for disabled persons. The expenses associated with these modifications could be material.
The operations of the U.S. Stores and any store
or stores the operating entities may open in the U.S. are also subject to the U.S. Occupational Safety and Health Act, which governs worker
health and safety, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages and overtime, and a variety of similar
federal, state, and local laws that govern these and other employment law matters. In addition, federal, state, and local proposals related
to paid sick leave or similar matters could, if implemented, materially adversely affect the operating entities’ business, financial
condition, or results of operations.
Disclosure of the operating entities’
recipes and other proprietary information, or a failure to adequately protect these, could result in increased competition and have a
material adverse effect on their business and financial results.
Our ability to compete effectively depends in
part on the operating entities’ ability to obtain, maintain, and protect their proprietary information. Our operating entities rely
on trade secret laws and practices, including physical security, limited dissemination and access, and confidentiality agreements with
their employees, consultants, business partners, and others, to protect their recipes, proprietary processes, and other proprietary information.
However, trade secrets are difficult to protect, and courts outside the jurisdictions in which the operating entities operate may be less
willing to protect their trade secrets. The operating entities’ protective measures might not effectively prevent disclosure or
unauthorized use of proprietary information or provide an adequate remedy in the event of misappropriation, infringement, or other violations
of their proprietary information.
Existing laws afford only limited protection for
the operating entities’ proprietary rights. Despite their efforts, the operating entities may not be able to protect some of their
proprietary information, or the protection that they receive may not be sufficient. The operating entities face additional risks that
their protective measures could prove to be inadequate, including:
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intellectual property laws may not sufficiently support their proprietary rights or may change in the future in a manner adverse to them; and |
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effective protection of intellectual property rights may be unavailable or limited in some countries in which they operate or plan to do business. |
From time to time, the operating entities may
seek to enforce their proprietary rights against third parties. Policing unauthorized use of proprietary information can be difficult
and expensive. The operating entities may not be successful in their attempts to enforce their proprietary rights against third parties.
Any such litigation may result in substantial diversion of financial and management resources and, if decided unfavorably to the operating
entities, could have a material adverse effect on their business and financial results.
The operating entities are subject to the
risks associated with leasing a substantial amount of space and are required to make substantial lease payments under their operating
leases. Any failure to make these lease payments when due would likely harm their business, financial condition, and results of operations.
The operating entities do not own any real estate.
Instead, our subsidiaries and the VIEs lease all of their store locations and their corporate office and central factory in Xinjiang and
New York City. Many of their lease agreements have defined escalating rent provisions over the initial term and any extensions. As the
operating entities’ stores mature and as the operating entities expand their store base, their lease expenses and their cash outlays
for rent under their lease agreements will increase. Their substantial operating lease obligations could have significant negative consequences,
including:
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requiring that an increased portion of their cash from operations and available cash be applied to pay their lease obligations, thus reducing liquidity available for other purposes; |
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increasing their vulnerability to adverse general economic and industry conditions; |
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limiting their flexibility to plan for or react to changes in their business or in the industry in which they compete; and |
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limiting their ability to obtain additional financing. |
If an existing or future store is not profitable,
and the operating entities decide to close it, they may nonetheless remain committed to perform their obligations under the applicable
lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation
clause, the operating entities may not satisfy the contractual requirements for early cancellation under that lease.
The operating entities depend on cash flow from
operations to pay their lease expenses, finance their growth capital requirements, and fulfill their other cash needs. If the operating
entities’ business does not generate sufficient cash flow from operating activities to fund these requirements, they may not be
able to achieve their growth plans, fund their other liquidity and capital needs, or ultimately service their lease expenses, which would
harm their business.
Unexpected termination of leases, failure
to renew the leases of the operating entities’ existing premises, or failure to renew such leases at acceptable terms could materially
and adversely affect their business.
Our subsidiaries and the VIEs lease the premises
for all of their stores and their corporate office and central factory. As a result, the operating entities may be subject to compulsory
acquisition, closure, or demolition of any of the properties on which their stores are situated. Although the operating entities may receive
liquidated damages or compensation if their leases are terminated unexpectedly, they may be forced to suspend operations of the relevant
store and divert management attention, time, and costs to find a new site and relocate their store, which will negatively affect their
business and results of operations.
Our subsidiaries and the VIEs enter into leases
of approximately one to 15 years with an option to renew for their stores. Rent for their leases is typically fixed amounts and subject
to annual or biennially incremental increases as stipulated in the lease agreements. We cannot assure you that the operating entities
would be able to renew the relevant lease agreements without substantial additional cost or increase in the rental cost payable by them.
If a lease agreement is renewed at a rent substantially higher than the current rate, or currently existing favorable terms granted by
the lessor are not extended, the operating entities’ business and results of operations may be materially and adversely affected.
If the operating entities are unable to renew the leases for their store sites, they will have to close or relocate the store, which could
subject them to decoration and other costs and risks, and loss of existing customers, and could have a material adverse effect on their
business and results of operations. In addition, the relocated store may not perform as well as the existing store.
If the operating entities cannot manage
their growth effectively and efficiently, their results of operations or profitability could be adversely affected.
Our revenue for the year ended December 31, 2021
increased by 42.4% to $14,690,295 from $10,313,512 for the year ended December 31, 2020. Although our revenue for the year ended December
31, 2022 decreased by 9.7% to $13,272,075 from $14,690,295 for the year ended December 31, 2021 due to the impact of the COVID-19 pandemic,
we still intend to continue to expand our business by opening new stores. This expansion has placed, and will continue to place, substantial
demands on the operating entities’ managerial, operational, technological, and other types of resources. The operating entities’
planned expansion will also place significant demands on them to maintain the quality of their product and customer services to ensure
that their brand does not suffer as a result of any deviations, whether actual or perceived, in the quality of their product and customer
services. In order to manage and support their growth, the operating entities must continue to improve their existing operational, administrative,
and technological systems and their financial and management controls, and recruit, train, and retain additional qualified bakery industry
professionals as well as other administrative and sales and marketing personnel, particularly as they expand into new markets and launch
new business initiatives. The operating entities may not be able to effectively and efficiently manage the growth of their operations,
recruit and retain qualified personnel, and integrate new expansion into their operations. As a result, their quality of service may deteriorate
and their results of operations or profitability could be adversely affected.
Any decrease in customer traffic in the
shopping malls or other locations in which the operating entities’ stores are located could cause their sales to be less than expected.
The operating entities’ stores are located
in shopping malls, other shopping centers, and busy street locations. Sales at these stores are derived, to a significant degree, from
the volume of customer traffic in those locations and in the surrounding area. The operating entities’ stores benefit from the current
popularity of shopping malls and centers as shopping destinations and their ability to generate customer traffic in the vicinity of these
stores. The operating entities’ sales volume and customer traffic may be adversely affected by, among other things:
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economic downturns in Xinjiang or New York City; |
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high fuel prices; |
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changes in customer demographics; |
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a decrease in popularity of shopping malls or centers in which a significant number of their stores are located; |
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epidemics, such as the COVID-19 pandemic, and measures imposed by governments or shopping malls in response to such epidemics, including limiting the number of customers in shopping malls; |
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the closing of the “anchor” store of a shopping mall or center or the stores of other key tenants; or |
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a deterioration in the financial condition of shopping mall and center operators or developers which could, for example, limit their ability to maintain and improve their facilities. |
A reduction in customer traffic as a result of
these or any other factors could have a material adverse effect on the operating entities.
In addition, severe weather conditions and other
catastrophic occurrences in areas in which the operating entities have stores may have a material adverse effect on their results of operations.
Such conditions may result in physical damage to the operating entities’ stores, loss of inventory, decreases in customer traffic,
and closure of one or more of their stores. Any of these factors may disrupt the operating entities’ business and have a material
adverse effect on their financial condition and results of operations.
If the operating entities are unable to
attract, train, assimilate, and retain employees that embody their culture, including store personnel, store and district managers, senior
managers, and technicians, they may not be able to grow or successfully operate their business.
The operating entities’ success depends
in part upon their ability to attract, train, assimilate, and retain a sufficient number of employees, including store personnel, store
managers, and district managers, who understand and appreciate their culture and are able to represent their brand effectively and establish
credibility with their customers. If the operating entities are unable to hire and retain store personnel capable of consistently providing
a high level of customer service, as demonstrated by their enthusiasm for the operating entities’ culture, understanding of their
customers, and knowledge of the bakery and other products the operating entities offer, the operating entities’ ability to open
new stores may be impaired, the performance of their existing and new stores could be materially adversely affected, and their brand image
may be negatively impacted. In addition, the rate of employee turnover in the bakery industry is typically high and finding qualified
candidates to fill positions may be difficult. The operating entities’ planned growth will require them to attract, train, and assimilate
even more personnel. Any failure to meet their staffing needs or any material increases in team member turnover rates could have a material
adverse effect on their business or results of operations.
We place substantial reliance on the bakery industry
experience and knowledge of our senior management team as well as their relationships with other industry participants. Mr. Gang Li, our
Chairman, and Ms. Jihong Cai, our chief financial officer, are particularly important to our future success due to their substantial experience
and reputation in the bakery markets. We do not carry, and do not intend to procure, key person insurance on any of our senior management
team. The loss of the services of one or more members of our senior management team due to their departure, or otherwise, could hinder
our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for our current senior
management could be difficult, and competition for such personnel of similar experience is intense. If we fail to retain our senior management,
our business and results of operations could be materially and adversely affected.
The market for technicians and other individuals
with the required technical expertise to succeed in the operating entities’ business is highly competitive. There may be a limited
supply of qualified individuals in some of the cities in the PRC where the operating entities have operations and other cities into which
they intend to expand. The operating entities must hire and train qualified technicians and other employees on a timely basis to keep
pace with their rapid growth while maintaining consistent quality of products across their operations in various geographic locations.
The operating entities must also provide continuous training to their technicians and other employees so that these employees are equipped
with up-to-date knowledge of various aspects of their operations and can meet their demand for high-quality products. If the operating
entities fail to do so, the quality of their products may decrease in one or more of the markets where they operate, which in turn, may
cause a negative perception of their brand and adversely affect their business.
Failure to maintain the quality of customer
services could harm the operating entities’ reputation and their ability to retain existing customers and attract new customers,
which may materially and adversely affect their business, financial condition, and results of operations.
The operating entities’ business is significantly
affected by the overall size of their customer base, which in turn is determined by, among other factors, these customers’ experience
with their customer services. As such, the quality of customer services is critical to retaining their existing customers and attracting
new customers. If the operating entities fail to provide quality customers services, their customers may be less inclined to visit the
operating entities’ stores and purchase their products or recommend these stores to new customers, and may switch to the operating
entities’ competitors. Failure to maintain the quality of customer services could harm the operating entities’ reputation
and may materially and adversely affect their business, financial condition, and results of operations.
The ongoing need for renovations and other
capital improvements at the operating entities’ stores could have a material adverse effect on the operating entities, including
their financial condition, liquidity, and results of operations.
To improve the in-store experience of our customers,
the operating entities’ stores have an ongoing need for maintenance and renovations and other capital improvements, including replacements,
from time to time, of furniture, fixtures, and equipment. These capital improvements may give rise to the following risks:
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possible environmental liabilities; |
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construction cost overruns and delays; |
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the decline in revenue while stores are out of service due to capital improvement projects; |
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a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to the operating entities on favorable terms, or at all; |
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uncertainties as to market demand or a loss of market demand after capital improvements have begun; and |
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bankruptcy or insolvency of a contracted party during a capital improvement project or other situation that renders them unable to complete their work. |
The costs of all these capital improvements or
any of the above noted factors could have a material adverse effect on the operating entities, including their financial condition, liquidity,
and results of operations.
Future acquisitions may have an adverse
effect on the operating entities’ ability to manage our business.
The operating entities may acquire businesses,
technologies, services, or products which are complementary to their core bakery product manufacturing and retail business. Future acquisitions
may expose the operating entities to potential risks, including risks associated with the integration of new operations, services,
and personnel, unforeseen or hidden liabilities, the diversion of resources from the operating entities’ existing business and technology,
their potential inability to generate sufficient revenue to offset new costs, the expenses of acquisitions, or the potential loss of or
harm to relationships with both employees and customers resulting from their integration of new businesses.
Any of the potential risks listed above could
have a material adverse effect on the operating entities’ ability to manage their business, their revenue, and net income. The operating
entities may need to raise additional debt funding or sell additional equity securities to make such acquisitions. The raising of additional
debt funding by the operating entities, if required, would result in increased debt service obligations and could result in additional
operating and financing covenants, or liens on their assets, that would restrict their operations. The sale of additional equity securities
could result in additional dilution to our shareholders.
Risks Relating to Our Class A Ordinary Shares
and the Trading Market
If we fail to establish and maintain an
effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent
fraud may be adversely affected, and investor confidence and the market price of our Class A Ordinary Shares may be adversely impacted.
We are subject to reporting obligations under
U.S. securities laws. The SEC adopted rules pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 requiring every public company to
include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s
assessment of the effectiveness of its internal control over financial reporting.
Our independent registered public accounting firm
has not conducted an audit of our internal control over financial reporting. However, in preparing our consolidated financial statements
as of and for the years ended December 31, 2022, 2021, and 2020, we have identified material weaknesses in our internal control over financial
reporting, as defined in the standards established by the PCAOB, and other control deficiencies. The material weaknesses identified included:
(i) a lack of accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements and
(ii) inappropriate privileged access in Yonyou ERP system application. See “Item 15. Controls and Procedures—Disclosure Controls
and Procedures.” Subsequent to year end our management has remediated the inappropriate privileged access and is currently in the
process of evaluating the steps necessary to remediate the first material weakness, such as (i) hiring more qualified accounting personnel
with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a
financial and system control framework, and (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training
programs for our accounting and financial reporting personnel. Measures that we implement may not fully address the material weakness
in our internal control over financial reporting and we may not be able to conclude that the material weakness has been fully remedied.
Failure to correct the material weakness and other
control deficiencies or failure to discover and address any other control deficiencies could result in inaccuracies in our consolidated
financial statements and could also impair our ability to comply with applicable financial reporting requirements and make related regulatory
filings on a timely basis. As a result, our business, financial condition, results of operations, and prospects, as well as the trading
price of our Class A Ordinary Shares, may be materially and adversely affected. Due to the material weakness in our internal control over
financial reporting as described above, our management concluded that our internal control over financial reporting was not effective
as of December 31, 2022. This could adversely affect the market price of our Class A Ordinary Shares due to a loss of investor confidence
in the reliability of our reporting processes.
The dual class structure of our ordinary
shares has the effect of concentrating voting control with our Chairman, and his interest may not be aligned with the interests of our
other shareholders.
We have a dual-class voting structure consisting
of Class A Ordinary Shares and Class B Ordinary Shares. Under this structure, holders of Class A Ordinary Shares are entitled to one vote
per one Class A Ordinary Share, and holders of Class B Ordinary Shares are entitled to 10 votes per one Class B Ordinary Share, which
may cause the holders of Class B Ordinary Shares to have an unbalanced, higher concentration of voting power. As of the date of this annual
report, Mr. Gang Li, our Chairman, beneficially owns 2,700,000, or 41.86% of our issued Class A Ordinary Shares, and 5,670,000, or 95.45%,
of our issued Class B Ordinary Shares, representing approximately 90.21% of the voting rights in our Company. As a result, until such
time as Mr. Gang Li’s voting power is below 50%, Mr. Gang Li as the controlling shareholder has substantial influence over our business,
including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and
other significant corporate actions. He may take actions that are not in the best interests of us or our other shareholders. These corporate
actions may be taken even if they are opposed by our other shareholders. Further, such concentration of voting power may discourage, prevent,
or delay the consummation of change of control transactions that shareholders may consider favorable, including transactions in which
shareholders might otherwise receive a premium for their shares. Future issuances of Class B Ordinary Shares may also be dilutive to the
holders of Class A Ordinary Shares. As a result, the market price of our Class A Ordinary Shares could be adversely affected.
The dual-class structure of our ordinary
shares may adversely affect the trading market for our Class A Ordinary Shares.
Several shareholder advisory firms have announced
their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may cause shareholder
advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital
structure. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure
could also adversely affect the value of our Class A Ordinary Shares.
Since we are a “controlled company”
within the meaning of the Nasdaq listing rules, we may follow certain exemptions from certain corporate governance requirements that could
adversely affect our public shareholders.
Our largest shareholder, Mr. Gang Li, owns more
than a majority of the voting power of our outstanding ordinary shares. Under the Nasdaq listing rules, a company of which more than 50%
of the voting power is held by an individual, group, or another company is a “controlled company” and is permitted to phase
in its compliance with the independent committee requirements. Although we do not intend to rely on the “controlled company”
exemptions under the Nasdaq listing rules even if we are a “controlled company,” we could elect to rely on these exemptions
in the future. If we were to elect to rely on the “controlled company” exemptions, a majority of the members of our board
of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist
entirely of independent directors. Accordingly, if we rely on the exemptions, during the period we remain a controlled company and during
any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to
shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
Substantial future sales of our Class A
Ordinary Shares or the anticipation of future sales of our Class A Ordinary Shares in the public market could cause the price of our Class
A Ordinary Shares to decline.
Sales of substantial amounts of our Class A Ordinary
Shares in the public market, or the perception that these sales could occur, could cause the market price of our Class A Ordinary Shares
to decline. An aggregate of 6,450,000 Class A Ordinary Shares are outstanding as of the date of this annual report. Sales of these shares
into the market could cause the market price of our Class A Ordinary Shares to decline.
We do not intend to pay dividends for the
foreseeable future.
We currently intend to retain any future earnings
to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future.
As a result, you may only receive a return on your investment in our Class A Ordinary Shares if the market price of our Class A Ordinary
Shares increases.
If securities or industry analysts do not
publish research or reports about our business, or if the publish a negative report regarding our Class A Ordinary Shares, the price of
our Class A Ordinary Shares and trading volume could decline.
Any trading market for our Class A Ordinary Shares
may depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any
control over these analysts. If one or more of the analysts who cover us downgrade us, the price of our Class A Ordinary Shares would
likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose
visibility in the financial markets, which could cause the price of our Class A Ordinary Shares and the trading volume to decline.
The market price of our Class A Ordinary
Shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above
the public offering price.
From the closing of our initial public offering on April 3, 2023 to
the date of this annual report, the closing price of our Class A Ordinary Shares has ranged from $1.10 to $2.45 per share. The trading
price of our Class A Ordinary Shares is likely to continue to be volatile and could fluctuate widely due to factors beyond our control.
This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other
companies with business operations located mainly in China that have listed their securities in the United States. The securities of some
of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial
price declines in their trading prices. The trading performances of other Chinese companies’ securities after their offerings may
affect the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading
performance of our Class A Ordinary Shares, regardless of our actual operating performance.
The market price of our Class A Ordinary Shares
may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our revenue and other operating results; |
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; |
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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; |
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announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; |
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; |
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lawsuits threatened or filed against us; and |
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other events or factors, including those resulting from war or incidents of terrorism, or responses to these events. |
In addition, the stock markets have experienced
extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies.
Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.
In the past, shareholders have filed securities class action litigation following periods of market volatility. If we were to become involved
in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business,
and adversely affect our business.
The price of our Class A Ordinary Shares
could be subject to rapid and substantial volatility. Such volatility, including any stock run-ups, may be unrelated to our actual or
expected operating performance and financial condition or prospects, making it difficult for prospective investors to assess the rapidly
changing value of our Class A Ordinary Shares.
There have been instances of extreme stock price
run-ups followed by rapid price declines and strong stock price volatility with recent initial public offerings, especially among those
with relatively smaller public floats. As a relatively small-capitalization company with a relatively small public float, we may experience
greater share price volatility, extreme price run-ups, lower trading volume, and less liquidity than large-capitalization companies. In
particular, our Class A Ordinary Shares may be subject to rapid and substantial price volatility, low volumes of trades, and large spreads
in bid and ask prices. Such volatility, including any stock run-ups, may be unrelated to our actual or expected operating performance
and financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our Class
A Ordinary Shares.
In addition, if the trading volumes of our Class
A Ordinary Shares are low, persons buying or selling in relatively small quantities may easily influence the price of our Class A Ordinary
Shares. This low volume of trades could also cause the price of our Class A Ordinary Shares to fluctuate greatly, with large percentage
changes in price occurring in any trading day session. Holders of our Class A Ordinary Shares may also not be able to readily liquidate
their investment or may be forced to sell at depressed prices due to low volume trading. Broad market fluctuations and general economic
and political conditions may also adversely affect the market price of our Class A Ordinary Shares. As a result of this volatility, investors
may experience losses on their investment in our Class A Ordinary Shares. A decline in the market price of our Class A Ordinary Shares
also could adversely affect our ability to issue additional Class A Ordinary Shares or other securities and our ability to obtain additional
financing in the future. No assurance can be given that an active market in our Class A Ordinary Shares will develop or be sustained.
If an active market does not develop, holders of our Class A Ordinary Shares may be unable to readily sell the shares they hold or may
not be able to sell their shares at all.
If we cease to qualify as a foreign private
issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers,
and we would incur significant additional legal, accounting, and other expenses that we would not incur as a foreign private issuer.
As a foreign private issuer, we are exempt from
the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors, and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In
addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as
promptly as United States domestic issuers, and we are not required to disclose in our periodic reports all of the information that United
States domestic issuers are required to disclose. While we currently are deemed as a foreign private issuer, we may cease to qualify as
a foreign private issuer in the future, in which case we would incur significant additional expenses that could have a material adverse
effect on our results of operations.
Because we are a foreign private issuer
and are exempt from certain Nasdaq corporate governance standards applicable to U.S. issuers, you will have less protection than you would
have if we were a domestic issuer.
As a Cayman Islands company listed on the Nasdaq
Capital Market, we are subject to the Nasdaq corporate governance listing standards. Nasdaq rules, however, permit a foreign private
issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman
Islands, which is our home country, may differ significantly from the Nasdaq corporate governance listing standards.
Nasdaq Listing Rule 5635 generally provides that
shareholder approval is required of U.S. domestic companies listed on Nasdaq prior to issuance (or potential issuance) of securities (i)
equaling 20% or more of the company’s common stock or voting power for less than the greater of market or book value (ii) resulting
in a change of control of the company; and (iii) which is being issued pursuant to a stock option or purchase plan to be established or
materially amended or other equity compensation arrangement made or materially amended. Notwithstanding this general requirement, Nasdaq
Listing Rule 5615(a)(3)(A) permits foreign private issuers to follow their home country practice rather than these shareholder approval
requirements. The Cayman Islands do not require shareholder approval prior to any of the foregoing types of issuances. We, therefore,
are not required to obtain such shareholder approval prior to entering into a transaction with the potential to issue securities as described
above. We intend to comply with the requirements of Nasdaq listing rules in determining whether shareholder approval is required on such
matters. We may, however, consider following home country practice in lieu of the requirements under Nasdaq listing rules with respect
to certain corporate governance standards which may afford less protection to investors.
Nasdaq Listing Rule 5605(b)(1) requires listed
companies to have, among other things, a majority of its board members be independent. As a foreign private issuer, however, we are permitted
to, and we may follow home country practice in lieu of the above requirement. The corporate governance practice in our home country, the
Cayman Islands, does not require a majority of our board to consist of independent directors. Currently, a majority of our board members
are independent. However, if we change our board composition such that independent directors do not constitute a majority of our board
of directors, our shareholders may be afforded less protection than they would otherwise enjoy under Nasdaq’s corporate governance
requirements applicable to U.S. domestic issuers.
If we cannot satisfy, or continue to satisfy,
the continued listing requirements and other rules of the Nasdaq Capital Market, our securities may not be listed or may be delisted,
which could negatively impact the price of our securities and your ability to sell them.
Our Class A Ordinary Shares are listed on the
Nasdaq Capital Market. In order to maintain our listing on the Nasdaq Capital Market, we are required to comply with certain rules of
the Nasdaq Capital Market, including those regarding minimum stockholders’ equity, minimum share price, minimum market value of
publicly held shares, and various additional requirements. Even if we currently meet the listing requirements and other applicable rules
of the Nasdaq Capital Market, we may not be able to continue to satisfy these requirements and applicable rules. If we are unable to satisfy
the Nasdaq Capital Market criteria for maintaining our listing, our securities could be subject to delisting.
If the Nasdaq Capital Market subsequently delists
our securities from trading, we could face significant consequences, including:
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a limited availability for market quotations for our securities; |
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reduced liquidity with respect to our securities; |
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a determination that our Class A Ordinary Share is a “penny stock,” which will require brokers trading in our Class A Ordinary Share to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our Class A Ordinary Share; |
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limited amount of news and analyst coverage; and |
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a decreased ability to issue additional securities or obtain additional financing in the future. |
Because we are an “emerging growth
company,” we may not be subject to requirements that other public companies are subject to, which could affect investor confidence
in us and our Class A Ordinary Shares.
For as long as we remain an “emerging growth
company,” as defined in the Jumpstart Our Business Startups Act of 2012, we will elect to take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including,
but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of
2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from
the requirements of shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory
requirements, our shareholders would be left without information or rights available to shareholders of more mature companies. If some
investors find our Class A Ordinary Shares less attractive as a result, there may be a less active trading market for our Class A Ordinary
Shares and our share price may be more volatile.
The laws of the Cayman Islands may not provide
our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United States.
We are an exempted company incorporated under
the laws of the Cayman Islands with limited liability. Our corporate affairs are governed by our amended and restated memorandum and articles
of association, by the Companies Act (2021 Revision) of the Cayman Islands and by the common law of the Cayman Islands. The rights of
shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors
to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands
is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy
Council (which is the final Court of Appeal for British overseas territories such as the Cayman Islands) are binding on a court in the
Cayman Islands. Decisions of the English courts, and particularly the Supreme Court and the Court of Appeal are generally of persuasive
authority but are not binding in the courts of the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are similarly
of persuasive but not binding authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman
Islands law are not as clearly established as they would be under statutes or judicial precedents in the U.S. In particular, the Cayman
Islands has a less developed body of securities laws relative to the U.S. Therefore, our public shareholders may have more difficulty
protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of
a corporation incorporated in a jurisdiction in the U.S.
Shareholders of Cayman Islands exempted companies
like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of the register of members of
these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions,
our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make
it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies
from other shareholders in connection with a proxy contest.
As a result of all of the above, public shareholders
may have more difficulty in protecting their interests in the face of actions taken by our management, members of the board of directors,
or controlling shareholders than they would as public shareholders of a company incorporated in the U.S.
You may be unable to present proposals before
annual general meetings or extraordinary general meetings not called by shareholders.
Cayman 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. These rights, however, 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 10% of our voting share capital in issue, to requisition a general meeting of our
shareholders, in which case our directors are obliged to call such meeting. Advance notice of at least 21 clear days is required for the
convening of our annual general shareholders’ meeting and at least 14 clear days’ notice any other general meeting of our
shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not
less than one-third of the total issued shares carrying the right to vote at a general meeting of the Company. For these purposes, “clear
days” means that period excluding (a) the day when the notice is given or deemed to be given and (b) the day for which it is given
or on which it is to take effect.
If we are classified as a PFIC, United States
taxpayers who own our Class A Ordinary Shares may have adverse United States federal income tax consequences.
A non-U.S. corporation such as ourselves will
be classified as a PFIC, for any taxable year if, for such year, either:
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At least 75% of our gross income for the year is passive income; or |
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The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held for the production of passive income is at least 50%. |
Passive income generally includes dividends, interest,
rents and royalties (other than rents or royalties derived from the active conduct of a trade or business), and gains from the disposition
of passive assets.
If we are determined to be a PFIC for any taxable
year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our Class A Ordinary Shares, the U.S. taxpayer
may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
Depending on the amount of cash we have and any
other assets held for the production of passive income, it is possible that, for our current taxable year or for any subsequent year,
more than 50% of our assets may be assets which produce passive income, in which case we would be deemed a PFIC, which could have adverse
U.S. federal income tax consequences for U.S. taxpayers who are shareholders. We will make this determination following the end of any
particular tax year.
Although the law in this regard is unclear, we
treat the PRC operating entities as being owned by us for United States federal income tax purposes, not only because we exercise effective
control over the operations of such entities but also because we are entitled to substantially all of their economic benefits, and, as
a result, we consolidate their operating results in our consolidated financial statements. For purposes of the PFIC analysis, in general,
a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own
at least 25% of the equity by value.
For a more detailed discussion of the application
of the PFIC rules to us and the consequences to U.S. taxpayers if we were or are determined to be a PFIC, see “Item 10. Additional
Information—E. Taxation—United States Federal Income Taxation—PFIC.”
Anti-takeover provisions in our amended
and restated memorandum and articles of association may discourage, delay, or prevent a change in control.
Some provisions of our amended and restated memorandum
and articles of association may discourage, delay, or prevent a change in control of our company or management that shareholders may consider
favorable, including, among other things, the following:
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provisions that authorize our board of directors to issue shares with preferred, deferred, or other special rights or restrictions without any further vote or action by our shareholders; and |
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provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings. |
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
On March 21, 2022, Chanson NY formed a wholly
owned subsidiary, Chanson Broadway, a New York limited liability company.
On March 30, 2023, our Class A Ordinary Shares commenced trading on
the Nasdaq Capital Market under the symbol “CHSN.” On April 3, 2023, we closed our initial public offering. We raised $13,560,000
in gross proceeds from our initial public offering (“IPO”), before deducting underwriting discounts and other related expenses.
See “Item 3. Key Information—Our Corporate Structure.”
Corporate Information
We are an exempted company with limited liability incorporated under
the laws of the Cayman Islands on July 26, 2019. Our principal executive offices are located at No. 26 Culture Road, Tianshan District,
Urumqi, Xinjiang, China, and our phone number is +86-0991-2302709. Our registered office in the Cayman Islands is located at 4th Floor,
Harbour Place, 103 South Church Street, PO Box 10240, Grand Cayman, KY1-1002 Cayman Islands, and the phone number of our registered office
is +1-345-949-8599. We maintain corporate websites at ir.chanson-international.net, www.patisseriechanson.com, and www.thymebarnyc.com.
The information contained in, or accessible from, our websites or any other website does not constitute a part of this annual report.
Our agent for service of process in the U.S. is George Chanson (NY) Corp., located at 41 Madison Avenue, New York, NY 10010.
The SEC maintains a website at www.sec.gov that
contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC using
its EDGAR system.
For information regarding our principal capital
expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures.”
B. Business Overview
Overview
The PRC Stores and the U.S. Stores manufacture
and sell a wide selection of bakery products, seasonal products (i.e. products sold during particular holiday seasons), and beverage products;
some of these stores also offer eat-in services. The PRC Stores and the U.S. Stores currently focus their business in Xinjiang of the
PRC and New York City, respectively. The PRC Stores and the U.S. Stores aim to make healthy, nutritious, and ready-to-eat food through
advanced facilities and industry research and to create a comfortable, yet distinguishable store environment in which customers can enjoy
their products.
The PRC Stores are a bakery chain consisting of
33 stores operated by Xinjiang United Family and the VIEs, under the “George●Chanson” brand in Xinjiang, and the U.S.
Stores sell their products in New York City. Selling through directly-operated stores, instead of franchise stores, allows the operating
entities to run their entire operation more efficiently and to exercise greater control over the quality of products and the presentation
of their brand, and to better manage customer experience in the stores. The PRC Stores and the U.S. Stores also sell their products on
their digital platforms and through third-party online food ordering platforms. The current customer base of the PRC Stores and the U.S.
Stores consists of both individual and corporate customers. To expand their customer base, the PRC Stores and the U.S. Stores have developed
a variety of marketing and sale strategies, such as increasing their presence on social media platforms, devising pricing and discounting
programs, and improving customer in-store experience.
The Company plans to continue its expansions in China and the U.S.
The Company opened one store in China in fiscal year 2022 and plans to open three to five new stores in China annually during the next
five years, which is expected to cost approximately RMB1.5 million to RMB3.0 million (approximately $0.2 million to $0.4 million) each
year. The Company plans to support the expansion plan with its cash on hand and cash flows from operations in PRC. In addition, Chanson
3rd Ave opened a store in March 2023. The renovation of Chanson Broadway was delayed and the store is expected to be open in May 2023.
The total budget for the two new stores is $1 million. The Company also plans to open six additional new stores in the U.S. later in fiscal
year 2023, which is expected to cost approximately $3.0 million in total. The Company plans to use its cash on hand, cash flows from operations,
and the proceeds it received from its IPO to open the new stores in the U.S.
The PRC Stores manufacture the majority of bakery
products in their central factory located in Urumqi, Xinjiang, prepare beverage products within the stores, and contract third-party manufacturers
to produce seasonal products. the U.S. Stores bake bakery products, prepare breakfast, lunch and all-day brunch, bar food, and other light
meals for eat in, and make beverage products all within the kitchen in the store. To ensure the quality and safety of their products,
the PRC Stores and the U.S. Stores procure raw materials, including flour, eggs, and milk, from renowned suppliers with a record of consistently
supplying high-quality raw materials over decades in the food industry. In addition, the PRC Stores and the U.S. Stores have implemented
a rigorous quality control system covering their entire operation process and mandated internal training to improve their employees’
awareness and knowledge of food safety.
The PRC Stores and the U.S. Stores have dedicated
and highly-experienced product development teams that constantly create new products that reflect market trends and are designed to meet
customer demand. As of March 2023, the PRC Stores had more than 707 types of bakery products and seasonal products on sale, including
over 145 types of new products introduced to the market since 2022, and the U.S. Stores had 138 types of eat-in menu items and bakery
products on sale, including 15 types of new products introduced to the market since 2022. The PRC Stores and the U.S. Stores also offer
a large number of beverage products and update their drink menus seasonally and in response to ever changing customer demand. By continuously
offering new products and refining their product formulas to enhance existing products, we believe that the PRC Stores and the U.S. Stores
are able to steadily bring in new customers and increase the frequency of their existing customers’ visits to their stores, digital
platforms, and store page on third-party platforms.
For the years ended December 31, 2022, 2021, and
2020, we had total revenue of $13,272,075, $14,690,295, and $10,313,512, and a net loss of $1,288,205, net income of $506,769 and a net
loss of $164,029, respectively. The PRC Stores accounted for 71.6%, 87.1%, and 87.0% of our total revenue for those fiscal years, respectively,
and the U.S. Stores accounted for 28.4%, 12.9%, and 13.0%, respectively.
The PRC Stores primarily generate revenue through
sale of bakery products, seasonal products, and beverage products. For the years ended December 31, 2022, 2021, and 2020, revenue derived
from sale of bakery products accounted for 91.7%, 91.4%, and 91.8% of the PRC Stores’ revenue, revenue derived from sale of seasonal
products accounted for 7.3%, 7.6%, and 6.6%, and revenue derived from sale of beverage products accounted for 1.0%, 1.0%, and 1.6%, respectively.
The U.S. Stores primarily generate revenue through
offering eat-in services and sale of bakery products and beverage products. For the years ended December 31, 2022, 2021, and 2020, revenue
derived from offering eat-in services accounted for 29.6%, 22.2%, and 37.9% of the U.S. Stores’ revenue, revenue derived from sale
of bakery products accounted for 16.2%, 25.0%, and 44.6%, and revenue derived from sale of beverage products accounted for 54.2%, 52.8%,
and 17.5%, respectively.
Our Competitive Strengths
We believe we have the following competitive strengths:
Trendy Brand Reflecting Healthy Food Concepts
The PRC Stores and the U.S. Stores aim to promote
long-term, healthy diets, and have integrated healthy food concepts and nutritious elements into all lines of their products. They have
successfully developed a group of popular products based on the low-fat, low-sugar, low-sodium, and protein-rich principles while adjusting
product textures and tastes to accommodate customer preferences. These products, including enzyme bread, high-fiber bread, whole-wheat
bread, and calcium bread, have been highly praised by their customers. We believe the differentiated approach of the PRC Stores and the
U.S. Stores will continue to strengthen the loyalty of existing customers to their brand and will attract new customers to both their
products and brand.
Strict Quality Control
Product quality has always been one of the top
priorities of the PRC Stores and the U.S. Stores. The PRC Stores and the U.S. Stores start quality control with their suppliers by procuring
raw materials from renowned suppliers that have proven records of supplying high-quality raw materials and complying with food safety
standards and measures. The PRC Stores and the U.S. Stores also continuously introduce new production equipment with up-to-date industry
technologies while making further improvements and adjustments to existing production equipment based on their product features and actual
production needs. As a result, the PRC Stores have effectively decreased defective rates of all product lines in their central factory
and enhanced the quality of their products.
The PRC Stores and the U.S. Stores have created
and executed a comprehensive system of quality control and performance appraisal, covering a wide range of activities in procurement,
production, sale, finance, and day-to-day employee management, among other things. The system includes central factory daily management
procedures, employee health review standards, and factory workshop sanitation and inventory management policies. This system has been
effectively used to monitor and conduct hazard analyses on raw materials, production, inventory maintenance, and transportation. In addition,
the PRC Stores and the U.S. Stores have adopted a set of strictly standardized rules to further refine quality control in every part of
the production process, appropriately adjusting management policies, standards, and measures based on distinct features of their production
mode. Through such an integrated approach, the operating entities have been able to adopt a science-backed and data-based style of management,
resulting in higher-quality products.
Advanced Industry Research and Constant Product Innovation
With a successful history of developing new products
based on customer demand and market trends, the PRC Stores and the U.S. Stores focus on constant innovation to improve the taste, texture,
formula, and packaging of their products, forming a virtuous cycle that has enabled them to introduce new products periodically. The PRC
Stores and the U.S. Stores keep separate product lines. As of March 2023, the PRC Stores had introduced over 145 types of new products
and the U.S. Stores had introduced 15 types of new products since 2022. The PRC Stores and the U.S. Stores typically evaluate the profitability
of their products annually or semi-annually by considering factors such as cost of revenue increases and competitive pricing strategies.
They have historically been able to terminate less profitable products, and launch similar new products and refine their product formulas
to enhance existing products with higher prices to cover higher ingredient costs.
To develop product formulas that reflect key market
trends and thus enable the operating entities’ products to be competitive, the research and development (“R&D”)
team members of the PRC Stores and the U.S. Stores frequently participate in industry conferences and engage with industry experts. Through
years of efforts, the operating entities have also developed a systematic approach to refine product packaging. For instance, the operating
entities seamlessly combine functionality with aesthetics by integrating automatic packaging and packaging techniques with a heat-sealing
feature and stylish graphic designs. To keep their organization rejuvenated with innovative ideas, the operating entities have not only
devised talent strategies to recruit talents from the PRC, Europe, and the U.S., but also increased the strength and scale of their internal
training programs to equip their employees with a strong sense of business and competitiveness.
Advantageous Information Management System
To maximize their operation efficiency and distribute
their resources based on a data-centric principle, the PRC Stores have adopted the ERP System in their stores and central factory. The
ERP System is a business process management software for managing business and automating back office functions related to technology,
services, and human resources. The ERP System integrates data collected from every critical aspect of the PRC Stores’ production
and sale process and facilitates a convenient data exchange process among the management office, the central factory and PRC Stores, and
other distributors. Through the ERP System, the PRC Stores are able to locate and verify details of all the processed transactions in
the stores and even determine the cost of every single kind of products. The U.S. Stores have not adopted and currently have no plan to
adopt the ERP System, since operations of the stores are not as complex as those of the PRC Stores.
Well-Developed Distribution Network in Xinjiang
The PRC Stores highly value the development of
their distribution network. With years of experience in marketing and selling products in the food industry in Xinjiang, the PRC Stores
have adopted a core strategy that focuses on developing a network of stores and supplementing the network with other distribution channels.
The PRC Stores consist of 33 stores in three well-developed cities of Xinjiang, namely Urumqi, Changji, and Shihezi. The relatively low
labor cost in Xinjiang and the PRC Stores’ long-term, sustainable business relationships with established local supermarkets that
enjoy high levels of brand loyalty, such as Youhao Supermarket and Huijia Supermarkets, strengthen their power to control front-end product
sales, prepare them with a solid foundation to explore new market opportunities, and improve their operation efficiency. The PRC Stores
also sell products through their digital platforms and collaboration with third-party online food ordering platforms such as Meituan-Dianping
and Koubei. To maintain a close connection between the point of sale of each distribution channel and their production team, the PRC Stores
primarily use their own transportation team to transport products. Third-party companies sometimes provide ancillary logistic support.
The PRC stores have designed and effectively implemented various marketing strategies in their distribution network in Xinjiang to introduce
new products and promote marketing campaigns within short periods of time.
Experienced Management and Professional
Teams
Our senior management team, led by Mr. Gang Li,
our chief executive officer, and Ms. Jihong Cai, our chief financial officer, has deep expertise and a proven track of record in managing
brands and operating food and retailing businesses. Our professional team is comprised of highly-skilled and dedicated employees with
wide ranging experience in services, product development, business development, and marketing. For instance, the R&D department of
the PRC Stores is led by Mr. Fufen Wang, Mr. Shangke Zhong, and Mr. Yiguang Mo, all of whom have decades of experience in the bakery industry
and are certified by the Ministry of Human Resources and Social Security of the PRC as National Advanced Chefs specializing in pastry
and bakery in the PRC. We believe that our management and professional teams will not only be able to effectively grow our business through
continued operating improvement and research, but also serve as key drivers of our success and position our Company as an attractive vehicle
for future long-term growth in the food industry beyond bakery products.
Our Growth Strategies
We intend to develop our business and strengthen
brand loyalty by pursuing the following strategies:
Expand into New Markets by Opening New Stores
The PRC Stores and the U.S. Stores plan to explore
new markets while enhancing their current presence in the Xinjiang market and the New York City market by analyzing their sales data and
features of customer trends in different regions, continuously focusing on improving customer in-store experience, further expanding their
distribution networks, and exploring new partnership opportunities.
After opening Chanson Greenwich in Tribeca in
December 2021 and Chanson 3rd Ave in March 2023, the U.S. Stores plan to open 10 additional stores in New York City during the next five
years. The cellar space at Chanson Greenwich is designed to be used as the U.S. Stores’ central kitchen to produce bakery products,
which will be delivered to these future stores on a daily basis. Such a store organization structure, we believe, will significantly reduce
the U.S. Stores’ costs for equipment and personnel, while satisfying their customers’ need for ready-to-eat and high-quality
food. We believe that the operation and business concepts of these new stores will allow us to successfully enter other markets underlining
urban, fast-paced lifestyles similar to first-tier cities in the U.S. and the PRC.
Enhance In-Store Customer Experience and
Customer Services
To improve customer in-store experience and the
visibility of their brand image across different regions, the PRC Stores and the U.S. Stores have renovated the majority of their stores
during the last five years. Their vision is to create a store environment consisting of a clean, modern interior design, with open kitchens,
relaxing background music, soft light, and the smell of freshly-made bakery products. In addition to implanting fundamental brand values
into renovation, the PRC Stores and the U.S. Stores also give individual store managers flexibility in decorating their store and arranging
the display of their products in ways that match characteristics of the region where the store is located and cater to local customers’
needs. To enhance customer services, the PRC Stores and the U.S. Stores have been systematically training and will continuously provide
standardized training to their store employees, so they are able to present themselves in consistent manners and provide high-quality
services that uphold their brand image. We firmly believe that a relaxing café environment, which allow customers to use the PRC
Stores and the U.S. Stores as their go-to places for multiple social purposes, in-store experiences with elements distinctively associated
with their brand, and high-quality services will allow the PRC Stores and the U.S. Stores to stand out from their competitors.
Keep Implementing Healthy and Nutritious
Diet Principles in Product Development
As a socially responsible company, the corporate
mission of the PRC Stores and the U.S. Stores is to promote healthy, nutritious, and conscious eating. To further align their actions
with their vision, the PRC Stores and the U.S. Stores have integrated and plan to keep integrating healthy elements and concepts, such
as zero fat or low fat, low calorie, zero or low sugar, high fiber, vitamins and minerals, and low oligosaccharide into their existing
and future products through measures and procedures that have been approved by industry experts.
Increase Brand Awareness
The PRC Stores and the U.S. Stores will continue
to increase customer awareness and excitement for the “George●Chanson,” “Patisserie Chanson,” and “Chanson”
brands and drive customer loyalty through their marketing efforts, social media presence, continued store expansion, and growing e-commerce
sales. Their marketing programs are designed to develop and foster a personal connection with the community and position Chanson as a
high-quality, community-conscious brand that provide healthy, nutritious, and ready-to-eat food. The PRC Stores and the U.S. Stores will
also continue to leverage their growing social media presence to increase their online sales and drive additional store visits within
existing and new markets. The U.S. Stores see a significant opportunity to increase their brand visibility in the New York City market,
which will be a key area of focus in their marketing strategy going forward.
The PRC Stores
Products
The PRC Stores currently offer more than 707 types
of bakery products and seasonal products, together with a large number of beverage products. The PRC Stores derived 91.7%, 91.4%, and
91.8% of their revenue from the sales of bakery products, 7.3%, 7.6%, and 6.6% of their revenue from the sales of seasonal products, and
1.0%, 1.0%, and 1.6% of their revenue from the sales of beverage products during the years ended December 31, 2022, 2021, and 2020, respectively.
The PRC Stores constantly research on the latest European pastry and bakery trends to improve their product presentation and packaging.
As the result of their effort, the products of the PRC Stores have been consistently praised by their customers as healthy, fresh, and
stylish, and are commonly perceived as popular gift choices among their customers.
Bakery products of the PRC Stores include packaged
bakery products (cakes, bread, and snacks), birthday cakes, and made-in-store pastries. The bestselling bakery products are little puffs,
chocolate cakes, cheese cakes, whole-wheat bread, multigrain bread, original-flavor cookies, amber-walnut cookies, seven-inch fruit cakes,
croissants, and almond pudding.
Seasonal products of the PRC Stores include mooncakes
and zongzi (sticky-rice ball stuffed with different fillings and wrapped in bamboo leaves). The bestselling seasonal products are red-bean
flavored mooncakes, sweet-date flavored zongzi, and flower flavored zongzi.
Beverage products of the PRC Stores include store-made
beverages and juice products. The bestselling beverage products are strawberry flavored latte, orange-and-lemon flavored tea, and freshly
squeezed orange juice.
Manufacturing and Logistics
The PRC Stores produce packaged bakery products
at their central factory before shipping them to the stores. For birthday cakes and made-in-store pastries, the PRC Stores primarily only
produce semi-finished products, such as various sweet dough and plain cakes at their central factory and ship them to the stores, leaving
the final processing of made-in-store pastries and the decoration of birthday cakes to their employees at the stores. As of December 2022,
30 of the PRC Stores were equipped with ovens to produce made-in-store pastries and to meet additional customer demand for their products
on a daily basis, and two stores got made-in-store pastries directly from their central factory.
The PRC Stores contract third-party producers
to produce seasonal products, mainly zongzi (sticky-rice ball stuffed with different fillings and wrapped in bamboo leaves) and mooncakes
to meet customer demand during Dragon Boat Festival and Mid-Autumn Festival, which are traditional Chinese holidays and respectively take
place at the end of the second quarter and the beginning of the third quarter of a year. Typically, third-party producers need a period
of 45 to 60 days to process their supply orders, produce seasonal products, and deliver them to the PRC Stores. Customers’ demand
for these seasonal products usually concentrates on the one or two months before these holidays. The PRC Stores sell seasonal products
to individual and corporate customers.
Whether the PRC Stores enter into a supply agreement
with a third-party producer for a particular year depends on the selling records of seasonal products in previous years, their sales plan
during that year, and the production capacity of the third-party producer. By promptly communicating with and maintaining sustainable
relationship with a group of third-party producers, the sales team of the PRC Stores is prepared to deal with additional customer orders
during a particular season.
Product transportation to the PRC Stores is carried
out by their own transportation team. As of December 2022, their transportation team had seven trucks capable of transporting an aggregate
of 9.5 tons of goods per transition per day. All of those trucks have been incorporated into the ERP System. Depending on product features,
the PRC Stores’ products are shipped at either room temperature, which is suitable for products that can be preserved at room temperature,
or through cold-chain transportation, which is applied to semi-finished products such as frozen dough and desserts. The PRC Stores’
-32.8 degree Fahrenheit large freezer and their 323 square feet cold-storage facilities can adequately house the operation of cold-chain
transportation.
Distribution Channels
Stores
The PRC Stores consist of 33 stores in three cities
of Xinjiang, namely Urumqi, Changji, and Shihezi. Instead of franchising, our PRC subsidiary and the VIEs directly operate all of the
PRC Stores because it allows them to exercise greater control over product quality, front-end sales, customer service quality, and overall
shopping environment. This model also makes it easier to initiate transparent communication between our central management team and employees
at the PRC Stores and to more efficiently manage our entire business operation in the PRC through the ERP System. Our subsidiary and the
VIEs plan to continue operating the PRC Stores directly in the foreseeable future.
The PRC Stores employ a rigorous analytical process
to identify new store locations, whereby they evaluate locations based on market characteristics, demographic characteristics, including
income and education levels, the presence of key anchor stores and co-tenants, population density, convenience for parking and other means
of transportation, and the overall surrounding environment, among other factors. Before entering into a lease agreement, their management
team conducts comprehensive research on lease prices near the selected location and identify factors causing any price difference. The
PRC Stores also actively monitor and manage the performance of their stores and seek to incorporate information learned through the monitoring
process into their future site selection decisions. We believe the PRC Stores have a flexible site selection model, whereby their stores
can be located in both street and mall locations. The PRC Stores have grown their store base in both locations since their first store
opened in 2012, with 14 stores in street locations and 19 stores in malls as of the date of this annual report.
Digital Platforms
Customers can place orders at the website of the PRC Stores, www.xsong.com.cn.
On their website, the PRC Stores sell birthday cakes and seasonal products, and promote seasonal and membership deals. The PRC Stores
have a team of professionals working on refining the website to improve their online interaction with customers and the efficiency of
customers’ online ordering process. For the years ended December 31, 2022, 2021, and 2020, the product sales made through the website
the PRC Stores accounted for 0.03%, 0.06%, and 0.11% of their total sales, respectively.
In February 2020, the PRC Stores launched a new
online store, which is linked to the official account of the PRC Stores on WeChat and focuses on selling seven-inch or larger cakes. Customers
may place orders directly through their mobile phones and get their cakes quickly delivered by the PRC Stores’ own transportation
team.
Third-Party Platforms
The PRC Stores list their bakery products on third-party online food
ordering platforms such as Meituan-Dianping and Koubei. Customers can order through mobile apps and websites of these platforms, and pick
up the ordered bakery products at the PRC Stores or have them delivered by the carriers of these platforms. For the years ended December
31, 2022, 2021, and 2020, the sales made through these third-party platforms accounted for 5.32%, 4.19%, and 4.2% of our total sales,
respectively.
Store Experience
The PRC Stores have sizes ranging from 215 square
feet to 2,640 square feet. 33 of the PRC Stores have seats, with an average capacity of eight guests. Their internal teams have designed
these stores and coordinated the whole renovation process to ensure the best presentation of their products and brand image. The PRC Stores
have been designed to possess a warm, inviting, and modern ambiance, with glass display cases and vintage cake stands showcasing baked
goods that sit high upon marble counters. We believe that it is with this inviting and accessible atmosphere that the PRC Stores have
cultivated a loyal customer base in residential and commercial markets.
The PRC Stores are generally open from 10:00 a.m.
to 10:30 p.m. daily during the summer and from 10:30 a.m. to 11:00 p.m. during the winter, and benefit from a balanced sales mix across
operating hours.
The Flagship Store
On November 29, 2019, the flagship store of the
PRC Stores, Hongshan Lifestyle Store, in Urumqi. At approximately 2,640 square feet and with 26 seats, the store features glass display
cases, an open kitchen, and a cocktail bar, and sells bread, desserts, sandwiches, custom cakes, and beverages. This flagship store is
an important marketing platform that allows the PRC Stores to showcase their vision of a comfortable yet distinguishable store environment
and connect with their customers in a new way, and for their customers to immerse themselves in an atmosphere that encompasses who the
PRC Stores are.
Membership and Customers
The PRC Stores issue free membership cards that are rechargeable with
cash in stores to encourage higher spending by customers and strengthen their loyalty to the PRC Stores’ brand. Both corporate and
individual customers can get membership cards, add money onto the cards, and use them to purchase products in the PRC Stores. By using
these membership cards, customers will enjoy benefits such as free cash vouchers that can be used to purchase products of the PRC Stores
and 12% off original prices of all products on member day each week. Once a customer adds at least RMB200 (approximately $29) to a new
membership card, the customer is counted as a member of the PRC Stores. As of December 2022, the PRC Stores had approximately 582,000
members. For the years ended December 31, 2022, 2021, and 2020, the sales to members collectively accounted for 54%, 52%, and 47% of our
total sales, respectively.
The PRC Stores sell bakery products to both individual
and corporate customers.
Individual customers of the PRC Stores come from
a variety of age groups and social backgrounds. There are three methods for these individual customers to purchase products of the PRC
Stores, namely, purchasing products at the stores with cash or credit cards, getting membership cards and using membership cards to make
a purchase at the stores, and ordering the products on digital platforms.
Corporate customers of the PRC Stores primarily get membership cards
and purchase cash vouchers for products such as seasonal products, cakes, and birthday cakes as part of employment benefits for their
employees. During the time of year around Mid-Autumn Festival and Dragon Boat Festival, the majority of customers of the PRC Stores buying
seasonal products are corporate customers (though the number of individual customers who purchased zongzi from the PRC Stores increased
during Dragon Boat Festival of 2020). The PRC Stores have already developed and maintained stable relationship with several corporate
customers over the years. Top corporate customers of the PRC Stores for the year ended December 31, 2022 included Industrial Bank Co.,
Ltd. Urumqi Branch Office, China Post Group Corporation Branch Office, the Labor Union Committee of State Grid Urumqi Electric Power Supply
Company, the Urumqi Branch of China Telecommunications Corporation Labor Union Committee, and Xinjiang Tianshan Rural Commercial Bank
Co., Ltd. Top corporate customers of the PRC Stores for the year ended December 31, 2021 included China Post Group Corporation Branch
Office, Industrial Bank Co., Ltd. Urumqi Branch Office, Affiliated Hospital of Traditional Chinese Medicine of Xinjiang Medical University,
Labor Union Committee of Urumqi City Rail Group Co., Ltd., and Xinjiang Gas (Group) Limited Company. Top corporate customers of the PRC
Stores for the year ended December 31, 2020 included First Affiliated Hospital of Xinjiang Medical University, Xinjiang Medical University
Affiliated Tumor Hospital, Xinjiang Medical University, the Labor Union Committee of Shenhua New Energy Co., Ltd., and the Labor Union
Committee of Urumqi City Rail Group Co., Ltd.
Competition
The PRC bakery products market is highly fragmented,
and competition in this market tends to be regionalized due to customers’ localized food preferences. Virtually all of the bakery
products of the PRC Stores are sold in Xinjiang. The major competitors of the PRC Stores are international and domestic companies that
produce and sell bakery products in Xinjiang, including Tous Les Jours, Vinesweet, Bakery Share, Lanzhou Aili’s Food Company Ltd.,
Maiquer Group Co., and BreadTalk Group Ltd. The PRC Stores compete for customers primarily on the basis of the price and quality of their
products, food safety, brand awareness and loyalty, responsiveness to customer demand and market trends, customer experience, the ability
to accurately estimate sales quota and control inventory, production capacity, and operation and management of chain stores.
The PRC Stores also potentially compete with bakery
product manufacturers, such as Grupo Bimbo, S.A.B. de C.V., and Toly Bread Co., and bakery chain stores, such as Paris Baguette from Korea,
Yamazaki Baking from Japan, and Holiland and Wedome, both of which are PRC based. Although none of the above enterprises has built a dominating
presence in Xinjiang, the PRC Stores anticipate to directly compete with them when the PRC Stores expand to other regional markets in
the PRC in the future.
The U.S. Stores
Chanson 23rd Street, which is located in New York City’s Flatiron
District, operates Patisserie Chanson on the ground floor and Thyme Bar both on the ground floor and in the underground cellar. Chanson
Greenwich, which is located in New York City’s Tribeca, operates Chanson Le Salon. Chanson 3rd Ave, which is located in New York
City’s Upper East Side, operates Patisserie Chanson (3rd Ave).
Patisserie Chanson was established in 2016 as
a modern European-style café and eatery that specializes in the art of making French-style viennoiseries and pastries. With an
open display array of innovative gourmet pastries and piquant coffee brews, Patisserie Chanson is committed to offering eat-in services
and serving freshly prepared bakery products and extensive beverage products.
Thyme Bar is a cocktail bar opened in February
2020, which features various to-go cocktails. Every drink on the opening menu was created with a sustainable and low-waste approach, repurposing
waste from nearby restaurants, like coffee grounds from Patisserie Chanson. Thyme Bar was one of the first bars in New York City to pivot
and offer to-go cocktails and has been able to successfully maintain and evolve this business model through the COVID-19 pandemic. In
August 2020, Thyme Bar introduced “The Thyme Bar Experience,” a floriography-based cocktail prix-fixe menu with food pairings.
Patisserie Chanson and Thyme Bar have both received
positive media coverage since their openings. The French-style chocolate fondants of Patisserie Chanson were reported by Vogue on April
14, 2017 as one of the most seasonally appropriate pastel-hued desserts for Easter season in New York City, and Thyme Bar was reported
by Forbes on April 16, 2020 to be among 11 of the best cocktails-to-go bars in New York and again on October 28, 2020 for crafting to-go
cocktails that are “sippable art.”
Chanson Le Salon opened in December 2021
as a modern French brasserie with a New American approach. Its menu shares both cultures’ flavors, serving fast upscale dining
with a health-conscious approach. Chanson Le Salon is committed to presenting all-day brunch, varieties of coffees and sandwiches, and
afternoon tea.
Patisserie Chanson (3rd Ave) opened in March 2023 and serves freshly
prepared bakery products and extensive beverage products.
Products
The U.S. Stores currently offer 138 types of eat-in
menu items and bakery products, together with a large number of beverage products. The U.S. Stores make these products in the kitchen
or bar of the store and serve them to eat-in customers or sell them in store. The U.S. Stores derived 29.6%, 22.2%, and 37.9% of their
revenue from offering eat-in services, 16.2%, 25.0%, and 44.6% from the sales of bakery products, and 54.2%, 52.8%, and 17.5% from the
sales of beverage products during the years ended December 31, 2022, 2021, and 2020, respectively.
The U.S. Stores’ eat-in menu includes sandwiches,
salads, toasts, croissants, soups, and desserts. Their bestselling menu items include avocado toast, smoked salmon croissant, and black
truffle grilled cheese.
The U.S. Stores’ bakery products include
cakes, bread, sweets, birthday cakes, and pastries. Their bestselling bakery products include kouign amann, kouign amann (salted caramel),
and croissant.
The U.S. Stores’ beverage products include
store-made coffee, herbal tea, fruit juices, and alcoholic beverages. Their bestselling beverage products include latte, cappuccino, brewed
coffee, and “Thyme 2 Go” cocktails, which are bottled cocktails have been pre-chilled and pre-diluted.
Store Design
Chanson 23rd Street has two floors with an aggregate
size of approximately 3,900 square feet. Seating in Chanson 23rd Street is comprised of a combination of table seats and bar seats with
a capacity of 40 guests.
Chanson Greenwich has two floors with an aggregate
size of approximately 4,140 square feet. Seating in Chanson Greenwich’s indoor area is comprised of a combination of table seats
and bar seats with a capacity of 55 guests. Chanson Greenwich also has an outdoor seating space with a capacity of 30 guests.
Chanson 3rd Ave has two floors with an aggregate size of approximately
1,065 square feet. Seating in Chanson 3rd Ave is comprised of table seats with a capacity of 14 guests.
The design of the U.S. Stores intends to deliver
a modern, clean, and inviting atmosphere with marble tables and counters, enhanced with abundant light and wooden fixture accents, and
a layout that optimizes the available space and serves as a setting for a wide variety of occasions. The U.S. Stores’ open kitchen
showcases their preparation processes and exemplified their commitment to freshness. We believe this layout achieves this atmosphere and
makes the U.S. Stores a desirable destination at any time of day.
Dining and Shopping Experience
The U.S. Stores offer a variety of dining and purchasing options. Customers
can either grab their bakery products and beverage products for take-out or take a seat and stay longer for a relaxed and enjoyable eat-in
experience. Chanson 23rd Street is currently providing indoor dining and delivery and pickup services from 8 a.m. to 5 p.m. from Tuesday
to Friday and from 9 a.m. to 5 p.m. during the weekend, and its bar is open from 5 p.m. to 1 a.m. from Tuesday to Sunday. Chanson Greenwich
is currently providing indoor and outdoor dining services from 8 a.m. to 6 p.m. daily and its bar is open from 5 p.m. to 11 p.m. Chanson
3rd Avenue is currently selling bakery and beverage products and provide delivery and pickup services from 8 a.m. to 6 p.m. from Tuesday
to Sunday.
The U.S. Stores offer delivery and pickup services
within New York City (Manhattan and limited areas in Queens and Brooklyn). Customers may order grab-to-go sandwiches, breakfast, desserts,
French pastries, brunch, and beverages via their website, patisseriechanson.com, and through third-party delivery partners, including
Grubhub, Uber Eats, Caviar, Doordash, and Seamless.
In addition, the U.S. Stores offer corporate catering
services in the New York City area. Their corporate catering focuses on meetings and work celebrations, offering breakfast and lunch boxes,
croissant platters, salads, parfaits, sandwiches, sweets, cakes, and beverages. For special events, the U.S. Stores can provide custom
cakes with a company logo, personal monogramming, or custom flavors and colors.
Revenue derived from delivery, pickup, and catering services accounted
for 15.5%, 12.8%, and 38.13% of the total revenue of the U.S. Stores for the years ended December 31, 2022, 2021, and 2020, respectively.
Customers
The majority of sales of the U.S. Stores are to individual customers
and the U.S. Stores also supply bread and desserts to corporate customers, including coffee shops and cafes in New York City. The U.S.
Stores generated 100%, 100%, and 71.17% of their revenue from sales to individual customers and 0%, 0%, and 28.83% from sales to corporate
customers during the years ended December 31, 2022, 2021, and 2020, respectively. Revenue generated from the top three corporate customers
accounted for approximately 0%, 0%, and 28% of the revenue of the U.S. Stores during the years ended December 31, 2022, 2021, and 2020,
respectively. Due to the impact of the COVID-19 pandemic, development of corporate customers has slowed down since 2020. As a result,
the U.S. Stores expect sales to individual customers to remain their most significant sales channel for the near future.
Competition
The New York City bakery products and restaurant business markets are
highly competitive and fragmented with a number of small to medium size manufacturers specializing in a wide variety of bakery products
and restaurants. All of the products of the U.S. Stores are sold in New York City. Their major competitors are internationally and domestically
renowned bakery chain-stores in New York City, including Paris Baguette and Le Pain Quotidien, and bakery product manufacturers including
Grupo Bimbo, S.A.B. de C.V., and Toly Bread Co. In addition, the U.S. Stores face significant competition from a variety of locally owned
restaurants and national chain restaurants offering bakery products, as well as take-out options from grocery stores. The U.S. Stores
compete for customers primarily on the basis of price, quality, product differentiation, marketing strategies, and nutritional values.
Suppliers
The PRC Stores and the U.S. Stores carefully select
suppliers based on product quality and authenticity, and they seek to develop long-term relationships with these suppliers. Each year,
the PRC Stores and the U.S. Stores conduct a rigorous selection and evaluating process that gives them a chance to review their relationship
with current suppliers and to explore relationships with new suppliers who are experienced and professionally trustworthy and strive for
providing high-quality raw materials. The PRC Stores and the U.S. Stores have been able to use the information learned from new suppliers
to evaluate their agreements with current suppliers. They do not engage in any hedging agreements to manage their exposure to fluctuations
in the price of food commodities. The PRC Stores and the U.S. Stores negotiate and manage supply arrangements separately.
The PRC Stores enter into supply agreements in the ordinary course
of business with their suppliers, pursuant to a form of supply agreement typically for a one-year term. For some raw materials, such as
butter, the suppliers provide a certain quantity of raw materials at a fixed price and deliver them separately based upon the needs of
the PRC Stores; for other raw materials, such as eggs, the suppliers provide raw materials at prices determined when the PRC Stores place
their orders. If the price of certain imported raw material is expected to rise, suppliers will provide a written notice to the PRC Stores
at least one month in advance and the PRC Stores will then decide whether to order additional raw materials before the price increases.
Suppliers deliver to the central factory of the PRC Stores approximately twice per week on Mondays and Fridays. After suppliers deliver,
the payment per order is calculated based on the actual number of qualified products that meet the PRC Stores’ verification standards.
Usually, the PRC Stores are given one to three months to complete the payment per order. Top suppliers of the PRC Stores during the year
ended December 31, 2022 included Urumqi Yuxin Commerce and Trade Co., Ltd. (“Yuxin”), Xinjiang Meishifu Food Co., Ltd. (“Meishifu”),
Pengcheng Fruit Company, Xinjiang Zhengda Food Co., Ltd. (“Zhengda”), and Peimeirun. Their supply constituted 10%, 10%, 7%,
7%, and 7% of the PRC Stores’ total raw materials in terms of monetary value in that period, respectively. Top suppliers of the
PRC Stores during the year ended December 31, 2021 included Meishifu, Urumqi Jinda Food Raw Material Co., Ltd. (“Jinda”),
Yuxin, and Zhengda. Their supply constituted 17%, 9%, 9%, and 8% of the PRC Stores’ total raw materials in terms of monetary value
in that fiscal year, respectively. Top suppliers of the PRC Stores during the year ended December 31, 2020 included Meishifu, Jinda, Yuxin,
and Zhengda. Their supply constituted 23%, 8%, 6%, and 6% of the PRC Stores’ total raw materials in terms of monetary value in that
fiscal year, respectively.
The U.S. Stores order raw materials from suppliers based on their needs,
instead of entering into long-term supply agreements with their suppliers. The U.S. Stores are able to ensure consistent delivery and
competitive pricing because of their long-term business relationships with these suppliers. Suppliers of sugar and flour deliver to the
U.S. Stores weekly and suppliers of vegetables and fruits do so daily. Top suppliers of the U.S. Stores during the year ended December
31, 2022 included Baldor Specialty Foods, Inc. (“Baldor”), Southern Glazers of NY Metro, and Empire Merchants. Their supply
constituted 30%, 7%, and 5% of the U.S. Stores’ total raw materials in terms of monetary value in that period, respectively. Top
suppliers of the U.S. Stores during the year ended December 31, 2021 included Baldor, The Chefs’ Warehouse, and Southern Glazers
of NY Metro. Their supply constituted 19%, 17%, and 13% of the U.S. Stores’ total raw materials in terms of monetary value in that
fiscal year, respectively. Top suppliers of the U.S. Stores during the year ended December 31, 2020 included Dairyland USA Corporation,
Paris Gourmet, and Baldor. Their supply constituted 29%, 18%, and 15% of the U.S. Stores’ total raw materials in terms of monetary
value in that fiscal year, respectively.
Food Safety
Food safety is essential to the success of the
PRC Stores and the U.S. Stores and they have established procedures to help ensure that their customers enjoy safe and quality food.
During the procurement of raw materials, the procurement
team and compliance team of the PRC Stores and the U.S. Stores evaluate the quality and applicability of the submitted samples of raw
materials, as well as suppliers’ capability to meet deadlines. They re-evaluate those suppliers who the PRC Stores and the U.S.
Stores have previously collaborated with on a yearly basis to meet the changing production needs. For suppliers who add additives into
the products they supply to the PRC Stores or the U.S. Stores, the PRC Stores and the U.S. Stores require them to warrant that additives
in their products comply with food safety requirements and standards according to relevant laws and regulations. The PRC Stores and the
U.S. Stores also periodically examine the freshness of all raw materials and make sure that their storage conditions are properly to preserve
freshness of raw materials.
During the actual production, the PRC Stores and
the U.S. Stores have designed and applied rigorous standards and requirements to oversee product formulas, product craftsmanship, and
production process. They also regularly organize mandatory firm-wide trainings to teach their employees appropriate ways of applying food
safety measures in different scenarios and to enhance awareness and understanding of food safety as a whole. Without the approval of training
managers, employees cannot work on production lines or in kitchens. The quality-control team of the PRC Stores and the U.S. Stores also
analyzes production sectors that may influence product quality and safety, formulating corresponding methods to prevent potential negative
effects. Before transporting or selling their products, the PRC Stores and the U.S. Stores conduct strict final examination on those products
according to food industry standards to ensure that their products have high quality and are safe to consume.
The PRC Stores and the U.S. Stores only sell their
bakery products on the day when these products are made and their light meals and beverage products on a made-to-order basis, and they
make sure that any unsold or leftover products and unused semi-finished products are promptly disposed of, so as to offer their customers
the freshest products that conform to stringent food safety standards on a day-to-day basis. The PRC Stores and the U.S. Stores have also
established systematic and efficient procedures to swiftly recall any product that imposes potential or existing food safety issues to
their customers, whose health and safety are always most important to the PRC Stores and the U.S. Stores. As of the date of this annual
report, the PRC Stores and the U.S. Stores have never had to recall any product. To further improve their quality and safety control,
the PRC Stores and the U.S. Stores conduct periodic customer satisfaction surveys to learn about customers’ needs and quality of
the products from the customers’ perspectives.
Inventory Management
The PRC Stores and central factory have established
policies and management procedures and formed a group of specialists to supervise employees working in the inventory team and to review
their job performance. These specialists also design emergency plans to deal with critical circumstances under which inventory runs extremely
low and conduct monthly reviews to assess differences between inventory accounts and actual amount of remaining inventory through the
ERP System. By using an information and expertise-based management method, we are confident that the PRC Stores can effectively reduce
costs and production waste.
|
● |
For packaged bakery products, the PRC Stores adopt a sale-history based method to estimate production quota because it allows the PRC Stores to effectively address the short-lived feature of bakery products, to ensure their customers are presented with fresh bakery products, to maintain flexibility in production planning, and to strengthen their ability to effectively reduce inventory; and |
|
● |
For their made-in-store pastries and birthday cakes, the PRC Stores alternatively adopt a method that combines sale-history based quota estimation and in-time demand. In addition to delivering a certain number of semi-finished products to the stores, the PRC Stores also deliver raw materials to the stores, so store employees can make extra cakes or further decorate delivered cakes if there are excessive or special customer demand on a particular day. |
In the U.S. Stores, the store manager or head
chef determines the amount of raw materials to be ordered on a weekly or daily basis based on his or her experience and recent sales trends
of their products. The U.S. Stores usually keep inventories low and rely on in-time deliveries from suppliers. The U.S. Stores take stock
of their inventory at the end of each month to understand the amount of raw material used.
Marketing and Sale Strategies
Pricing and Discounting
The PRC Stores and the U.S. Stores determine their
product prices on the basis of various factors, including the consumption power of their targeted customer groups, market demand for specific
products, product cost, prices of competitive products, and the macroeconomic environment. Such method gives the PRC Stores and the U.S.
Stores the space to change prices flexibly if circumstances require them to do so and allows them to better respond to customers’
changing sensitivity to price. This advantageous approach has allowed the PRC Stores and the U.S. Stores, and, we expect will continue,
to attract more customers and reinforce and further expand brand loyalty. The PRC Stores and the U.S. Stores plan to further refine their
calculation formula to ensure that their product prices accurately and cautiously take into consideration both existing and potential
market factors.
On a periodic basis, the PRC Stores and the U.S.
Stores design and execute discounting strategies to stimulate sales. The PRC Stores and the U.S. Stores have effectively adopted a number
of discounting strategies, including: in the PRC Stores, (i) a member day on which members enjoy 12% off original prices of all products
each week, (ii) discounting activities on third-party digital platform, and (iii) discounting benefits enjoyable only through using credit
cards issued by Shanghai Pudong Development Bank Co., Ltd; in Chanson 23rd Street, (i) an “All Week Brunch” menu from 11:30
a.m. to 4:30 p.m. that allows its customers to try its café items and dessert items at the same time at a discounted price, (ii)
a “Dessert Tasting” menu with seasonal selections from its dessert bar, and (ii) discounts to employees of nearby corporations,
such as Estee Lauder and Tiffany; and in Chanson Greenwich, (i) a “Weekday Lunch Special” menu from 10 a.m. to 3 p.m. that
allows its customers to try its café items and dessert items at the same time at a discounted price and (ii) discounts to employees
of nearby corporations, such as Citibank and Goldman Sachs.
Social Media
The PRC Stores and the U.S. Stores enhance publicity
of their products and the effectiveness of their other marketing strategies on major Chinese and U.S. social media platforms and their
own websites.
The PRC Stores operate official accounts on WeChat,
Weibo, and Douyin, which had an aggregate of over 24,710 followers as of December 2022, and regularly post information of their new products,
discounting activities, and brand development there.
The U.S. Stores operate four official accounts
on Instagram, which had over 67,000 followers in total, and four official Facebook accounts, which had over 25,400 followers, as of December
2022. The U.S. Stores regularly post pictures of their stores and products with detailed information of their new products and promotion
activities to attract potential customers and promote their image as a modern European-style café and eatery specializing in dessert-making.
Since 2019, the U.S. Stores have partnered with
Aranka Media Enterprise, a full-service media agency, to accelerate its brand growth and improve customer relationships. Aranka Media
Enterprise oversees the U.S. Stores’ media strategy and entire online presence, including their presence on digital booking systems,
delivery platforms, and social media. Aranka Media Enterprise also implements data collection systems to provide sales reports and market
analyses, which help the U.S. Stores discover new consumer trends and optimize physical storefront operations.
Properties
Properties in the PRC
We maintain our headquarters and the central factory
of the PRC Stores in Urumqi, Xinjiang.
The old central factory of the PRC Stores has
three production lines, which run 40 to 45 hours per week. Equipped with advanced production equipment, including egg-beating machines,
proofing cabinets, dough mixers, ovens, hot stoves, and cold-storage facilities, the old central factory has an annual production capacity
of bakery products worth RMB80 million (approximately $12.41 million). During the year ended December 31, 2021, the old central factory
was at approximately 54% of the annual production capacity and produced bakery products and semi-finished products worth RMB43 million
(approximately $6.71 million). The PRC Stores stopped their production in this central factory after their new central factory began production
in August 2022. Pursuant to a Premises Use Agreement dated April 30, 2020 and a Supplemental Agreement dated June 18, 2020, Urumqi Plastic
Surgery Hospital Co., Ltd., a PRC company controlled by our Chairman, Gang Li, provided approximately 5,382 square feet office space for
our headquarters and 10,763 square feet for the old central factory without charge. The term of the agreement is from January 1, 2020
to June 25, 2028, unless otherwise terminated by either party.
Xinjiang United Family has constructed a new central
factory in Urumqi, Xinjiang, to expand the production capacity of the PRC Stores. On June 30, 2021, Xinjiang United Family entered into
a lease agreement for approximately 54,638 square feet of building space and paid a deposit of RMB574,357 (approximately $90,000). The
term of the lease agreement is from June 15, 2021 to June 14, 2031, unless otherwise terminated by either party, and the annual rent is
RMB1,148,714 (approximately $180,000) for the first year with annual increments of 2.5%. Xinjiang United Family is required to notify
the landlord in advance within 90 days prior to the end of the lease term if it would like to renew the lease agreement. The investment
budget for the new central factory is approximately RMB17.9 million (approximately $2.8 million) after VAT deduction and the new central
factory is designed to have an annual production capacity of bakery products, seasonal products, and beverage products worth (on the raw
cost basis) RMB150 million (approximately $23.26 million). As of December 31, 2022, Xinjiang United Family had spent approximately RMB12.9
million (approximately $1.9 million) for the construction. The construction of the production line for bakery products was completed in
June 2022 and the new central factory began production in August 2022. Xinjiang United Family plans to start the construction of two additional
production lines for beverage products and seasonal products in 2023 and complete them in late 2023. Xinjiang United Family plans to use
cash flow from the operations of the PRC Stores to fund the construction. For details, see “Item 5. Operating and Financial Review
and Prospects—B. Liquidity and Capital Resources.”
Our PRC subsidiary and the VIEs currently operate
33 stores in Xinjiang, with individual store sizes ranging from 215 square feet to 2,640 square feet and an average monthly rent of RMB32,335
(approximately $5,092). Our PRC subsidiary and the VIEs lease all these store spaces from third-party individuals and corporations, except
that the store space of Wenhua is provided by Urumqi Plastic Surgery Hospital Co., Ltd., pursuant to a Premises Use Agreement and a Supplemental
Agreement without charge.
The following table shows the information of the
PRC Stores as of the date of this annual report:
|
|
Store |
|
City |
|
Size (Square Feet) |
|
|
Opened |
1 |
|
Midong |
|
Urumqi |
|
|
579 |
|
|
April 2017 |
2 |
|
Dehui Wanda |
|
Urumqi |
|
|
1,111 |
|
|
January 2018 |
3 |
|
Changji Youhao |
|
Changji |
|
|
1,029 |
|
|
August 2015 |
4 |
|
Changji Huijia |
|
Changji |
|
|
861 |
|
|
September 2015 |
5 |
|
Hongshan |
|
Urumqi |
|
|
2,422 |
|
|
November 2017 |
6 |
|
Beimen |
|
Urumqi |
|
|
942 |
|
|
May 2018 |
7 |
|
Minzhu |
|
Urumqi |
|
|
1,830 |
|
|
April 2014 |
8 |
|
Riyue Xingguang |
|
Urumqi |
|
|
1,428 |
|
|
May 2014 |
9 |
|
Wanyancheng |
|
Urumqi |
|
|
1,152 |
|
|
October 2017 |
10 |
|
Huarun Wanjia |
|
Urumqi |
|
|
482 |
|
|
January 2015 |
11 |
|
Medical College |
|
Urumqi |
|
|
990 |
|
|
July 2017 |
12 |
|
Changchun |
|
Urumqi |
|
|
1,335 |
|
|
March 2014 |
13 |
|
Huijia Third Floor |
|
Urumqi |
|
|
920 |
|
|
September 2012 |
14 |
|
Baishang |
|
Urumqi |
|
|
1,276 |
|
|
February 2019 |
15 |
|
Xiaoxigou |
|
Urumqi |
|
|
1,184 |
|
|
April 2019 |
16 |
|
Railway Bureau |
|
Urumqi |
|
|
1,830 |
|
|
May 2019 |
17 |
|
Economics Development Wanda |
|
Urumqi |
|
|
1,253 |
|
|
July 2019 |
18 |
|
Hongshan Lifestyle Store |
|
Urumqi |
|
|
2,640 |
|
|
November 2019 |
19 |
|
Nanhu |
|
Urumqi |
|
|
1,507 |
|
|
September 2020 |
20 |
|
Hebei Road Huarun |
|
Urumqi |
|
|
1,033 |
|
|
October 2020 |
21 |
|
Degang Wanda |
|
Urumqi |
|
|
1,163 |
|
|
December 2020 |
22 |
|
Xinbei Yuanchun |
|
Urumqi |
|
|
814 |
|
|
October 2021 |
23 |
|
Dehui Wangda Fourth Floor |
|
Urumqi |
|
|
215 |
|
|
November 2021 |
24 |
|
Qingnian Road Haojiaxiang |
|
Urumqi |
|
|
861 |
|
|
November 2021 |
25 |
|
Vanke Jincheng Huafu |
|
Urumqi |
|
|
910 |
|
|
November 2021 |
26 |
|
Gaoxin Wanda |
|
Urumqi |
|
|
1,481 |
|
|
December 2021 |
27 |
|
Shidai Guangchang |
|
Urumqi |
|
|
1,841 |
|
|
June 2022 |
28 |
|
Meimei No. 2 |
|
Urumqi |
|
|
239 |
|
|
March 2023 |
29 |
|
Shihezi |
|
Shihezi |
|
|
799 |
|
|
May 2014 |
30 |
|
Tianbai |
|
Urumqi |
|
|
807 |
|
|
October 2015 |
31 |
|
Wenhua |
|
Urumqi |
|
|
1,184 |
|
|
October 2012 |
32 |
|
Meimei |
|
Urumqi |
|
|
1,442 |
|
|
November 2012 |
33 |
|
Ruitai |
|
Urumqi |
|
|
1,076 |
|
|
May 2015 |
Subject to specific terms of each lease agreement,
lease terms range from one to six years. With respect to the payment method of lease fee, some agreements require a minimum rent per month,
typically including rent increases after the first year, while the remaining agreements specify a fixed rent per year and requires a first-year
deposit in advance. The agreements generally require the PRC Stores to pay insurance, utilities, real estate taxes, and repair and maintenance
expenses. The termination clause provides a lessor the right to terminate a lease agreement under different situations, including but
not limited to nonpayment of rent, changed purpose of the lease space without the lessor’s permission, and illegal conducts at the
lease space. Correspondingly, some lease agreements provide the PRC Stores the right to terminate the agreement if the lessor does not
provide access to the leased space upon the PRC Stores’ payment of lease fee or has not properly repaired broken areas of the leased
space.
Tangible properties of the PRC Stores and central
factory include production, transportation, and electronic equipment.
Properties in the U.S.
Chanson 23rd Street leases 3,900 square feet of
store space in New York City from a third party for a lease term of 15 years starting from January 2017, with a monthly rent of $50,000
and an increase in the monthly base rent every year. The agreement requires Chanson 23rd Street to pay insurance, utilities, and repair
and maintenance expenses, and acquire all required licenses and permits from governmental authorities. Chanson 23rd Street may extend
the lease for an additional five years upon its expiration.
Chanson Greenwich leases 4,140 square feet of
store space in New York City from a third party for a lease term of 10 years starting from July 1, 2020, with an annual rent of $385,000
and an increase in the annual base rent starting from the third year. The agreement requires Chanson Greenwich to pay insurance, utilities,
and repair and maintenance expenses, and acquire all required licenses and permits from governmental authorities. Chanson Greenwich may
extend the lease for an additional six years upon its expiration.
Chanson 3rd Ave leases 1,069 square feet of store
space and 1,041 square feet of storage space in New York City from a third party for a lease term of 15 years starting from August 9,
2021, with an annual rent of $168,000 and an increase in the annual base rent every year. The agreement requires Chanson 3rd Ave to pay
insurance, utilities, and repair and maintenance expenses, and acquire all required licenses and permits from governmental authorities.
Chanson Broadway leases 850 square feet of store
space in New York City from a third party for a lease term of 10 years starting from April 1, 2022, with an annual rent of $222,000 and
an increase in the annual base rent every year. The agreement requires Chanson Broadway to pay insurance, utilities, and repair and maintenance
expenses, and acquire all required licenses and permits from governmental authorities.
Chanson NY rents three offices in New York City
from a third party pursuant to a month-to-month office agreement starting from August 1, 2021, with a monthly rent of $5,474.
Tangible properties of the U.S. Stores include
production, transportation, and electronic equipment. As of December 2022, the transportation team of the U.S. Stores had a cargo van
capable of transporting up to 1 ton of goods per transition per day.
R&D
A considerable portion of sales of the PRC Stores
and the U.S. Stores is driven by the introduction of new products, and as a result, product R&D is, and will continue to be, an important
component of their business. The PRC Stores and the U.S. Stores take a deliberate approach to new product development, with a primary
focus on enhancing the quality, flavor, texture, presentation, and packaging of their products while adjusting product formulas and evolving
production methods to meet customers’ demand for healthy, nutritious, and ready-to-eat food. In the realm of experimenting with
healthy food concepts, such as low in carb, low in sugar, and high in fiber and vitamins, they have been exploring new product categories,
including multi-grain products and products enriched with minerals.
The PRC Stores maintain an in-house R&D team
to improve their market research and customer insight capabilities. Currently, the R&D team of the PRC Stores has six employees. The
PRC Stores and the U.S. Stores expect to invest resources to retain more qualified employees. Their R&D team members frequently participate
in industry conferences and engage with industry experts to develop product formulas that follow key customer trends and to enhance their
product quality. Their management team also regularly attends industry exhibits in Japan, the U.S., and the European countries to learn
about the most up-to-date industry trends and developments, deepening their expertise in brand building and product diversification.
The passion and dedication for innovation of the
PRC Stores and the U.S. Stores has been translated into their ability to develop and introduce new products and ramp them into volume
with a fast pace, converting their advantage in R&D into their commercial competitive advantage in the bakery industry. As of March
2023, the PRC Stores had introduced over 145 types of new products and the U.S. Stores had introduced 15 types of new products since 2022.
Through years of effort, the PRC Stores and the
U.S. Stores have also developed a systematic approach to refine product packaging. They seamlessly combine functionality with aesthetics
by integrating automatic packaging and packaging techniques with an exceptional heat-sealing feature with stylish graphic designs.
Intellectual Property
Trademark
Xinjiang United Family has registered the brand
name, “George●Chanson,” as its trademark in 19 categories, its logo as its trademark in six categories, and “The
thyme bar” as its trademark in four categories in the PRC. These registrations allow the PRC Stores to exclusively use the trademark
in areas under those categories. Chanson 23rd Street has registered “CHANSON,” “PATISSERIE CHANSON,” and “CHANSON
NEW YORKTM” as its trademarks in the U.S. The following tables summarize these trademark registrations:
Trademarks Registered in the PRC
|
|
Registration Number |
|
Category |
|
Effective Period |
|
Trademark Logo |
1 |
|
17999111 |
|
40 |
|
11/07/2016-11/06/2026 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
|
|
|
|
|
|
|
2 |
|
17999258 |
|
43 |
|
11/07/2016-11/06/2026 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
|
|
|
|
|
|
|
3 |
|
17999032 |
|
31 |
|
11/07/2016-11/06/2026 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
|
|
|
|
|
|
|
4 |
|
17999068 |
|
33 |
|
11/14/2016-11/13/2026 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
|
|
|
|
|
|
|
5 |
|
17998952 |
|
5 |
|
11/14/2016-11/13/2026 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
|
|
|
|
|
|
|
6 |
|
17998971 |
|
29 |
|
11/14/2016-11/13/2026 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
|
|
|
|
|
|
|
7 |
|
13241648 |
|
30 |
|
04/14/2015-04/13/2025 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
|
|
|
|
|
|
|
8 |
|
13241661 |
|
32 |
|
04/14/2015-04/13/2025 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
|
|
|
|
|
|
|
9 |
|
13241679 |
|
39 |
|
03/28/2015-03/27/2025 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
|
|
|
|
|
|
|
10 |
|
12911052 |
|
35 |
|
08/07/2017-08/06/2027 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_006.jpg) |
|
|
Registration Number |
|
Category |
|
Effective Period |
|
Trademark Logo |
11 |
|
39954090 |
|
35 |
|
10/28/2020-10/27/2030 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_007.jpg) |
|
|
|
|
|
|
|
|
|
12 |
|
39954063 |
|
30 |
|
11/07/2020-11/06/2030 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_007.jpg) |
|
|
|
|
|
|
|
|
|
13 |
|
44626303 |
|
30 |
|
12/07/2020-12/06/2030 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_008.jpg) |
|
|
|
|
|
|
|
|
|
14 |
|
44629314 |
|
32 |
|
12/07/2020-12/06/2030 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_008.jpg) |
|
|
|
|
|
|
|
|
|
15 |
|
44623341 |
|
33 |
|
12/07/2020-12/06/2030 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_008.jpg) |
|
|
|
|
|
|
|
|
|
16 |
|
44639541 |
|
35 |
|
12/21/2020-12/20/2030 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_008.jpg) |
17 |
|
53288503 |
|
8 |
|
08/28/2021-08/27/2031 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_009.jpg) |
|
|
|
|
|
|
|
|
|
18 |
|
53317617 |
|
11 |
|
08/28/2021-08/27/2031 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
53296291 |
|
21 |
|
08/28/2021-08/27/2031 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_009.jpg) |
|
|
|
|
|
|
|
|
|
20 |
|
53302745 |
|
16 |
|
09/07/2021-09/06/2031 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_009.jpg) |
|
|
Registration Number |
|
Category |
|
Effective Period |
|
Trademark Logo |
21 |
|
53157597 |
|
36 |
|
09/07/2021-09/06/2031 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_009.jpg) |
|
|
|
|
|
|
|
|
|
22 |
|
53310418 |
|
44 |
|
09/07/2021-09/06/2031 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_009.jpg) |
|
|
|
|
|
|
|
|
|
23 |
|
53141021 |
|
41 |
|
09/14/2021-09/13/2031 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_009.jpg) |
|
|
|
|
|
|
|
|
|
24 |
|
53140661 |
|
3 |
|
09/21/2021-09/20/2031 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_009.jpg) |
|
|
|
|
|
|
|
|
|
25 |
|
56986085 |
|
25 |
|
12/28/2021-12/27/2031 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_012.jpg) |
26 |
|
53129642 |
|
30 |
|
03/28/2022-03/27/2032 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_007.jpg) |
27 |
|
53145548 |
|
32 |
|
03/28/2022-03/27/2032 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_007.jpg) |
28 |
|
53145551 |
|
33 |
|
03/28/2022-03/27/2032 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_007.jpg) |
29 |
|
53145555 |
|
35 |
|
03/28/2022-03/27/2032 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_007.jpg) |
Trademarks Registered in the U.S.
|
|
Registration Number |
|
Registration Date |
|
Trademark Logo |
1 |
|
5785931 |
|
June 25, 2019 |
|
CHANSONTM |
|
|
|
|
|
|
|
2 |
|
5768100 |
|
June 4, 2019 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_010.jpg) |
|
|
|
|
|
|
|
3 |
|
5768096 |
|
June 4, 2019 |
|
![](https://content.edgar-online.com/edgar_conv_img/2023/05/01/0001213900-23-034610_image_011.jpg) |
Chanson 23rd Street is also currently registering
a trademark for Thyme Bar in the U.S. and the trademark was published in the Trademark Official Gazette on March 29, 2022.
Domain Name
The operating entities own the internet domain names ir.chanson-international.net,
www.patisseriechanson.com, www.thymebarnyc.com, and chansonlesalon.com in the U.S.
Patent
As of the date of this annual report, the operating
entities do not own any patent and have not applied for the registration of patent design or any other means of patent protection. Nevertheless,
the operating entities plan to actively apply for patent protection with respect to their independently designed packaging methods and
production methods.
Employees
As of December 31, 2022, 2021, and 2020, our PRC
subsidiary and the VIEs had 294, 305, and 272 employees and our subsidiaries in the U.S. had 60, 41, and 18 employees, respectively. The
following table sets forth the number of employees of our subsidiaries and the VIEs on December 31, 2022 by area of business:
Employees based in the PRC
| |
Number of Employees | |
Management | |
| 10 | |
Finance | |
| 15 | |
Production and R&D | |
| 68 | |
General and Administration | |
| 8 | |
Logistics | |
| 10 | |
Marketing and Sales | |
| 183 | |
Total | |
| 294 | |
Employees based in the U.S.
| |
Number of
Employees | |
Management | |
| 7 | |
Cooking and Baking | |
| 18 | |
Finance | |
| 1 | |
Logistics | |
| 1 | |
General and Administration | |
| 3 | |
General Store Operation | |
| 30 | |
Total | |
| 60 | |
Employment Agreements, Non-competition,
and Confidentiality
Generally, our PRC subsidiary and the VIEs enter
into standard employment agreements with their officers, managers, and other employees, and our subsidiaries in the U.S. enter into at-will
employment agreements with their employees. According to the non-competition and confidentiality clause in these agreements, the operating
entities ask senior executives and key employees, especially those with the opportunity to deal with their trade secrets and other intellectual
property, to enter into separate non-competition ad confidentiality agreements with them.
The non-competition and confidentiality agreements
prohibit employees from engaging in any other employment during the period of their employment with the operating entities and from soliciting
the operating entities’ customers on behalf of themselves or any third party. The agreements restrict employees from making any
comments that could defame the operating entities’ reputation. The agreements further prohibit employees from disclosing any information
and knowledge about the operating entities’ business, operation, development, and strategies, including trade secrets and their
customers’ information, to any third party, as long as employees have acquired the information and knowledge during their employment
term at the company. Employees of the PRC Stores whose employment agreements are not renewed are prohibited from working for competitors
in two years after they leave the PRC Stores. Employees’ obligation to confidentially keep the PRC Stores’ trade secrets survives
beyond the termination or expiration of their employment agreements.
Occupational Health and Safety
The PRC Stores and the U.S. Stores fulfill their
legal responsibility to protect the health and safety of their employees by providing a safe workplace that meets the applicable labor
and sanitation standards, controlling risks to health, and ensuring that their plants and machinery are safe and that work safety systems
and guidelines are both established and adhered to. The PRC Stores and the U.S. Stores also make sure that dangerous articles and substances
are transported, stored, and used safely, provide adequate welfare facilities, provide employees the information, instruction, training,
and supervision necessary to preserve their health and safety, and consult with employees on health and safety matters.
In general, the PRC Stores and the U.S. Stores
consider their relationship with their employees to be good.
Seasonality
Bakery products sold by the PRC Stores and the
U.S. Stores and eat-in services offered by the U.S. Stores have not experienced obvious seasonal fluctuations in their sales as these
products have been commonly consumed on a daily basis by customers. Beverage products sold by the PRC Stores and the U.S. Stores have
experienced in the past, and expect to continuously experience in the future, higher retail sales during summer as a result of higher
customer demand. Seasonal products sold by the PRC Stores have experienced in the past, and expect to continuously experience in the future,
seasonal fluctuations in their retail sales as a result of customers’ increased demand for these seasonal products as gifts and
for person consumption during festival seasons. Historically, the PRC Stores generate almost all the retail sales of their seasonal products
during the one or two months before Dragon Boat Festival and Mid-Autumn Festival, which respectively take place at the end of the second
quarter and the beginning of the third quarter of a year.
Regulations
This section sets forth a summary of the principal
laws and regulations relevant to our business and operations in the PRC and the U.S.
PRC Regulations
Regulations on Food Production and Food Business
Operation
Food Safety
The Food Safety Law of the People’s Republic of China, or
the “Food Safety Law,” was promulgated by the SCNPC on February 28, 2009, and amended on April 24, 2015, December 29, 2018,
and April 29, 2021. The Food Safety Law is formulated for the purposes of ensuring food safety and safeguarding the physical health and
life of members of the public. Persons engaging in food manufacturing and processing, circulation of food, and storage and transportation
of food in the PRC shall comply with this law. Under the Food Safety Law, food manufacturers and food business operators shall be accountable
for the safety of food consumers, comply with food safety standards, and satisfy the specific requirements.
The Food Safety Law establishes a licensing system
for food manufacturing and food business operations, which means persons engaging in food manufacturing, foodstuff sale, and food and
beverage services shall obtain a permit. According to the Implementation Regulations for the Food Safety Law, which was promulgated by
the State Council of the PRC on July 20, 2009, and amended in 2016, a food production permit shall be valid for three years. The Implementation
Regulations for the Food Safety Law were amended in 2019, which stipulates that a food production permit shall be valid for five years
starting from December 1, 2019.
Food Production Permit and Food Business
Permit
The Administrative Measures for Food Production Permitting, or the
“Food Production Permitting Measures,” were promulgated by the Market Supervision and Management Department on December 23,
2019, which came into effect on March 1, 2020. Pursuant to the Food Production Permitting Measures, an enterprise shall obtain a food
production permit prior to engaging in food production activities within the territory of the PRC. The principle of one permit per enterprise
is applied to food production permitting, and the Market Supervision and Management Department implements classified permitting on food
production, according to the degree of risk of food. When applying for the food production permit, food manufacturers should have places
for raw material handling, places for processing, packaging, and storage of food, and manufacturing equipment or facilities, compatible
with the category and quantity of the food under production, and a reasonable equipment layout and production process, and other conditions
required by laws and regulations. Our PRC subsidiary Xinjiang United Family has obtained a food production permit that allows it to manufacture
bakery products. The permit will expire on November 23, 2026, and Xinjiang United Family will file a renewal request 30 business days
prior to the expiration date. In general, as long as a business entity operates legally and in good standing, its renewal request will
be approved.
The Administrative Measures for Food Business Permitting, or the “Food
Business Permitting Measures,” were promulgated by the China Food and Drug Administration, or “CFDA,” on August 31,
2015, and were amended on November 7, 2017. According to the Food Business Permitting Measures, an enterprise shall obtain a food business
permit prior to engaging in food sale and catering services within the territory of the PRC. The principle of one permit per enterprise
is applied to the food business permitting. When applying for the food business permit, food business operators should meet certain conditions
in accordance with laws and regulations, including but not limited to requirements on places for food processing, storing, and selling,
operational equipment and facilities, food safety management personnel, regulations and rules on food safety assurance, reasonable equipment
layout, and technological processes.
As of the date of this annual report, (i) the three branch offices
of Xinjiang United Family have obtained the food business permits, (ii) two UFG Entities are applying for the renewal of their food business
permits; and (iii) all remaining UFG Entities have obtained the food business permits, which are valid currently, allowing them to retail
bakery products and store-made beverages and juice products, although some of them did not have the food business permits at the time
of their opening. Pursuant to the Food Safety Law, the failure of these entities to have the food business permit at the time of opening
may result in the confiscation of their illegal income, foodstuffs from the illegal business operations, tools, equipment, and ingredients
used in the illegal activities. Where the value of foodstuffs from the illegal operations is less than RMB10,000 (approximately $1,446),
a fine ranging from RMB50,000 (approximately $7,231) to RMB100,000 (approximately $14,460) shall be imposed; where the value of foodstuffs
is RMB10,000 (approximately $1,446) or more, a fine ranging from 10 to 20 times the value of the foodstuffs shall be imposed. Although
the PRC Stores have not received any notice of warning or been subject to penalties or other penalties such as income confiscation from
the relevant governmental authorities regarding conducting their business without the above mentioned permits, we cannot assure you that
the PRC Stores will not be subject to any penalties in the future. The PRC Stores will file a renewal request 30 business days prior to
the expiration date of those permits. In general, as long as a business entity operates legally and is in good standing, its renewal request
will be approved, but we cannot assure you that the PRC Stores will be able to renew such permits in the future.
Employee Health Examination System and Health
Record System
Under the Food Safety Law and the Implementation
Regulations for the Food Safety Law, food manufacturers and food business operators are required to establish and implement an employee
health examination system and a health record system. Persons suffering from diseases that may cause food safety issues as prescribed
by the health administrative department of the State Council shall not engage in work in contact with ready-to-eat food. Personnel of
food manufacturers and food business operators shall undergo annual health checks and may undertake duties only upon obtaining health
certificates. The PRC Stores have established an employee health examination system and a health record system, and their employees have
obtained the health certificates as required. Their employee health examination system and health record system are updated once a year
and no employee is allowed to work in the PRC Stores or central factory without first obtaining a health certificate, which is valid for
a year.
Procurement Check Record System and Food
Inspection System
Under the Food Safety Law and the Implementation
Regulations for the Food Safety Law, food manufacturers and food business operators shall examine the relevant licenses and eligibility
certification documents of the suppliers when procuring food ingredients, food additives, food-related products, and food. If the relevant
eligibility certification documents are unavailable, food ingredients, food additives, food-related products, and food shall be inspected
in accordance with food safety standards and shall not be procured or used if they do not meet these standards. Food manufacturers and
food business operators are required to establish a record system for inspection of procured food ingredients, food additives, food-related
products, and food, and truthfully record the names, specifications, quantities, production date or batch number, shelf life and purchase
date, names and contact information of suppliers of food ingredients, food additives, food-related product and food, and retain the relevant
certificates. The inspection records for procured food ingredients, food additives, food-related products, and food shall be true and
be retained for at least six months after the expiration of the shelf life of the product. If there is no shelf life, the records and
certificates shall be kept for at least two years. Food manufacturers are also required to establish a record system for the inspection
of food exiting its factory, check its inspection certificate and safety status, and record the information truthfully. The PRC Stores
have established a record system and are currently in compliance with the relevant legal requirements.
Food Recall System
A food recall system has been established in the PRC in accordance
with the Food Safety Law and the Implementation Regulations on the Food Safety Law. On March 11, 2015, CFDA promulgated the Administrative
Measures for Food Recall, which came into effect on September 1, 2015 and was amended on October 23, 2020. The Administrative Measures
for Food Recall provides for detailed rules on the food recall system. A food manufacturer shall, upon discovering that the food produced
by itself does not comply with the food safety standards, immediately stop production, recall the food from the market, notify the relevant
food business operators and consumers, and record information of the recall and notification. A food business operator shall, upon discovering
that the food in its business operations does not comply with the food safety standards, immediately cease business operation, notify
the relevant food distributors and consumers, and record information of cessation of business operation and notification. Where the food
manufacturer deems that recall of the food is necessary, the food shall be recalled immediately. The food manufacturers and food business
operators shall carry out innocuous treatment and destruction measures for recalled food to prevent the recalled food from being re-circulated
to the market, and report the information of recall and treatment of the food to the local Market Supervision and Management Department
at or above the county level.
Pollutant Discharge Permit
Article 45 of the Environmental Protection Law
of the People’s Republic of China, which became effective on January 1, 2015, stipulates that enterprises, institutions, and other
producers and operators that implement pollution discharge permit management in China shall discharge pollutants in accordance with the
requirements of the pollution discharge license; those who have not obtained the discharge license shall not discharge pollutants. At
the same time, according to the relevant regulations of the “the List of Classification Management of Emission Permit for Fixed
Source of Pollution (2019 Edition),” key management, simplified management, and registration management of pollutant discharge permit
have been implemented. Pollutant discharge units that implement registration management do not need to apply for a pollutant discharge
permit, but should fill in the pollutant discharge registration form on the national pollutant discharge permit management information
platform. Based on the situation of the central factory of the PRC Stores, as well as their production equipment and production process,
at least a sewage registration is required. As of the date of this annual report, Xinjiang United Family has completed the sewage registration.
According to Article 63 of the Environmental Protection
Law of the People’s Republic of China, if an enterprise, institution, or other producer or business operator, in violation of the
provisions of the law, discharges pollutants without obtaining a pollutant discharge license, and is ordered to stop discharging pollutants
but refuses to carry out the order, which does not constitute a crime, in addition to punishment in accordance with relevant laws and
regulations, the Environmental Protection Departments of the People’s Governments at or above the county level or other relevant
departments shall transfer the case to the Bureau of Public Security. The person in charge and other persons directly responsible shall
be detained for not less than 10 days but not more than 15 days; if the circumstances are relatively minor, they shall be detained for
not less than five days but not more than 10 days.
Regulations on Product Quality
Manufacturers and sellers of defective products
in the PRC may incur liability for losses and injuries caused by such products. In accordance with the Product Quality Law of the PRC,
or the “Product Quality Law,” promulgated on February 22, 1993, and amended on July 8, 2000, August 27, 2009, and December
29, 2018, manufacturers and sellers are responsible for the product quality.
Under the Product Quality Law, manufacturers and
sellers shall establish a sound internal product quality control system. Adulteration of, or mixing of improper elements with products
produced or sold, selling fake products as genuine products, or selling products of poor quality as high-quality products is prohibited.
Substandard products shall not be sold as products that are up to standard. Product shall have no unreasonable danger to personal safety
or the safety of property. Where there are national or industry standards for the protection of health, personal safety, and the safety
of property, such standards shall be complied with. Manufacturers shall not produce products that the State has determined should be eliminated.
Manufacturers shall not falsify the place of origin of products or falsify or imitate the name or address of another factory. Sellers
shall adopt measures to maintain the quality of products sold. Sellers shall not sell any products that the State has determined should
be eliminated and whose sale has ceased, or any expired products or deteriorated products.
The Consumer Protection Law of the PRC, which
was promulgated on October 31, 1993, and amended on October 25, 2013, and came into effect on March 15, 2014, has also provided protection
for customers regarding food safety. Food business operators shall ensure the requisite quality, function, use, and shelf life of their
goods under normal use, except where a consumer is aware of a defect before purchasing the goods, and the defect does not violate the
mandatory provisions of the law. Food business operators demonstrating the quality of their goods or services through advertisements,
product demonstrations, actual samples or any other methods shall ensure that the actual quality of their goods is consistent with the
demonstrated quality.
Regulations on Product Liabilities
The Civil Code, which was promulgated by the National People’s
Congress on May 28, 2020, and became effective on January 1, 2021, provides that where a product endangers life or property due to its
defect, the manufacturers and the distributors shall bear the tort liability.
Under the Civil Code, in the event of product defects that have caused
damage to others, the manufacturer shall bear tort liability and the infringed person may claim compensation against the manufacturer
or the seller of the product. In such event if the defect is caused by the manufacturer, the seller who has paid compensation has the
right to indemnification against the manufacturer; if the defect is caused by the fault of the seller, the manufacturer who has paid compensation
has the right to indemnification against the seller. If a defect of a product endangers the personal or property safety of another person,
the infringed person has the right to request the manufacturer or seller to bear tort liability, such as in forms of cessation of the
infringement, removal of the nuisance, or elimination of the danger. Where a defect of a product is discovered after the product is put
into circulation, the manufacturer or seller shall take remedial measures, such as stopping sales, providing warnings, or recalling the
product, in a timely manner. The manufacturer or seller, who fails to take remedial measures in a timely manner or take ineffective measures
so that the damage is aggravated, shall be liable also for the aggravated part of the damage. The manufacturer or seller shall bear the
necessary expenses incurred by the infringed person for recalling such defective products. If a manufacturer or seller manufactures or
sells a product knowing that the product is defective, or failing to take remedial measures accordingly, so that death or serious physical
harm is caused to another person, the infringed person has the right to request for the corresponding punitive damages.
Regulations on Internet Advertising
The Interim Measures for the Administration of
Internet Advertising, which was promulgated by the SAIC on July 4, 2016 and came into effect on September 1, 2016, governs all advertisements
published on the Internet, including but not limited to advertisements in the form of text, image, audio, and video which are published
through websites, web pages, and applications. Internet advertisement operators and publishers (1) shall not design, produce, or provide
agency services for or publish any advertisements they know or should have known to be false; (2) shall establish a review and file management
system, inspect and verify relevant supporting documents, and check content of advertisements; and (3) shall not design, produce, or provide
agency services for or publish any advertisements whose content is untrue or without sufficient supporting documents.
Regulations relating to Information Security
and Privacy Protection
Internet content in China is regulated and restricted from a state
security standpoint. On December 28, 2000, the SCNPC enacted the Decisions on Maintaining Internet Security, later amended on August 27,
2009, which subject violators to criminal punishment in China for any effort to: (1) use the Internet to market fake and substandard products
or carry out false publicity for any commodity or service; (2) use the Internet for the purpose of damaging the commercial goodwill and
product reputation of any other person; (3) use the Internet for the purpose of infringing on the intellectual property of any person;
(4) use the Internet for the purpose of fabricating and spreading false information that affects the trading of securities and futures
or otherwise jeopardizes the financial order; or (5) create any pornographic website or webpage on the Internet, provide links to pornographic
websites, or disseminate pornographic books and magazines, movies, audio-visual products, or images. Pursuant to the Administrative Measures
for the Security Protection of Computer Information Networks Linked to the Internet, which was promulgated by the Ministry of Public Security
(the “MPS”) on December 16, 1997 and later amended and became effective on January 8, 2011, the Internet is prohibited to
be used in ways which, among other things, would result in a leakage of state secrets or a spread of socially destabilizing content. On
December 13, 2005, the MPS promulgated the Provisions on the Technical Measures for the Protection of the Security of the Internet, which
require internet service providers to take proper measures including anti-virus, data back-up, and other related measures, to keep records
of certain information about its users (including user registration information, log-in and log-out time, IP address, content, and time
of posts by users) for at least 60 days, and to detect illegal information, stop transmission of such information, and keep relevant records.
If an Internet information service provider violates these measures, the MPS and the local public security bureaus may recommend that
the original certificate examination, approval, and issuing organizations revoke its operating license and shut down its websites. Pursuant
to the Administrative Measures for the Graded Protection of Information Security promulgated by the MPS, the State Secrecy Bureau, the
State Cipher Code Administration, and the Information Office of the State Council on June 22, 2007, the state shall, by formulating nationally
effective administrative norms and technical standards for the graded protection of information security, organize citizens, legal persons,
and other organizations to grade information systems and protect their security, and supervise and administer the graded protection work.
The security protection grade of an information system may be classified into the five grades. To newly build an information system of
Grade II or above, its operator or user shall, within 30 days after the information system is put into operation, go through the record-filing
procedures at the local public security organ at the level of municipality divided into districts or above.
Regulations on Intellectual Property Rights
Trademarks
Trademarks are protected by the PRC Trademark Law adopted on August
23, 1982, and subsequently amended on February 22, 1993, October 27, 2001, August 30, 2013, and April 23, 2019, as well as the Implementation
Regulation of the PRC Trademark Law adopted by the State Council in August 3, 2002, and amended on April 29, 2014. The PRC Trademark Office
under the State Administration of Market Regulation handles trademark registrations and grants a term of 10 years to registered trademarks
and another 10 years if requested upon expiration of the first or any renewed 10-year term. Trademark license agreements must be filed
with the PRC Trademark Office for record. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark
registration. Where a trademark to be registered is identical or similar to another trademark which has already been registered or been
subject to a preliminary examination and approval for use on the same kind of or similar goods or services, the application for registration
of such trademark may be rejected. Any person applying for the registration of a trademark may not prejudice the existing right first
obtained by others, nor may any person register in advance a trademark that has already been used by another party and has already gained
a “sufficient degree of reputation” through such party’s use. After receiving an application, the PRC Trademark Office
will make a public announcement if the relevant trademark passes the preliminary examination. During the three months after this public
announcement, any person entitled to prior rights and any interested party may file an objection against the trademark. The PRC Trademark
Office’s decisions on rejection, objection, or cancellation of an application may be appealed to the PRC Trademark Review and Adjudication
Board, whose decision may be further appealed through judicial proceedings. If no objection is filed within three months after the public
announcement or if the objection has been overruled, the PRC Trademark Office will approve the registration and issue a registration certificate,
at which point the trademark is deemed to be registered and will be effective for a renewable 10-year period, unless otherwise revoked.
For licensed use of a registered trademark, the licensor shall file record of the licensing with the PRC Trademark Office, and the licensing
shall be published by the PRC Trademark Office. Failure of the licensing of a registered trademark shall not be contested against a good
faith third party. As of December 2022, Xinjiang United Family held 29 registered trademarks in the PRC and enjoyed the corresponding
rights.
Copyrights
In accordance with the Copyright Law of the PRC promulgated by the
SCNPC on September 7, 1990, last amended on November 11, 2020, and came into effect on June 1, 2021, Chinese citizens, legal persons,
or other entities own the copyright in their works whether published or not, including written works, oral works, music, comedy, arts
of talking and singing, dance and acrobatics, work of art and architecture work, photographic works, cinematographic work and work created
by the method similar to the film production method, engineering design drawing, product design drawing, map, sketch and other graphic
works and model works, computer software, and other works specified by laws and administrative regulations. The rights a copyright owner
has include but not limited to the following rights of the person and property rights: the right of publication, right of authorship,
right of modification, right of integrity, right of reproduction, distribution right, rental right, right of network communication, translation
right, and right of compilation.
In accordance with the Regulations on the Protection
of Computer Software promulgated by the State Council on December 20, 2001 and last amended on January 30, 2013, Chinese citizens, legal
persons, or other entities own the copyright, including the right of publication, right of authorship, right of modification, right of
reproduction, distribution right, rental right, right of network communication, translation right, and other rights software copyright
owners shall have in software developed by them, regardless of whether the software has been published. In accordance with the Measures
for the Registration of Computer Software Copyright promulgated by the National Copyright Administration on April 6, 1992 and last amended
on February 20, 2002, software copyrights, exclusive licensing contracts for software copyrights, and software copyright transfer contracts
shall be registered, and the National Copyright Administration shall be the competent authority for the administration of software copyright
registration and the Copyright Protection Center of China is designated as a software registration authority. The Copyright Protection
Center of China shall grant a registration certification to a computer software copyright applicant who complies with relevant regulations.
Domain Name
In accordance with the Measures for the Administration of Internet
Domain Names, which was promulgated by the Ministry of Industry and Information Technology (the “MIIT”) on August 24, 2017
and came into effect on November 1, 2017, and the Implementation Rules for National Top-level Domain Name Registration, which were promulgated
by China Internet Network Information Center (the “CNNIC”) on June 18, 2019 and came into effect on the same day, domain name
registrations are handled through domain name service agencies established under relevant regulations, and an applicant becomes a domain
name holder upon successful registration, and domain name disputes shall be submitted to an organization authorized by CNNIC for resolution.
In accordance with the Notice from the Ministry
of Industry and Information Technology on Regulating the Use of Domain Names in Internet Information Services, which was promulgated by
the MIIT on November 27, 2017 and came into effect on January 1, 2018, Internet access service providers shall verify the identity of
each Internet information service provider, and shall not provide services to any Internet information service provider which fails to
provide real identity information.
Regulations on Patents
Pursuant to the Patent Law of the PRC, or the “Patent Law,”
promulgated by the SCNPC on March 12, 1984, most recently amended on October 17, 2020, and effective from June 1, 2021, and the Implementation
Rules of the Patent Law of the PRC, promulgated by the State Council on June 15, 2001 and most recently amended on January 9, 2010, there
are three types of patents in the PRC: invention patent, utility model patent, and design patent. The protection period is 20 years for
invention patent, 10 years for utility model patent, and 15 years for design patent, commencing from their respective application dates.
Any individual or entity that utilizes a patent or conducts any other activity in infringement of a patent without prior authorization
of the patentee shall pay compensation to the patentee and is subject to a fine imposed by relevant administrative authorities and, if
the infringement constitutes a crime, shall be held criminally liable. In the event that a patent is owned by two or more co-owners without
an agreement regarding the distribution of revenue generated from the exploitation of any co-owner of the patent, such revenue shall be
distributed among all the co-owners.
Existing patents can become narrowed, invalid,
or unenforceable due to a variety of grounds, including lack of novelty, creativity, and deficiencies in patent application. In China,
a patent must have novelty, creativity, and practical applicability. Under the Patent Law, novelty means that before a patent application
is filed, no identical invention or utility model has been publicly disclosed in any publication in China or overseas or has been publicly
used or made known to the public by any other means, whether in or outside of China, nor has any other person filed with the patent authority
an application that describes an identical invention or utility model and is recorded in patent application documents or patent documents
published after the filing date. Creativity means that, compared with existing technology, an invention has prominent substantial features
and represents notable progress, and a utility model has substantial features and represents any progress. Practical applicability means
an invention or utility model can be manufactured or used and may produce positive results. Patents in China are filed with the State
Intellectual Property Office, or the “SIPO.” Normally, the SIPO publishes an application for an invention patent within 18
months after the filing date, which may be shortened at the request of applicant. The applicant must apply to the SIPO for a substantive
examination within three years from the date of application.
Regulations on Company Establishment
The establishment, operation, and management of
companies in the PRC is governed by the PRC Company Law, or the “Company Law,” as promulgated by the SCNPC on December 29,
1993, effective on July 1, 1994, and subsequently amended in 1999, 2004, 2005, 2013, and 2018. According to the Company Law, companies
established in the PRC are either limited liability companies or joint stock limited liability companies. The Company Law applies to both
domestic companies and foreign-invested companies.
On March 15, 2019, the National People’s
Congress approved the Foreign Investment Law of the PRC, or the “Foreign Investment Law,” which came into effect on January
1, 2020, repealing simultaneously the Law of the PRC on Sino-foreign Equity Joint Ventures, the Law of the PRC on Wholly Foreign-owned
Enterprises, and the Law of the PRC on Sino-foreign Cooperative Joint Ventures. The Foreign Investment Law adopts the management system
of pre-establishment national treatment and negative list for foreign investment. Policies in support of enterprises shall apply equally
to foreign-funded enterprises according to laws and regulations. Foreign investment enterprises shall be guaranteed that they could equally
participate in the setting of standards, and the compulsory standards formulated by the State shall be equally applied. Fair competition
for foreign investment enterprises to participate in government procurement activities shall be protected. The Foreign Investment Law
also stipulates the protection on intellectual property rights and trade secrets. In addition, Regulations for the Implementation of the
Foreign Investment Law of the PRC came into effect as of January 1, 2020.
Notice on the Implementation of Foreign Investment Law and the Registration
of Foreign-funded Enterprises was issued by the State Administration for Market Regulation on December 28, 2019. According to such notice,
the State Administration for Market Regulation conducts business registration, and the applicant shall apply for the registration of foreign-funded
enterprises through the enterprise registration system. The registration authority shall conduct formal examination on relevant application
materials. Where a foreign investor or enterprise with foreign investment invests in a field other than those in the negative list, it
shall register in accordance with the principle of consistency of domestic and foreign investment.
The Measures for Reporting Foreign Investment
Information were adopted by MOFCOM on December 19, 2019, approved by the State Administration for Market Regulation, and became effective
on January 1, 2020. According to such measures, when a foreign investor directly or indirectly conducts investment activities in China,
the foreign investor or foreign-invested enterprise shall submit investment information to the competent department of commerce in accordance
with the measures.
Regulation on Foreign Investment
Investment activities in the PRC by foreign investors were principally
governed by the Guidance Catalog of Industries for Foreign Investment, promulgated and as amended from time to time by MOFCOM and National
Development and Reform Commission (“NDRC”), which was later divided into two legal documents, including the Catalog of Industries
for Encouraged Foreign Investment, or the “Encouraged Catalog,” and the Special Administrative Measures for Access of Foreign
Investment (Negative List), or the “Negative List.” The current Encouraged Catalog was promulgated by MOFCOM and NDRC on October
26, 2022 and became effective on January 1, 2023. The current Negative List was promulgated by MOFCOM and NDRC on December 27, 2021, and
became effective on January 1, 2022. Industries listed in the Negative List are divided into two categories: restricted and prohibited.
Industries not listed in the Negative List are generally constituted “permitted,” and are open to foreign investment unless
specifically restricted by other PRC regulations. For restricted industries, some are limited to equity or contractual joint ventures,
while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, restricted category
projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited
category. Pursuant to the current Negative List, manufacturing and selling bakery products is an encouraged industry for foreign investment
access.
Regulations on Foreign Exchange
General Administration of Foreign Exchange
According to the Foreign Exchange Control Regulations
of the PRC, which were promulgated by the State Council on January 29, 1996, came into effect on April 1, 1996, and were amended on January
14, 1997, and August 1, 2008 (which amendment came into effect on August 5, 2008), payments for transactions that take place within the
PRC must be made in Renminbi. PRC companies or individuals may repatriate foreign exchange receipts received overseas or deposit overseas.
Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related
foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments
in securities outside of the PRC, unless prior approval is obtained from SAFE and prior registration with SAFE is made. Foreign exchange
proceeds under the current accounts may be either retained or sold to a financial institution engaged in settlement and sale of foreign
exchange. For foreign exchange proceeds under the capital accounts, approval from SAFE is generally required for the retention or sale
of such proceeds to a financial institution engaged in settlement and sale of foreign exchange.
Foreign Investment
According to Provisions on Foreign Exchange Control on Direct Investments
in China by Foreign Investors, which were promulgated on May 10, 2013 and amended on October 10, 2018, by SAFE, upon establishment of
a foreign investment enterprise pursuant to the law, registration formalities shall be completed with SAFE. In the event of subsequent
changes in the capital of the foreign investment enterprise such as increase in capital, capital reduction, and equity transfer, registration
change formalities shall be completed with SAFE.
Pursuant to the Circular of SAFE on Further Improving
and Adjusting Foreign Exchange Administration Policies for Direct Investment, or the “SAFE Circular No. 59,” promulgated by
SAFE on November 19, 2012, and was further amended on May 4, 2015, as well as October 10, 2018 and December 30, 2019, approval is not
required for opening a foreign exchange account and depositing foreign exchange into the account relating to the direct investments. SAFE
Circular No. 59 also simplified foreign exchange-related registration required for the foreign investors to acquire the equity interests
of Chinese companies and further improve the administration on foreign exchange settlement for foreign investment enterprises.
The Notice of the State Administration of Foreign Exchange on Reforming
the Mode of Management of Settlement of Foreign Exchange Capital of Foreign-Funded Enterprises, or the “SAFE Circular No.19,”
which was promulgated by SAFE on March 30, 2015, and became effective on June 1, 2015, and was further amended on December 30, 2019 and
March 23, 2023, provides that a foreign investment enterprise may, according to its actual business needs, settle with a bank the portion
of the foreign exchange capital in its capital account for which the relevant foreign exchange administration has confirmed monetary capital
contribution rights and interests (or for which the bank has registered the injection of the monetary capital contribution into the account).
Pursuant to the SAFE Circular No.19, for the time being, foreign investment enterprises are allowed to settle 100% of their foreign exchange
capitals on a discretionary basis; a foreign-invested enterprise shall truthfully use its capital for its own operational purposes within
the scope of business; where an ordinary foreign-invested enterprise makes domestic equity investment with the amount of foreign exchanges
settled, the invested enterprise shall first go through domestic re-investment registration and open a corresponding account for foreign
exchange settlement pending payment with the foreign exchange administration or the bank at the place where it is registered.
Overseas Investment and Financing and Round-Trip
Investment
Under SAFE Circular 37 issued by SAFE and effective
on July 4, 2014, PRC residents are required to register with the local SAFE branch prior to the establishment or control of an offshore
SPV, which is defined as offshore enterprises directly established or indirectly controlled by PRC residents for offshore equity financing
of the enterprise assets or interests they hold in the PRC. An amendment to registration or subsequent filing with the local SAFE branch
by such PRC resident is also required if there is any change in basic information of the offshore company or any material change with
respect to the capital of the offshore company. At the same time, SAFE has issued the Operation Guidance for the Issues Concerning Foreign
Exchange Administration over Round-trip Investment regarding the procedures for SAFE registration under SAFE Circular 37, which became
effective on July 4, 2014, as an attachment of SAFE Circular 37, and provided operational guidance in detail on how to complete the required
registration under SAFE Circular 37. Pursuant to the Circular on Further Simplifying and Improving the Foreign Currency Management Policy
on Direct Investment, or the “SAFE Circular No. 13,” which was promulgated by SAFE and effective from June 1, 2015, the administrative
approvals of foreign exchange registration of direct domestic investment and direct overseas investment are canceled and the procedure
of foreign exchange-related registration are simplified. The investors shall register with banks for direct domestic investment and direct
overseas investment.
As of the date of this annual report, all of our
beneficial shareholders who are PRC residents have completed registrations in accordance with SAFE Circular 37. See “Item 3. Key
Information—D. Risk Factors—Risks Relating to Doing Business in the PRC—PRC regulations relating to offshore investment
activities by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our
ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute
profits to us, or may otherwise adversely affect us.”
Dividend Distribution
Under the Company Law, the Foreign Investment
Law, and Implementation Regulations of Foreign Investment Law, wholly foreign-owned enterprises in the PRC may pay dividends only out
of their accumulated after-tax profits, if any, determined in accordance with China accounting standards and regulations. According to
the Foreign Investment Law and Implementation Regulations of Foreign Investment Law, foreign investors’ investment, profits, capital
gains, assets disposal income, intellectual property license fees, compensation or indemnification obtained according to law, and income
from liquidation, among other things, may be freely remitted in or out of China in RMB or foreign currency. In addition, under the Company
Law, wholly foreign-owned enterprises in the PRC are required to allocate at least 10% of their respective accumulated profits each year,
if any, to fund certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign-owned
enterprises may, at their discretion, allocate a portion of their after-tax profits based on China accounting standards to staff welfare
and bonus funds. These reserves are not distributable as cash dividends. See “Item 3. Key Information—D. Risk Factors—Risks
Relating to Doing Business in the PRC—Our PRC subsidiary is 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.”
Regulations on Mergers & Acquisitions and
Overseas Listings
On August 8, 2006, six PRC regulatory agencies,
including the CSRC, MOFCOM, the State-owned Assets Supervision and Administration Commission, the SAT, the State Administration of Industry
and Commerce and SAFE, adopted the M&A Rules, which became effective on September 8, 2006, and were amended on June 22, 2009. Foreign
investors shall comply with the M&A Rules when they purchase equity interests of a domestic company or subscribe the increased capital
of a domestic company, and thus changing the nature of the domestic company into a foreign-invested enterprise, when the foreign investors
establish a foreign-invested enterprise in the PRC, purchase the assets of a domestic company and operate the assets, or when the foreign
investors purchase the assets of a domestic company, establish a foreign-invested enterprise by injecting such assets, and operate the
assets. As for merger and acquisition of a domestic company with a related party relationship by a domestic company, enterprise or natural
person in the name of an overseas company legitimately incorporated or controlled by the domestic company, enterprise of natural person,
such merger and acquisition shall be subject to examination and approval of MOFCOM. The parties involved shall not use domestic investment
by foreign investment enterprises or other methods to circumvent the requirement of examination and approval.
Pursuant to the Manual of Guidance on Administration
for Foreign Investment Access, which was issued and became effective on December 18, 2008 by MOFCOM, notwithstanding the fact that (i)
the domestic shareholder is connected with the foreign investor or not, or (ii) the foreign investor is the existing shareholder or the
new investor, the M&A Rules shall not apply to the transfer of an equity interest in an incorporated foreign-invested enterprise from
the domestic shareholder to the foreign investor.
On July 6, 2021, the General Office of the Central
Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions. The Opinions emphasized
the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies.
The Opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the
risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection.
On February 17, 2023, the CSRC promulgated the
Trial Measures and five supporting guidelines, which came into effect on March 31, 2023. Pursuant to the Trial Measures, domestic companies
that seek to offer or list securities overseas, both directly and indirectly, shall complete filing procedures with the CSRC pursuant
to the requirements of the Trial Measures within three working days following its submission of initial public offerings or listing application.
If a domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its
filing documents, such domestic company may be subject to administrative penalties, such as an order to rectify, warnings, fines, and
its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject
to administrative penalties, such as warnings and fines.
The Trial Measures establish a list outlining
the circumstances where a PRC enterprise is prohibited from offering and listing securities overseas, and the CSRC has the authority to
block offshore listings that: (i) are explicitly prohibited by laws; (ii) may endanger national security as determined by relevant competent
departments under the State Council; (iii) involve criminal offenses that disrupting PRC economy such as corruption, bribery, embezzlement,
or misappropriation of property by the issuer, the controlling shareholder, and/or actual controller in the recent three years; (iv) involve
the issuer under investigations for suspicion of criminal offenses or major violations of laws and regulations; or (v) involve material
ownership disputes over the shares held by the controlling shareholder or by other shareholders that are controlled by the controlling
shareholder and/or actual controller. An issuer seeking direct or indirect overseas listing is also required to undergo national security
review or obtain clearance from relevant authorities if necessary before making any application with overseas regulator or listing venue.
Where an overseas securities regulator investigates and collects evidence relating to the overseas offering and listing of a PRC enterprise
and related activities, and requests the CSRC for cooperation in accordance with the cross-border supervision and management cooperation
mechanism, the CSRC may provide necessary assistance according to law and based on the principle of reciprocity. Our application for listing
in Nasdaq does not fall under the circumstance that such overseas listing is prohibited by the Trial Measures, nor do we need to go through
the review such as security review or clearance approval from relevant authorities.
According to the CSRC Notice, the domestic companies
that have already been listed overseas before the effective date of the Trial Measures (namely, March 31, 2023) shall be deemed as Existing
Issuers. Existing Issuers are not required to complete the filing procedures immediately, and they shall be required to file with the
CSRC for any subsequent offerings. Further, according to the CSRC Notice, domestic companies that have obtained approval from overseas
regulatory authorities or securities exchanges (for example, the effectiveness of a registration statement for offering and listing in
the U.S. has been obtained) for their indirect overseas offering and listing prior to March 31, 2023 but have not yet completed their
indirect overseas issuance and listing, are granted a six-month transition period from March 31, 2023 to September 30, 2023. Those that
complete their indirect overseas offering and listing within such six-month period are deemed as Existing Issuers and are not required
to file with the CSRC for their indirect overseas offerings and listings. Within such six-month transition period, however, if such domestic
companies fail to complete their indirect overseas issuance and listing, they shall complete the filing procedures with the CSRC.
Based on the foregoing, as our registration statement on Form F-1 was
declared effective on March 29, 2023 and we have completed our initial public offering and listing prior to September 30, 2023, we are
currently not required to complete the filing procedures pursuant to the Trial Measures. However, in the event that we undertake new offerings
or fundraising activities in the future, we may be required to complete the filing procedures.
On February 24, 2023, the CSRC, together with
the MOF, National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions issued
by the CSRC and National Administration of State Secrets Protection and National Archives Administration of China in 2009. The revised
Provisions were issued under the title the “Provisions on Strengthening Confidentiality and Archives Administration of Overseas
Securities Offering and Listing by Domestic Companies,” and came into effect on March 31, 2023 together with the Trial Measures.
One of the major revisions to the revised Provisions is expanding their application to cover indirect overseas offering and listing, as
is consistent with the Trial Measures. The revised Provisions require that, among other things, (a) a domestic company that plans to,
either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities, including
securities companies, securities service providers, and overseas regulators, any documents and materials that contain state secrets or
working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy
administrative department at the same level; and (b) a domestic company that plans to, either directly or indirectly through its overseas
listed entity, publicly disclose or provide to relevant individuals and entities, including securities companies, securities service providers,
and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest,
shall strictly fulfill relevant procedures stipulated by applicable national regulations. Any failure or perceived failure by our Company,
our subsidiaries, or the VIEs to comply with the above confidentiality and archives administration requirements under the revised Provisions
and other PRC laws and regulations may result in the relevant entities being held legally liable by competent authorities, and referred
to the judicial organ to be investigated for criminal liability if suspected of committing a crime.
The Opinions, the Trial Measures, the revised
Provisions and any related implementing rules to be enacted may subject us to additional compliance requirements in the future. See “Item
3. Key Information—D. Risk Factors—Risks Relating to Doing Business in the PRC—The Opinions, the Trial Measures, and
the revised Provisions recently issued by the PRC authorities may subject us to additional compliance requirements in the future.”
Regulations on Taxation
Enterprise Income Tax
According to the EIT Law, which was promulgated
by the SCNPC on March 16, 2007, and became effective on January 1, 2008, and then amended on February 24, 2017 as well as December 29,
2018, and the Implementation Rules for the Enterprise Income Tax Law of the PRC, or the Implementation Rules, which were promulgated by
the State Council on December 6, 2007, became effective on January 1, 2008, and were amended on April 23, 2019, enterprises are divided
into resident enterprises and non-resident enterprises. Resident enterprises pay enterprise income tax on their incomes obtained in and
outside the PRC at the rate of 25%. Non-resident enterprises setting up institutions in the PRC pay enterprise income tax on the incomes
obtained by such institutions in and outside the PRC at the rate of 25%. Non-resident enterprises with no institutions in the PRC, and
non-resident enterprises with income having no substantial connection with their institutions in the PRC, pay enterprise income tax on
their income obtained in the PRC at a reduced rate of 10%. An enterprise established outside of the PRC with its “de facto management
bodies” located within the PRC is considered a “resident enterprise,” meaning that it can be treated in a manner similar
to a PRC domestic enterprise for enterprise income tax purposes. The Implementing Rules of the EIT Law define a “de facto management
body” as a managing body that in practice exercises “substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the enterprise. It is more likely than not that the Company and its offshore
subsidiary would be treated as a non-resident enterprise for PRC tax purposes. Please see “Item 10. Additional Information—E.
Taxation—People’s Republic of China Enterprise Taxation.”
During the year ended December 31, 2018, Xinjiang
United Family and two branch offices qualified as small-scaled minimal profit enterprises, and during the year ended December 31, 2019,
Xinjiang United Family and all its three branch offices qualified as small-scaled minimal profit enterprises. Based on the EIT Law, and
according to the Notice on Further Expanding the Scope of Income Tax Preferential Policies for Small Low Profit Enterprises issued by
MOF and the SAT on July 11, 2018, for the year ended December 31, 2018, once an enterprise meets certain requirements and is identified
as a small-scale minimal profit enterprise, the portion of its taxable income not more than RMB1 million is subject to a reduced rate
of 10%. According to the Announcement on Issues Related to the Implementation of Inclusive Income Tax Reduction and Exemption Policy for
Small and Low Profit Enterprises issued by the SAT on January 18, 2019, from January 1, 2019 to December 31, 2021, the portion of its
taxable income not more than RMB1 million is subject to a reduced rate of 5%, which rate is further reduced to 2.5% during the period
from January 1, 2021 to December 31, 2022, and the portion above RMB1 million is subject to a reduced rate of 10%.
Individual Income Tax of Individual Industrial
and Commercial Households
The UFG Entities are individually-owned businesses, which are not subject
to the EIT Law. The Measures for Individual Income Tax Calculation of Individual Industrial and Commercial Households, or the “Measures,”
was adopted by the SAT on December 19, 2014 and promulgated on December 27, 2014 and was further amended on June 15, 2018. According to
Article 7 of the Measures, for the income from production and operation of individually-owned businesses, the amount of taxable income
shall be the balance of the total income of each tax year after deducting costs, expenses, taxes, losses and other expenditures, and allowable
compensation for losses in previous years, which is generally levied at a fixed-rate income tax at a certain percentage of a deemed TNI
as assessed by the local tax authority. For the year ended December 31, 2021, 12 of the UFG Entities were subject to income tax assessed
at 1% of TNI that ranged from RMB33,000 to RMB180,000 per month. For the year ended December 31, 2020, 11 of the UFG Entities were subject
to income tax assessed at 1% of TNI that ranged from RMB33,000 to RMB120,000 per month. The rest of the UFG Entities were exempted from
paying income tax.
Value-Added Tax
Pursuant to the Provisional Regulations on Value-added
Tax of the PRC, or the “VAT Regulations,” which were promulgated by the State Council on December 13, 1993, and took effect
on January 1, 1994, and were amended on November 10, 2008, February 6, 2016, and November 19, 2017, respectively, and the Rules for the
Implementation of the Provisional Regulations on Value-added Tax of the PRC, which were promulgated by the MOF on December 25, 1993, and
were amended on December 15, 2008, and October 28, 2011, respectively, entities and individuals that sell goods or labor services of processing,
repair or replacement, sell services, intangible assets, or immovables, or import goods within the territory of the People’s Republic
of China are taxpayers of value-added tax. The VAT rate is 17% for taxpayers selling goods, labor services, or tangible movable property
leasing services or importing goods, except otherwise specified; 11% for taxpayers selling transport services, postal services, basic
telecommunications services, construction services, or real property leasing services, selling real property, transferring the land use
right, or selling or importing the goods within specified scope listed, except otherwise specified; 6% for taxpayers selling services
or intangible assets and not falling within the scope as specified in other items; and 3% for small-scale taxpayers, unless otherwise
stipulated by the State Council
According to the Notice on the Adjustment to the
Value-added Tax Rates issued by the SAT and the MOF on April 4, 2018, where taxpayers make VAT taxable sales or import goods, the applicable
tax rates were adjusted from 17% to 16% and from 11% to 10%, respectively. Subsequently, the Notice on Policies for Deepening Reform of
Value-added Tax was issued by SAT, the MOF, and the General Administration of Customs on March 20, 2019, and took effective on April 1,
2019, which further adjusted the applicable tax rates for taxpayers making VAT taxable sales or import goods. The applicable tax rates
were adjusted from 16% to 13% and from 10% to 9%, respectively. Pursuant to Announcement on Value-added Tax Policies for Supporting Individual
Businesses in Resumption of Business promulgated by SAT and the MOF on February 28, 2020, from March 1, 2020 to May 31, 2020, which was
further extended to December 31, 2021, the applicable tax rates for small-scale VAT payers outside Hubei Province were adjusted from 3%
to 1%.
Before April 2019, Xinjiang United Family and
its branch offices were paying VAT at the rate of 16% for manufacturing and selling bakery products. Currently, Xinjiang United Family
and its branch offices are paying VAT at the rate of 13% for manufacturing and selling bakery products. One of the UFG Entities is currently
paying VAT at the rate of 1% and the rest of the UFG Entities are exempted from paying VAT.
Additional Taxes
Before September 1, 2021, the Provisional Regulations
of the People’s Republic of China on Urban Maintenance and Construction Tax, or the “Provisional Regulations,” promulgated
by the State Council on February 8, 1985 and revised on January 8, 2011 governs the payment of urban maintenance and construction tax.
According to the Provisional Regulations, all units and individuals paying consumption tax, VAT, and business tax are taxpayers of urban
maintenance and construction tax, and shall pay urban maintenance and construction tax in accordance with the provisions of these regulations.
The Standing Committee of the National People’s Congress passed the Tax Law of the People’s Republic of China on Urban Maintenance
and Construction on August 11, 2020, which will become effective after September 1, 2021. According to this law, the urban maintenance
and construction tax is based on VAT and consumption tax actually paid by taxpayers. Therefore, if VAT is exempted, urban construction
tax will also be exempted.
The Interim Provisions on Levying Educational
Surcharges, or the “Interim Provisions,” was issued by the State Council on April 28, 1986 and revised on June 7, 1990, August
20, 2005, and January 8, 2011. According to the Interim Provisions, the educational surcharges shall be calculated and levied on the basis
of the actual VAT, business tax, and consumption tax paid by various units and individuals. The education surcharges rate is 3%, which
shall be paid at the same time as the VAT, business tax, and consumption tax.
The Notice on Expanding the Exemption Scope of
Relevant Government Funds, or “The Notice,” was issued by the MOF and the SAT on January 29, 2016 and implemented from February
1, 2016. According to The Notice, with the approval of the State Council, the scope of exemption from education surcharges, local education
surcharges, and water conservancy construction funds shall be expanded from the payers whose monthly sales volume or turnover does not
exceed RMB30,000 (quarterly sales or turnover paid on a quarterly basis shall not exceed RMB90,000) to RMB100,000 (quarterly sales or
turnover paid on a quarterly basis shall not exceed RMB300,000).
Currently, Xinjiang United Family and its branch
offices are paying urban maintenance and construction tax at the rate of 7%, educational surcharges at the rate of 3%, and local education
surcharges at 2%. All the UFG Entities are exempted from paying such additional taxes.
Dividend Withholding Tax
The EIT Law and the Implementation Rules provide
that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends declared to non-PRC resident investors
which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant
income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources
within the PRC.
Pursuant to the Double Tax Avoidance Arrangement
and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the
relevant conditions and requirements under such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on
the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5%. However, based on the SAT
Circular 81 issued on February 20, 2009 by the SAT, if the relevant PRC tax authorities determine, in their discretion, that a company
benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may
adjust the preferential tax treatment. According to the Circular on Several Questions regarding the “Beneficial Owner” in
Tax Treaties, which was issued on February 3, 2018, by the SAT and took effect on April 1, 2018, when determining the applicant’s
status of the “beneficial owner” regarding tax treatments in connection with dividends, interests, or royalties in the tax
treaties, several factors, including without limitation, whether the applicant is obligated to pay more than 50% of his or her income
in 12 months to residents in third country or region, whether the business operated by the applicant constitutes the actual business activities,
and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or
levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific
cases. This circular further provides that applicants who intend to prove his or her status of the “beneficial owner” shall
submit the relevant documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration
of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements.
Regulations on Employment and Social Welfare
Labor Law of the PRC
The Labor Law of the PRC, or the “Labor
Law,” was promulgated on July 5, 1994, and most recently amended on December 29, 2018. The Labor Law stipulates the provisions on
the establishment and annulment of employment relationship, essential contents of employment contracts, working hours, remuneration, labor
safety and hygiene, social insurance and other welfare, and liabilities for violating the Labor Law. The Labor Contract Law, which was
implemented on January 1, 2008, and amended on December 28, 2012, is primarily aimed at regulating the rights and obligations of employers
and employees, including the establishment, performance, and termination of labor contracts. Pursuant to the Labor Contract Law, labor
contracts shall be in writing if labor relationships are to be or have been established between employers and the employees. Employers
are prohibited from forcing employees to work above certain time limit and employers shall pay employees for overtime work in accordance
to national regulations. In addition, employee wages shall be no lower than local standards on minimum wages and shall be paid to employees
timely. Xinjiang United Family and its branch offices and the UFG Entities have entered into written employment contracts with all employees
and performed its obligations required under the relevant PRC laws and regulations.
Social Insurance and Housing Fund
As required under the Regulation of Insurance
for Labor Injury implemented on January 1, 2004, and amended in 2010, the Provisional Measures for Maternity Insurance of Employees of
Corporations implemented on January 1, 1995, the Decisions on the Establishment of a Unified Program for Pension Insurance of the State
Council issued on July 16, 1997, the Decisions on the Establishment of the Medical Insurance Program for Urban Workers of the State Council
promulgated on December 14, 1998, the Unemployment Insurance Measures promulgated on January 22, 1999, the Interim Regulations Concerning
the Collection and Payment of Social Insurance Premiums implemented on January 22, 1999, and the Social Insurance Law of the PRC implemented
on July 1, 2011, employers are required to provide their employees in the PRC with welfare benefits covering pension insurance, unemployment
insurance, maternity insurance, labor injury insurance, and medical insurance. These payments are made to local administrative authorities
and any employer that fails to contribute may be fined and ordered to make up within a prescribed time limit. Xinjiang United Family has
not deposited the social insurance fees in full for all the employees in compliance with the relevant regulations.
In accordance with the Regulations on the Management
of Housing Fund, which were promulgated by the State Council in 1999 and amended in 2002, employers must register at the designated administrative
centers and open bank accounts for depositing employees’ housing funds. Employer and employee are also required to pay and deposit
housing funds, with an amount no less than 5% of the monthly average salary of the employee in the preceding year in full and on time.
Xinjiang United Family has not yet paid housing funds for all employees.
See “Item 3. Key Information—D. Risk
Factors—Risks Relating to Doing Business in the PRC—Our PRC subsidiary and the VIEs have not made adequate social insurance
and housing fund contributions for all employees as required by PRC regulations, which may subject us to penalties.”
U.S. Regulations
Government Regulations on Food Production and
Store Operation
The U.S. Stores are subject to extensive and varied
federal, state, and local government regulations, including regulations relating, among others, to public and occupational health and
safety, healthcare, environment, sanitation, and fire prevention. The U.S. Stores operate in accordance with standards and procedures
designed to comply with applicable codes and regulations. However, an inability to obtain or retain health department or other licenses
would adversely affect the operations of the U.S. Stores. Although the U.S. Stores have not experienced, and do not anticipate, any significant
difficulties, delays, or failures in obtaining required licenses, permits, or approvals, any such problem could delay or prevent the opening
of, or adversely impact the viability of, a particular store or group of stores. Additionally, difficulties, delays, or failures to retain
or renew licenses, permits, or approvals, or increased compliance costs due to changed regulations, could adversely affect operations
at the U.S. Stores.
In addition, in order to develop and construct
additional stores, the U.S. Stores must comply with applicable zoning, land use, and environmental regulations. Federal and state environmental
regulations have not had a material effect on our operations to date, but more stringent and varied requirements of local governmental
bodies with respect to zoning, land use, and environmental factors could delay or even prevent construction and increase development costs
for new stores. The U.S. Stores are also required to comply with the accessibility standards mandated by the U.S. Americans with Disabilities
Act, which generally prohibits discrimination in accommodation or employment based on disability. The U.S. Stores may in the future have
to modify stores, for example, by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable
accommodations for disabled persons. While these expenses could be material, the current expectation is that any such actions will not
require the U.S. Stores to expend substantial funds.
A portion of the sales in the U.S. Stores is attributable
to the sale of alcoholic beverages. Alcoholic beverage control regulations require the U.S. Stores to apply to the New York State Liquor
Authority for a license that must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control
regulations relate to numerous aspects of daily operations of the U.S. Stores, including minimum age of patrons and employees, hours of
operation, advertising, trade practices, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors,
inventory control and handling, storage, and dispensing of alcoholic beverages. The U.S. Stores are also subject in certain states to
“dram shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from
an establishment that wrongfully served alcoholic beverages to the intoxicated person. The U.S. Stores carry liquor liability coverage
as part of their existing comprehensive general liability insurance. Currently, the U.S. Stores hold liquor licenses.
Further, the U.S. Stores are subject to the U.S.
Fair Labor Standards Act, the U.S. Immigration Reform and Control Act of 1986, the Occupational Safety and Health Act and various other
federal and state laws governing similar matters including minimum wages, overtime, workplace safety, and other working conditions. Significant
numbers of the food service and preparation personnel employed by the U.S. Stores are paid at rates related to the applicable minimum
wage, and further increases in the minimum wage or other changes in these laws could increase its labor costs. The ability of the U.S.
Stores to respond to minimum wage increases by increasing menu prices will depend on the responses of their competitors and guests. The
suppliers of the U.S. Stores also may be affected by higher minimum wage and benefit standards, which could result in higher costs of
goods and services supplied by the U.S. Stores. The U.S. Stores may also be subject to lawsuits from their employees, the U.S. Equal Employment
Opportunity Commission, or others alleging violations of federal and state laws regarding workplace and employment matters, discrimination,
and similar matters.
There has been increased regulation of certain
food establishments in the U.S., and the U.S. Stores may have to expend additional time and resources to comply with new food safety requirements
either required by current or future federal food safety regulation or legislation. Additionally, the suppliers of the U.S. Stores may
initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or
require the U.S. Stores to take actions that could be costly for them or otherwise harm their business.
Environmental Matters
The U.S. Stores are subject to federal, state,
and local environment laws and regulations concerning waste disposal, pollution, protection of the environment, and the presence, discharge,
storage, handing, release, and disposal of, or exposure to, hazardous or toxic substances. These environmental laws can provide for significant
fines and penalties for non-compliance and liabilities for remediation, sometimes without regard to whether the owner or operator of the
property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. Third parties may also make claims
against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged
exposure to, such substances. The U.S. Stores are not aware of any environmental laws that will materially affect their earnings or competitive
position, or result in material capital expenditures relating to the U.S. Stores. However, we cannot predict what environmental laws will
be enacted in the future, how existing or future environmental laws will be administered, interpreted, or enforced, or the amount of future
expenditures that the U.S. Stores may need to make to comply with, or to satisfy claims relating to, environmental laws. It is possible
that the U.S. Stores will become subject to environmental liabilities at their properties, and any such liabilities could materially affect
their business, financial condition, or results of operation.
Other Regulations
The U.S. Stores are also subject to laws and regulations
relating to advertising, information security, privacy, cashless payments, online payments, gift cards and consumer credit, protection
and fraud, and food delivery, and any failure or perceived failure to comply with these laws could harm their reputation or lead to litigation,
which could adversely affect their business, financial condition, or results of operations.
Furthermore, the U.S. Stores are subject to import
laws and tariffs which could impact their ability to source and secure food products, other suppliers, and equipment necessary to their
operations.
C. Organizational Structure
See “Item 3. Key Information—Our Corporate
Structure.”
D. Property, Plants and Equipment
See “—B. Business Overview—Properties.”
Item 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 5. OPERATING AND FINANCIAL REVIEW AND
PROSPECTS
The following discussion of our financial condition
and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related
notes included in this annual report. This report contains forward-looking statements. In evaluating our business, you should carefully
consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report.
We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
A. Operating Results
Key financial performance indicators
We consider a variety of financial and operating
measures in assessing the performance of our business. The key financial performance measures we use are revenue, comparable store sales,
gross profit and gross margin, selling, general, and administrative expenses (“SG&A expenses”), and operating income.
Revenue
Our revenue is derived primarily from sales of
bakery and other products under the operating entities’ “George●Chanson,” “Patisserie Chanson,” and
“Chanson” brand names. The PRC Stores and the U.S. Stores experienced stable growth prior to the COVID-19 pandemic, resulting
from their focus on supporting their best-selling items and the introduction of new products. Our revenue is periodically influenced by
the efficiency of sales promotions and the introduction and discontinuance of sales and promotion incentives. Growth of our revenue is
primarily driven by expansion of the operating entities’ store base in existing and new markets as well as comparable store sales
growth, described below under “Comparable Store Sales.” Revenue is impacted by competition, current economic conditions, pricing,
inflation, product mix and availability, promotion, and spending habits of the operating entities’ customers. The product offerings
of the PRC Stores and the U.S. Stores across diverse product categories support growth in revenue by attracting new customers and encouraging
repeat visits from their existing customers.
Comparable Store Sales
Comparable store sales measure the performance
of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year.
Comparable store sales are important points of analysis for the operating entities, as comparable store sales can be helpful to them in
making future decisions regarding existing stores and new locations. Comparable store sales are impacted by the same factors that impact
revenue. The operating entities often drill down into comparable store sales figures to determine the exact cause of changes in revenue.
The operating entities also use comparable store sales to evaluate current and likely future performance and as a measure of revenue growth
to evaluate how established stores have performed over time compared to new stores.
For simplicity, our comparable store sales consist
of revenue from the operating entities’ stores only after they have had two full years of operations, which is when we believe comparability
is achieved. Our comparable store definition includes stores that have been remodeled, expanded, or relocated in their existing location
or respective geographic areas, but excludes stores that have been closed for an extended period or are planned to be closed or disposed
of. Comparable store sales figures are presented as a percentage that indicates the relative amount of revenue increase or decrease, excluding
the impact of foreign currency translation.
Opening new stores is a primary component of our
growth strategy and, as the operating entities continue to execute on their growth strategy, we expect a significant portion of their
revenue growth will be attributable to revenue from new stores. Accordingly, comparable store sales are one of the measures the operating
entities use to assess the success of their growth strategy.
Gross Profit and Gross Margin
Gross profit is the difference between revenue
and cost of revenue. Our cost of revenue consists of labor costs, costs of ingredients used to prepare the operating entities’ bakery
products, inventory write-off due to discarded bakery products, packaging costs, freight charges, utility costs, rent expenses of manufacturing
space, depreciation of production equipment, and other overhead costs. Ingredients costs account for the largest portion of our cost of
revenue. Supplies and prices of the operating entities’ various ingredients can be affected by a variety of factors, such as weather,
seasonal fluctuations, demand, political environment, and economic conditions. An increase in the price of any ingredients used in the
operating entities’ bakery products could result in an increase in costs from their suppliers, and the operating entities may not
be able to increase prices to cover increased costs, which would have an adverse effect on their operating results and profitability.
In order to negotiate more favorable prices on ingredients, the operating entities have been and will continue to be directly involved
in sourcing ingredients from qualified suppliers and try to lock in ingredient prices for typically six to 12 months through non-cancelable
purchase commitments, when they expect the price to increase. Over the past years, the operating entities have invested significant time
and energy to achieve cost reduction and productivity improvement in their supply chain. The operating entities have focused on reducing
ingredient and packaging costs through increased volume buying, direct purchasing, and price negotiations, as well as strengthening inventory
management from raw materials to finished goods to reduce the spoilage and wastage. On the other hand, labor is a primary component in
the cost of operating the operating entities’ business. Increased labor costs due to competition, increased minimum wage or employee
benefits costs, or otherwise, would adversely impact the operating entities’ operating expenses. In addition, the operating entities’
success depends on their ability to attract, motivate, and retain qualified employees, including store managers and staff, to keep pace
with their growth strategy.
Gross margin is gross profit divided by revenue.
Gross margin is a measure used by management to indicate whether the operating entities are selling their products at an appropriate gross
profit. Our gross margin is impacted by the operating entities’ product mix and availability, as some products provide higher gross
margins, and by their merchandise costs, which may vary. Gross margin is also impacted by prices of the operating entities’ products.
The operating entities typically evaluate the profitability of their products annually or semi-annually. The operating entities consider
many factors such as cost of revenue fluctuations and competitive pricing strategies. The operating entities have historically been able
to replace less profitable products with similar new products, and refine their product formulas to enhance existing products with higher
prices to cover higher ingredient costs. In addition, the operating entities have a dedicated and highly-experienced product development
team that constantly creates brand new products that reflect market trends and are attractive to customers.
SG&A Expenses
Our SG&A expenses are comprised of both store-related
expenses and corporate expenses. Store-related expenses include payroll and employee benefit expenses and sales commissions paid to sales
personnel, store rent, occupancy and maintenance costs, the cost of opening new stores, and marketing and advertising expenses. Corporate
expenses include payroll and benefits for corporate and field support, legal, professional, and other consulting fees, travel expenses,
and other facility related costs, such as rent and depreciation.
SG&A expenses generally increase as the operating
entities grow their store base and invest in corporate infrastructure. The operating entities have made significant investments in talent
retention and storefront upgrades over the past years which have resulted in higher SG&A expenses. Our SG&A expenses are expected
to continue increasing in the future as the operating entities invest to open new stores, launch new products, increase brand awareness,
attract new customers, and increase their market penetration. To support their growth, the operating entities will continue to increase
headcount, particularly in the sales and marketing departments. This increase in headcount will drive higher payroll and employee-related
expenses. Our operating entities also continue to invest in product innovation and fuel sales growth. We expect our SG&A expenses
to continue to increase in absolute dollars as we incur increased costs related to the growth of our business and our operation as a public
company.
Operating Income
Operating income is the difference between gross
profit and SG&A expenses. Operating income excludes interest expenses, other income (expenses), and income tax expenses. We use operating
income as an indicator of the productivity of our business and our ability to manage expenses.
Comparable Store Sales
A variety of factors affect our comparable store
sales, including, among others, consumer trends, competition, current economic conditions, pricing, inflation, changes in the operating
entities’ product mix, the success of their marketing programs, and the COVID-19 pandemic. During the year ended December 31, 2022,
the comparable store sales in China (excluding the impact of foreign currency translation) decreased by 27.1%, as the PRC Stores’
business operation was adversely interrupted by the 2022 Outbreak. During the year ended December 31, 2022, the comparable store sales
in the U.S. increased by 15.7%, as the U.S. Stores’ cocktail bar launched several new types of cocktail products, and Chanson 23rd
Street has been allowed to provide indoor dining services at full capacity starting from May 19, 2021. During the year ended December
31, 2021, the comparable store sales in China (excluding the impact of foreign currency translation) increased by 20.7%, as the PRC Stores’
business operation gradually recovered from the pandemic in 2021. During the year ended December 31, 2021, the comparable store sales
in the U.S. increased by 37.0%, as the U.S. Stores’ cocktail bar launched several new types of cocktail products, and Chanson 23rd
Street has been allowed to provide indoor dining services at full capacity starting from May 19, 2021. During the year ended December
31, 2020, our comparable store sales in China (excluding the impact of foreign currency translation) decreased by 24.1% and our comparable
store sales in the U.S. decreased by 43.6%, due to the impact by COVID-19 pandemic.
Comparison of Results of Operations for the
Years Ended December 31, 2022 and 2021
The following table summarizes the results of
our operations during the years ended December 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage
increase or decrease during such years.
| |
For the years ended December 31, | | |
Variance | |
| |
2022 | | |
2021 | | |
Amount | | |
% | |
Revenue | |
$ | 13,272,075 | | |
$ | 14,690,295 | | |
$ | (1,418,220 | ) | |
| (9.7 | )% |
Cost of revenue | |
| 7,169,404 | | |
| 7,759,872 | | |
| (590,468 | ) | |
| (7.6 | )% |
Gross profit | |
| 6,102,671 | | |
| 6,930,423 | | |
| (827,752 | ) | |
| (11.9 | )% |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 3,697,909 | | |
| 4,126,126 | | |
| (428,217 | ) | |
| (10.4 | )% |
General and administrative expenses | |
| 3,842,787 | | |
| 3,249,181 | | |
| 593,606 | | |
| 18.3 | % |
Total operating expenses | |
| 7,540,696 | | |
| 7,375,307 | | |
| 165,389 | | |
| 2.2 | % |
| |
| | | |
| | | |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (1,438,025 | ) | |
| (444,884 | ) | |
| (993,141 | ) | |
| 223.2 | % |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME (EXPENSES) | |
| | | |
| | | |
| | | |
| | |
Interest expense, net | |
| (35,457 | ) | |
| (98,033 | ) | |
| (62,576 | ) | |
| (63.8 | )% |
Other income, net | |
| 194,824 | | |
| 1,065,963 | | |
| (871,139 | ) | |
| (81.7 | )% |
Total other income, net | |
| 159,367 | | |
| 967,930 | | |
| (808,563 | ) | |
| (83.5 | )% |
| |
| | | |
| | | |
| | | |
| | |
INCOME (LOSS) BEFORE INCOME TAX PROVISION | |
| (1,278,658 | ) | |
| 523,046 | | |
| (1,801,704 | ) | |
| (344.5 | )% |
| |
| | | |
| | | |
| | | |
| | |
INCOME TAX PROVISION | |
| 9,547 | | |
| 16,277 | | |
| (6,730 | ) | |
| (41.3 | )% |
| |
| | | |
| | | |
| | | |
| | |
NET INCOME (LOSS) | |
$ | (1,288,205 | ) | |
$ | 506,769 | | |
$ | (1,794,974 | ) | |
| (354.2 | )% |
Revenue
We generate revenue primarily from bakery products
and other products sold in China and the U.S. In the PRC Stores, bakery products consist of packaged bakery products (cakes, bread, and
snacks), birthday cakes, and made-in-store pastries, and other products consist of seasonal products (mooncakes and zongzi) and beverage
products. In the U.S. Stores, bakery products consist of cakes, bread, sweets, birthday cakes, and pastries, and other products consist
of eat-in menu items (sandwiches, salads, toasts, croissants, soups, and desserts) and beverage products.
Our total revenue decreased by $1,418,220, or
9.7%, from $14,690,295 for the year ended December 31, 2021 to $13,272,075 for the year ended December 31, 2022. The decrease in our revenue
was due to decreased revenue from our stores in China, which was partially offset by the increased revenue from our stores in the U.S.,
as discussed in greater details below.
The following table sets forth the breakdown of
our revenue for the years ended December 31, 2022 and 2021, respectively:
| |
For the Years Ended December 31, | | |
Variance | |
| |
2022 | | |
% | | |
2021 | | |
% | | |
Amount | | |
% | |
China | |
| | |
| | |
| | |
| | |
| | |
| |
Bakery products | |
$ | 8,705,218 | | |
| 65.7 | % | |
$ | 11,694,918 | | |
| 79.6 | % | |
$ | (2,989,700 | ) | |
| (25.6 | )% |
Other products | |
| 785,990 | | |
| 5.9 | % | |
| 1,101,171 | | |
| 7.5 | % | |
| (315,181 | ) | |
| (28.6 | )% |
Subtotal: revenue from China | |
| 9,491,208 | | |
| 71.6 | % | |
| 12,796,089 | | |
| 87.1 | % | |
| (3,304,881 | ) | |
| (25.8 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Bakery products | |
| 612,819 | | |
| 4.6 | % | |
| 473,914 | | |
| 3.2 | % | |
| 138,905 | | |
| 29.3 | % |
Beverage products | |
| 2,047,670 | | |
| 15.4 | % | |
| 1,000,039 | | |
| 6.8 | % | |
| 1,047,631 | | |
| 104.8 | % |
Eat-in services | |
| 1,120,378 | | |
| 8.4 | % | |
| 420,253 | | |
| 2.9 | % | |
| 700,125 | | |
| 166.6 | % |
Subtotal: revenue from the United States | |
| 3,780,867 | | |
| 28.4 | % | |
| 1,894,206 | | |
| 12.9 | % | |
| 1,886,661 | | |
| 99.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Revenue | |
$ | 13,272,075 | | |
| 100.0 | % | |
$ | 14,690,295 | | |
| 100.0 | % | |
$ | (1,418,220 | ) | |
| (9.7 | )% |
China
The PRC Stores accounted for 71.6% and 87.1% of
our total revenue for the years ended December 31, 2022 and 2021, respectively. Revenue from China decreased by $3,304,881, or 25.8%,
from $12,796,089 for the year ended December 31, 2021 to $9,491,208 for the year ended December 31, 2022. The decrease in our revenue
was mainly due to decreased revenue from bakery products as well as other products, as discussed below.
Revenue from bakery products decreased by $2,989,700,
or 25.6%, from $11,694,918 for the year ended December 31, 2021 to $8,705,218 for the year ended December 31, 2022. The decrease was due
to impact by 2022 Outbreak, as the operations of the PRC Stores and the production of the PRC Stores’ central factory were adversely
affected starting from August 10, 2022 and all of the PRC Stores and the central factory were closed between October 5, 2022 and November
30, 2022, during which the PRC Stores only managed to generate limited online sales and group sales.
Revenue from other products decreased by $315,181,
or 28.6%, from $1,101,171 for the year ended December 31, 2021 to $785,990 for the year ended December 31, 2022, among which, revenue
from seasonal products decreased by $276,640, or 28.6%, from $967,670 for the year ended December 31, 2021 to $691,030 for the year ended
December 31, 2022, and revenue from beverage products decreased by $38,541, or 28.9%, from $133,501 for the year ended December 31, 2021
to $94,960 for the year ended December 31, 2022. The decrease was due to the 2022 Outbreak as mentioned above.
United States
Revenue from the U.S. increased by $1,886,661,
or 99.6%, from $1,894,206 for the year ended December 31, 2021 to $3,780,867 for the year ended December 31, 2022. The increase was due
to increased revenue from beverage products, bakery products, and eat-in services as discussed below.
Revenue from bakery
products increased by $138,905, or 29.3%, from $473,914 for the year ended December 31, 2021 to $612,819 for the year ended December 31,
2022. The increase was primarily due to increase of $0.25 million generated by Chanson Greenwich, the new store opened in December 2021,
partially offset by a decrease of $0.11 million generated by Chanson 23rd Street
as a result of increasing competition from rivals operating in the same area. Some famous bakery brands opened new stores in New York
City, and customers now have more choices and sales of Chanson 23rd Street’s bakery products were affected.
Revenue from beverage products increased by $1,047,631,
or 104.8%, from $1,000,039 for the year ended December 31, 2021 to $2,047,670 for the year ended December 31, 2022. The increase was mainly
due to increase of $0.6 million generated by the newly opened Chanson Greenwich and increase of $0.4 million generated by Chanson 23rd
Street. After the cocktail bar of Chanson 23rd Street launched several new types of cocktail products with a variety of new flavors and
styles, its products became popular among its customers and its cocktail bar was often fully booked by reservation during weekends. Meanwhile,
Chanson 23rd Street managed to increase the prices of its cocktail products which resulted in higher revenue.
Revenue from eat-in services increased by $700,125,
or 166.6%, from $420,253 for the year ended December 31, 2021 to $1,120,378 for the year ended December 31, 2022. The increase was mainly
due to the increased revenue from eat-in services of $0.8 million generated by the newly opened Chanson Greenwich.
Cost of Revenue
Our cost of revenue consists of food ingredient
costs, packing costs, workforce related costs, overhead costs such as store rental and utilities for food production and processing, depreciation,
and amortization. Our overall cost of revenue decreased by $590,468, or 7.6%, from $7,759,872 for the year ended December 31, 2021 to
$7,169,404 for the year ended December 31, 2022. The decrease in our cost of revenue was due to decreased cost of revenue from the stores
in China, which was partially offset by the increased cost of revenue from the stores in the U.S., as discussed in greater details below.
The following table sets forth the breakdown of
our cost of revenue for the years ended December 31, 2022 and 2021, respectively:
| |
For the Years Ended December 31, | | |
Variance | |
| |
2022 | | |
% | | |
2021 | | |
% | | |
Amount | | |
% | |
China | |
| | |
| | |
| | |
| | |
| | |
| |
Bakery products | |
$ | 4,686,808 | | |
| 65.4 | % | |
$ | 6,144,101 | | |
| 79.3 | % | |
$ | (1,457,293 | ) | |
| (23.7 | )% |
Other products | |
| 393,808 | | |
| 5.5 | % | |
| 438,361 | | |
| 5.6 | % | |
| (44,553 | ) | |
| (10.2 | )% |
Subtotal: cost of revenue from China | |
| 5,080,616 | | |
| 70.9 | % | |
| 6,582,462 | | |
| 84.9 | % | |
| (1,501,846 | ) | |
| (22.8 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Bakery products | |
| 404,535 | | |
| 5.6 | % | |
| 305,228 | | |
| 3.9 | % | |
| 99,307 | | |
| 32.5 | % |
Beverage products | |
| 1,013,181 | | |
| 14.1 | % | |
| 528,827 | | |
| 6.8 | % | |
| 484,354 | | |
| 91.6 | % |
Eat-in services | |
| 671,072 | | |
| 9.4 | % | |
| 343,355 | | |
| 4.4 | % | |
| 327,717 | | |
| 95.4 | % |
Subtotal: cost of revenue from the United States | |
| 2,088,788 | | |
| 29.1 | % | |
| 1,177,410 | | |
| 15.1 | % | |
| 911,378 | | |
| 77.4 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Cost of Revenue | |
$ | 7,169,404 | | |
| 100.0 | % | |
$ | 7,759,872 | | |
| 100.0 | % | |
$ | (590,468 | ) | |
| (7.6 | )% |
China
Cost of revenue from China decreased by $1,501,846,
or 22.8%, from $6,582,462 for the year ended December 31, 2021 to $5,080,616 for the year ended December 31, 2022. The decrease was due
to decreased cost of revenue of bakery products and other products, as discussed below.
Cost of revenue from sales of bakery products
decreased by $1,457,293, or 23.7%, from $6,144,101 for the year ended December 31, 2021 to $4,686,808 for the year ended December 31,
2022 due to the decrease in sales of bakery products. The percentage of decrease in cost of revenue was less than that in revenue during
the same period, due to higher spoilage and wastage of inventory as discussed in “—Gross Profit and Gross Margin” below
in more details.
Cost of revenue from other products decreased
by $44,553, or 10.2%, from $438,361 for the year ended December 31, 2021 to $393,808 for the year ended December 31, 2022. The cost of
revenue from seasonal products decreased by $43,598, or 11.5%, from $379,213 for the year ended December 31, 2021 to $335,615 for the
year ended December 31, 2022. The percentage of decrease in cost of revenue was less than that in revenue during the same period, due
to more discounts offered to our customers as discussed in “—Gross Profit and Gross Margin” below in more details. The
cost of revenue from beverage products decreased by $955, or 1.6%, from $59,148 for the year ended December 31, 2021 to $58,193 for the
year ended December 31, 2022. The percentage of decrease in cost of revenue was less than that in revenue during the same period, due
to the higher spoilage and wastage of inventory and increased price of raw materials, as discussed in “—Gross Profit and Gross
Margin” below in more details.
United States
Cost of revenue from the U.S. increased by $911,378,
or 77.4%, from $1,177,410 for the year ended December 31, 2021 to $2,088,788 for the year ended December 31, 2022. The increase was due
to the increased cost of revenue from beverage products, bakery products, and eat-in services as discussed below.
Cost of revenue from sales of bakery products
increased by $99,307, or 32.5%, from $305,228 for the year ended December 31, 2021 to $404,535 for the year ended December 31, 2022. The
increase in cost of revenue from bakery products was due to increase in sales of bakery products from newly opened Chanson Greenwich,
which was partially offset by the decrease in sales of bakery products from Chanson 23rd Street. The increase in cost of revenue from
bakery products was largely in line with the increase in revenue from bakery products in the U.S. stores.
Cost of revenue from sales of beverage products
increased by $484,354, or 91.6%, from $528,827 for the year ended December 31, 2021 to $1,013,181 for the year ended December 31, 2022,
primarily due to the increase in the sales of new cocktail products by Chanson 23rd Street and the increase in the sales from the newly
opened Chanson Greenwich. The percentage of increase in cost of revenue was less than that in revenue during the same period, which was
attributable to the increased sale of new cocktail products that have higher gross margin and the decreased inventory spoilage and damage,
as discussed in “—Gross Profit and Gross Margin” below in more details.
The cost of revenue from eat-in services increased
by $327,717, or 95.4%, from $343,355 for the year ended December 31, 2021 to $671,072 for the year ended December 31, 2022 due to the
increase in sales of eat-in services from the newly opened Chanson Greenwich. The percentage of increase in cost of revenue was less than
that in revenue during the same period, due to the decreased inventory spoilage as a result of the stricter inventory management as discussed
in “—Gross Profit and Gross Margin” below in more details.
Gross Profit and Gross Margin
Our gross profit decreased by $827,752, or 11.9%,
from $6,930,423 for the year ended December 31, 2021 to $6,102,671 for the year ended December 31, 2022. The decrease was mainly attributable
to the overall decrease in revenue. Our gross margin decreased slightly by 1.2 percentage points from 47.2% for the year ended December
31, 2021 to 46.0% for the year ended December 31, 2022.
The following table sets forth the breakdown of
our gross profit for the years ended December 31, 2022 and 2021, respectively:
| |
For the Years Ended December 31, | | |
Variance | |
| |
2022 | | |
Margin % | | |
2021 | | |
Margin % | | |
Amount | | |
% | |
China | |
| | |
| | |
| | |
| | |
| | |
| |
Bakery products | |
$ | 4,018,410 | | |
| 46.2 | % | |
$ | 5,550,817 | | |
| 47.5 | % | |
$ | (1,532,407 | ) | |
| (27.6 | )% |
Other products | |
| 392,182 | | |
| 49.9 | % | |
| 662,810 | | |
| 60.2 | % | |
| (270,628 | ) | |
| (40.8 | )% |
Subtotal: gross margin and margin % from China | |
| 4,410,592 | | |
| 46.5 | % | |
| 6,213,627 | | |
| 48.6 | % | |
| (1,803,035 | ) | |
| (29.0 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Bakery products | |
| 208,284 | | |
| 34.0 | % | |
| 168,686 | | |
| 35.6 | % | |
| 39,598 | | |
| 23.5 | % |
Beverage products | |
| 1,034,489 | | |
| 50.5 | % | |
| 471,212 | | |
| 47.1 | % | |
| 563,277 | | |
| 119.5 | % |
Eat-in services | |
| 449,306 | | |
| 40.1 | % | |
| 76,898 | | |
| 18.3 | % | |
| 372,408 | | |
| 484.3 | % |
Subtotal: gross margin and margin % from the United States | |
| 1,692,079 | | |
| 44.8 | % | |
| 716,796 | | |
| 37.8 | % | |
| 975,283 | | |
| 136.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Gross Margin and Margin % | |
$ | 6,102,671 | | |
| 46.0 | % | |
$ | 6,930,423 | | |
| 47.2 | % | |
$ | (827,752 | ) | |
| (11.9 | )% |
China
Gross profit from China decreased by $1,803,035,
or 29.0%, from $6,213,627 for the year ended December 31, 2021 to $4,410,592 for the year ended December 31, 2022. The decrease was mainly
attributable to the overall decrease in sales. The gross margin decreased by 2.1 percentage points from 48.6% for the year ended December
31, 2021 to 46.5% for the year ended December 31, 2022.
The gross profit of bakery products decreased
by $1,532,407, or 27.6%, from $5,550,817 for the year ended December 31, 2021 to $4,018,410 for the year ended December 31, 2022, and
the gross margin of bakery products decreased by 1.3 percentage points from 47.5% for the year ended December 31, 2021 to 46.2% for the
year ended December 31, 2022. As mentioned above, the business operation of our PRC Stores was adversely interrupted by the 2022 Outbreak,
and the irregular opening hours and the store closure caused the customer demand of the products was harder to estimate, which resulted
in excess bakery products, fresh ingredients, or ingredients with shorter storage life, being spoiled or expired during the 2022 Outbreak
periods.
The gross profit of other products decreased by
$270,628, or 40.8%, from $662,810 for the year ended December 31, 2021 to $392,182 for the year ended December 31, 2022, and the gross
margin decreased by 10.3 percentage points from 60.2% for the year ended December 31, 2021 to 49.9% for the year ended December 31, 2022.
The decrease in gross margin was mainly due to a decrease in gross margin of beverage products by 17.0 percentage points from 55.7% for
the year ended December 31, 2021 to 38.7% for the year ended December 31, 2022. The decrease was mainly due to higher spoilage and wastage
of raw materials during the first few months after we started our new coffee business. Moreover, the decrease in gross margin of beverage
products was also attributable to increased prices of raw materials such as fresh fruit during the year ended December 31, 2022, as well
as the increased inventory spoilage of fresh ingredients caused by the irregular opening hours and store closure during the 2022 Outbreak
periods. The decrease in gross margin was also due to the decrease in gross margin of seasonal products by 9.4 percentage points from
60.8% for the year ended December 31, 2021 to 51.4% for the year ended December 31, 2022. As the Mid-autumn Festival fell in September
2022, our sales of mooncakes were adversely affected by the 2022 Outbreak. In order to increase the sales and clear our stocks, we had
to offer more discounts to our customers, which resulted in a decrease in gross margin of seasonal products for the year ended December
31, 2022 as compared to the same period last year.
United States
Gross profit from the U.S. increased by $975,283,
or 136.1%, from $716,796 for the year ended December 31, 2021 to $1,692,079 for the year ended December 31, 2022. The increase was mainly
attributable to the overall increase in revenue. The gross margin increased by 7.0 percentage points from 37.8% for the year ended December
31, 2021 to 44.8% for the year ended December 31, 2022.
The gross profit of bakery products increased
by $39,598, or 23.5%, from $168,686 for the year ended December 31, 2021 to $208,284 for the year ended December 31, 2022, and the gross
margin of bakery products remained relatively stable with a slight decrease of 1.6 percentage points, from 35.6% for the year ended
December 31, 2021 to 34.0% for the year ended December 31, 2022. The decrease was mainly attributable to the increased cost of some of
our main ingredient materials for the year ended December 31, 2022.
The gross profit of beverage products increased
by $563,277, or 119.5%, from $471,212 for the year ended December 31, 2021 to $1,034,489 for the year ended December 31, 2022, and the
gross margin of beverage products increased by 3.4 percentage points from 47.1% for the year ended December 31, 2021 to 50.5% for the
year ended December 31, 2022. The increase in gross margin was mainly due to the increased revenue in the U.S. Stores’ new cocktail
products that have a higher gross margin. Meanwhile, since the beginning of fiscal year of 2022, the staff at the U.S. Stores have become
more experienced in preparing cocktail products, and the spoilage and damage of raw materials was well controlled and decreased accordingly.
The gross profit of eat-in services increased
by $372,408, or 484.3%, from $76,898 for the year ended December 31, 2021 to $449,306 for the year ended December 31, 2022, and the gross
margin of eat-in services increased by 21.8 percentage points from 18.3% for the year ended December 31, 2021 to 40.1% for the year ended
December 31, 2022. The increase was mainly attributable to the strengthened inventory management and the decreased inventory spoilage
during the year ended December 31, 2022 as mentioned above.
Operating Expenses
The following table sets forth the breakdown of
our operating expenses for the years ended December 31, 2022 and 2021.
| |
For the Years Ended December 31, | |
| |
2022 | | |
2021 | | |
Variance | |
| |
Amount | | |
% of revenue | | |
Amount | | |
% of revenue | | |
Amount | | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Total revenue | |
$ | 13,272,075 | | |
| 100.0 | % | |
$ | 14,690,295 | | |
| 100.0 | % | |
$ | (1,418,220 | ) | |
| (9.7 | )% |
Total operating expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 3,697,909 | | |
| 27.9 | % | |
| 4,126,126 | | |
| 28.1 | % | |
| (428,217 | ) | |
| (10.4 | )% |
General and administrative expenses | |
| 3,842,787 | | |
| 29.0 | % | |
| 3,249,181 | | |
| 22.1 | % | |
| 593,606 | | |
| 18.3 | % |
Total operating expenses | |
$ | 7,540,696 | | |
| 56.9 | % | |
$ | 7,375,307 | | |
| 50.2 | % | |
$ | 165,389 | | |
| 2.2 | % |
Selling Expenses
Our selling expenses primarily include payroll
and sales commission expenses paid to our sales and marketing personnel, store operating expenses, store rental, store decoration and
maintenance expenses, utility expenses, and other expenses related to sales activities. Selling expenses decreased by $428,217, or 10.4%,
from $4,126,126 for the year ended December 31, 2021 to $3,697,909 for the year ended December 31, 2022. The decrease in selling expenses
was primarily due to the decrease of $619,483 from PRC stores, as our business operation was adversely interrupted by the 2022 Outbreak
as mentioned above, partially offset by the increase of $240,596 incurred by newly opened Chanson Greenwich. Our selling expenses accounted
for 27.9% and 28.1% of our revenue for the years ended December 31, 2022 and 2021, respectively.
General and Administrative Expenses
Our general and administrative expenses primarily
consist of administrative employee salaries, welfare and insurance expenses, depreciation, and professional service expenses. General
and administrative expenses increased by $593,606, or 18.3%, from $3,249,181 for the year ended December 31, 2021 to $3,842,787 for the
year ended December 31, 2022. The increase was primarily due to increased general and administrative expenses of $636,227 incurred by
our stores in the U.S., mainly resulting from the full year operation of the newly opened Chanson Greenwich as well as the increase rental
expense for Chanson 3rd Ave and Chanson Broadway stores during the renovation period. The increase was partially offset by decreased general
and administrative expenses of $42,621 incurred by our stores in China, as our business operation was adversely interrupted by the 2022
Outbreak as mentioned above. Our general and administrative expenses accounted for 29.0% and 22.1% of our revenue for the years ended
December 31, 2022 and 2021, respectively.
Other Income, Net
Our other income, net primarily consists of interest
expenses on our short-term bank loans, gain or loss from disposal of fixed assets, and government subsidies. Other income, net decreased
by $808,563, or 83.5%, from other income, net of $967,930 for the year ended December 31, 2021 to other income, net of $159,367 for the
year ended December 31, 2022. The decrease in other income, net was mainly due to the funding of $531,992 Chanson 23rd Street received
from the SBA under the SBA Restaurant Revitalization Fund program and the forgiveness of a $209,291 loan under the SBA Paycheck Protection
Program during the year ended December 31, 2021, and no such income was received during the year ended December 31, 2022.
Provision for Income Taxes
Our provision for income taxes was $9,547 and
$16,277 for the years ended December 31, 2022 and 2021, respectively. Under the EIT Law, domestic enterprises and foreign investment enterprises
are usually subject to a unified 25% EIT rate while preferential tax rates, tax holidays, or exemptions may be granted on a case-by-case
basis.
Xinjiang United Family and its three branch offices
were incorporated in the PRC. During the years ended December 31, 2022 and 2021, Xinjiang United Family and all its three branch offices
qualified as small-scaled minimal profit enterprises. Based on the EIT Law, from January 1, 2019 to December 31, 2021, the portion of
its taxable income not more than RMB1 million is subject to a reduced rate of 5% and the portion above RMB1 million was subject to a reduced
rate of 10%. According to the Announcement on Implementing the Preferential Income Tax Policies for Small-Scale Minimal Profit Enterprise
and Individually-Owned Businesses on April 2, 2021, the tax rate for the portion of its taxable income not more than RMB1 million is further
reduced to 2.5% during the period from January 1, 2021 to December 31, 2022 and the tax rate for the portion above RMB1 million remains
at a reduced rate of 10%. Xinjiang United Family and all its three branch offices will continue enjoying the favorable tax rate as long
as they are qualified as small-scaled minimal profit enterprises.
The UFG Entities are individually-owned businesses,
which are not subject to the EIT Law of the PRC, but the Individual Income Tax. The Measures for Individual Income Tax Calculation of
Individual Industrial and Commercial Households, or the “Measures,” were adopted by the SAT on December 19, 2014 and promulgated
on December 27, 2014, and amended on June 15, 2018. According to Article 7 of the Measures, for the income from production and operation
of individually-owned businesses, the amount of taxable income shall be the balance of the total income of each tax year after deducting
costs, expenses, taxes, losses and other expenditures, and allowable compensation for losses in previous years. Income tax for an individually-owned
business can generally be assessed on an actual basis or a deemed basis, which the UFG Entities apply. Therefore, income tax for the UFG
Entities is levied as a fixed-rate income tax at 1% of the deemed Taxable Net Income (“TNI”) as assessed by the local tax
authority. According to Announcement No. 12 [2021] of the SAT, the tax rate is reduced by half to 0.5% during the period from January
1, 2021 to December 31, 2022. For the year ended December 31, 2022, 13 of these UFG entities were subject to income tax assessed at 0.5%
of TNI that ranged from RMB33,000 to RMB180,000 per month. For the year ended December 31, 2021, 13 of these UFG entities were subject
to income tax assessed at 0.5% of TNI that ranged from RMB25,000 to RMB180,000 per month. The rest of these UFG Entities were exempted
from paying income tax. As of December 31, 2022, the tax years ended December 31, 2018 through December 31, 2022 for the UFG Entities
remained open for statutory examination by PRC tax authorities. In addition, the TNI and tax rate of the UFG Entities are subject to periodical
reassessment by the local tax authority. If the local tax authority determined that income tax for the UFG Entities should be levied at
a higher TNI or higher tax rate, the UFG Entities would be obligated to pay additional income tax. Along with the continuing growth of
business, we expect that the tax rates of these UFG Entities are likely to increase in the future in the annual assessment by the local
tax authority based on past performance. If these UFG Entities change their forms of organization from individually-owned businesses to
other corporate forms (such as limited liability company) as a result of their business development requirement, they will no longer enjoy
the favorable tax rates and will be subject to the EIT Law, though we currently do not expect their forms of organization to change in
the foreseeable future.
For the years ended December 31, 2022 and 2021,
the tax saving as the result of the favorable tax rates and tax exemption amounted to $223,920 and $494,744, respectively, and per share
effect of the favorable tax rate and tax exemption was $0.02 and $0.05, respectively.
Net Income (Loss)
As a result of the foregoing, we reported a net
loss of $1,288,205 for the year ended December 31, 2022 as compared to net income of $506,769 for the year ended December 31, 2021.
Comparison of Results of Operations for the
Years Ended December 31, 2021 and 2020
The following table summarizes the results of
our operations during the years ended December 31, 2021 and 2020, respectively, and provides information regarding the dollar and percentage
increase or decrease during such years.
| |
For the years ended December 31, | | |
Variance | |
| |
2021 | | |
2020 | | |
Amount | | |
% | |
Revenue | |
$ | 14,690,295 | | |
$ | 10,313,512 | | |
$ | 4,376,783 | | |
| 42.4 | % |
Cost of revenue | |
| 7,759,872 | | |
| 5,164,178 | | |
| 2,595,694 | | |
| 50.3 | % |
Gross profit | |
| 6,930,423 | | |
| 5,149,334 | | |
| 1,781,089 | | |
| 34.6 | % |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 4,126,126 | | |
| 2,947,088 | | |
| 1,179,038 | | |
| 40.0 | % |
General and administrative expenses | |
| 3,249,181 | | |
| 2,230,893 | | |
| 1,018,288 | | |
| 45.6 | % |
Total operating expenses | |
| 7,375,307 | | |
| 5,177,981 | | |
| 2,197,326 | | |
| 42.4 | % |
| |
| | | |
| | | |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (444,884 | ) | |
| (28,647 | ) | |
| 416,237 | | |
| 1,453.0 | % |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME (EXPENSES) | |
| | | |
| | | |
| | | |
| | |
Interest expense, net | |
| (98,033 | ) | |
| (108,852 | ) | |
| (10,819 | ) | |
| (9.9 | )% |
Other income (expenses), net | |
| 1,065,963 | | |
| (11,946 | ) | |
| 1,077,909 | | |
| 9,023.2 | % |
Total other income (expenses), net | |
| 967,930 | | |
| (120,798 | ) | |
| 1,088,728 | | |
| 901.3 | % |
| |
| | | |
| | | |
| | | |
| | |
INCOME (LOSS) BEFORE INCOME TAX PROVISION | |
| 523,046 | | |
| (149,445 | ) | |
| 672,491 | | |
| 450.0 | % |
| |
| | | |
| | | |
| | | |
| | |
INCOME TAX PROVISION | |
| 16,277 | | |
| 14,584 | | |
| 1,693 | | |
| 11.6 | % |
| |
| | | |
| | | |
| | | |
| | |
NET INCOME (LOSS) | |
$ | 506,769 | | |
$ | (164,029 | ) | |
$ | 670,798 | | |
| 409.0 | % |
Revenue
We generate revenue primarily from bakery products
and other products sold in China and the U.S. In the PRC Stores, bakery products consist of packaged bakery products (cakes, bread, and
snacks), birthday cakes, and made-in-store pastries, and other products consist of seasonal products (mooncakes and zongzi) and beverage
products. In the U.S. Stores, bakery products consist of cakes, bread, sweets, birthday cakes, and pastries, and other products consist
of eat-in menu items (sandwiches, salads, toasts, croissants, soups, and desserts) and beverage products.
Our total revenue increased by $4,376,783, or
42.4%, from $10,313,512 for the year ended December 31, 2020 to $14,690,295 for the year ended December 31, 2021. The increase in our
revenue was due to increased revenue from the stores in China and the U.S., as discussed in greater details below.
The following table sets forth the breakdown of
our revenue for the years ended December 31, 2021 and 2020, respectively:
|
|
For the Years Ended December 31, |
|
|
Variance |
|
|
|
2021 |
|
|
% |
|
|
2020 |
|
|
% |
|
|
Amount |
|
|
% |
|
China |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bakery products |
|
$ |
11,694,918 |
|
|
|
79.6 |
% |
|
$ |
8,245,355 |
|
|
|
79.9 |
% |
|
$ |
3,449,563 |
|
|
|
41.8 |
% |
Other products |
|
|
1,101,171 |
|
|
|
7.5 |
% |
|
|
728,388 |
|
|
|
7.1 |
% |
|
|
372,783 |
|
|
|
51.2 |
% |
Subtotal: revenue from China |
|
|
12,796,089 |
|
|
|
87.1 |
% |
|
|
8,973,743 |
|
|
|
87.0 |
% |
|
|
3,822,346 |
|
|
|
42.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bakery products |
|
|
473,914 |
|
|
|
3.2 |
% |
|
|
597,072 |
|
|
|
5.8 |
% |
|
|
(123,158 |
) |
|
|
(20.6 |
)% |
Beverage products |
|
|
1,000,039 |
|
|
|
6.8 |
% |
|
|
233,936 |
|
|
|
2.3 |
% |
|
|
766,103 |
|
|
|
327.5 |
% |
Eat-in services |
|
|
420,253 |
|
|
|
2.9 |
% |
|
|
508,761 |
|
|
|
4.9 |
% |
|
|
(88,508 |
) |
|
|
(17.4 |
)% |
Subtotal: revenue from the United States |
|
|
1,894,206 |
|
|
|
12.9 |
% |
|
|
1,339,769 |
|
|
|
13.0 |
% |
|
|
554,437 |
|
|
|
41.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
14,690,295 |
|
|
|
100.0 |
% |
|
$ |
10,313,512 |
|
|
|
100.0 |
% |
|
$ |
4,376,783 |
|
|
|
42.4 |
% |
China
The PRC Stores accounted for 87.1% and 87.0% of
our total revenue for the years ended December 31, 2021 and 2020, respectively. Revenue from China increased by $3,822,346, or 42.6%,
from $8,973,743 for the year ended December 31, 2020 to $12,796,089 for the year ended December 31, 2021. The increase in our revenue
was mainly due to increased revenue from bakery products, as discussed below.
Revenue from bakery products increased by $3,449,563,
or 41.8%, from $8,245,355 for the year ended December 31, 2020 to $11,694,918 for the year ended December 31, 2021. The increase was mainly
due to an increase in comparable store sales of 20.1% in bakery products. The COVID-19 pandemic first started to impact the operations
of the PRC Stores in January 2020, and the PRC Stores closed during the period between late January and early March of 2020, and closed
again between mid-July and September of 2020 due to the resurgence of COVID-19 cases in Xinjiang, which caused the significantly lower
comparable store sales during the year ended December 31, 2020. However, since the COVID-19 pandemic in China appeared to be under relative
control in 2021, our revenue increased as our business operations gradually recovered during the year ended December 31, 2021. There was
also increased revenue of approximately $1.1 million from PRC stores that were opened during the second half of 2020 that generated full
year revenue during the year ended December 31, 2021 and also the new stores opened during the fiscal year of 2021. Furthermore, since
the start of fiscal year 2021, the PRC Stores have focused more on increasing their market share and there have been increased promotion
activities and price discounts given to their customers, which attracted more customers to make purchases at the PRC Stores in 2021. The
increase was also partly due to the appreciation of RMB against U.S. dollars. The average translation rate for the years ended December
31, 2021 and 2020 was at $1 to RMB6.4490 and $1 to RMB6.9020, respectively, an increase of
6.6%.
Revenue from other products increased by $372,783,
or 51.2%, from $728,388 for the year ended December 31, 2020 to $1,101,171 for the year ended December 31, 2021. The increase was due
to increased revenue from seasonal products, which was partially offset by slightly decreased revenue from beverage products. Revenue
from seasonal products increased by $379,139, or 64.4%, from $588,531 for the year ended December 31, 2020 to $967,670 for the year ended
December 31, 2021. The increase was mainly due to increased group purchases from corporate customers of the PRC Stores; as the business
of these corporate customers gradually recovered from the negative impact of the COVID-19 pandemic, they made more group purchases of
seasonal products from the PRC Stores during the year ended December 31, 2021. The increase was also due to the increased purchases from
our existing and new customers as we updated packaging for our seasonal products and launched more promotion activities and price discounts.
Revenue from beverage products remained relatively stable with a slight decrease of $6,356, or 4.5%, from $139,857 for the year ended
December 31, 2020 to $133,501 for the year ended December 31, 2021.
United States
Revenue from the U.S. increased by $554,437, or
41.4%, from $1,339,769 for the year ended December 31, 2020 to $1,894,206 for the year ended December 31, 2021. The increase was due to
increased revenue from beverage products, which was partially offset by decreased revenue from bakery products and eat-in services as
discussed below.
Revenue from bakery products decreased by $123,158,
or 20.6%, from $597,072 for the year ended December 31, 2020 to $473,914 for the year ended December 31, 2021. The decrease was due to
increased competition from rivals. Between the end of February 2020 and the end of June 2020, most of Chanson 23rd Street’s competitors
were closed due to the COVID-19 pandemic while Chanson 23rd Street remained one of the few bakery stores that continued their business
operations, leading to high demand for its bakery products. During the year ended December 31, 2021, however, since main rivals of Chanson
23rd Street already resumed their business at the end of year 2020 or the beginning of year 2021 and some famous bakery brands opened
new stores in New York City, customers had more choices and sales of Chanson 23rd Street’s bakery products were negatively affected.
Revenue from beverage products increased by $766,103,
or 327.5%, from $233,936 for the year ended December 31, 2020 to $1,000,039 for the year ended December 31, 2021. During the year ended
December 31, 2020, Chanson 23rd Street only sold bottled cocktails at its outdoor booth since its indoor dining services were suspended.
After Chanson 23rd Street resumed its indoor dining services in February 2021, its cocktail bar launched several new types of cocktail
products with a variety of new flavors and styles. As Chanson 23rd Street’s products became popular among its customers and its
cocktail bar was often fully booked by reservation during weekends, Chanson 23rd Street managed to increase the prices of its cocktail
products. As a result, its revenue from beverage products increased significantly during the year ended December 31, 2021 as compared
to the year ended December 31, 2020.
Revenue from eat-in services decreased by $88,508,
or 17.4%, from $508,761 for the year ended December 31, 2020 to $420,253 for the year ended December 31, 2021. As Chanson 23rd Street
is located at central business district, its revenue from eat-in services mainly comes from breakfast and brunch sold to the people working
in nearby offices during the weekdays and tourists during the weekends. Before Chanson 23rd Street suspended its eat-in services at the
end of February 2020, it had stable customer traffic, which contributed to the majority of its revenue during the year ended December
31, 2020. Even though Chanson 23rd Street gradually resumed its indoor dining services since February 12, 2021, its customer traffic had
not recovered because most of the companies were still closed and people remained working from home, and the number of tourists was limited
due to travel restrictions. Therefore, its revenue of eat-in services decreased during the year ended December 31, 2021 as compared to
the year ended December 31, 2020.
Cost of Revenue
Our cost of revenue consists of food ingredient
costs, packing costs, workforce related costs, overhead costs such as store rental and utilities for food production and processing, depreciation,
and amortization. Our overall cost of revenue increased by $2,595,694, or 50.3%, from $5,164,178 for the year ended December 31, 2020
to $7,759,872 for the year ended December 31, 2021. The increase was attributable to the increase in the cost of revenue from both the
stores in China and the U.S., as discussed below.
The following table sets forth the breakdown of
our cost of revenue for the years ended December 31, 2021 and 2020, respectively:
| |
For the Years Ended December 31, | | |
Variance | |
| |
2021 | | |
% | | |
2020 | | |
% | | |
Amount | | |
% | |
China | |
| | |
| | |
| | |
| | |
| | |
| |
Bakery products | |
$ | 6,144,101 | | |
| 79.3 | % | |
$ | 4,147,151 | | |
| 80.3 | % | |
$ | 1,996,950 | | |
| 48.2 | % |
Other products | |
| 438,361 | | |
| 5.6 | % | |
| 263,137 | | |
| 5.1 | % | |
| 175,224 | | |
| 66.6 | % |
Subtotal: cost of revenue from China | |
| 6,582,462 | | |
| 84.9 | % | |
| 4,410,288 | | |
| 85.4 | % | |
| 2,172,174 | | |
| 49.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Bakery products | |
| 305,228 | | |
| 3.9 | % | |
| 324,636 | | |
| 6.3 | % | |
| (19,408 | ) | |
| (6.0 | )% |
Beverage products | |
| 528,827 | | |
| 6.8 | % | |
| 129,227 | | |
| 2.5 | % | |
| 399,600 | | |
| 309.2 | % |
Eat-in services | |
| 343,355 | | |
| 4.4 | % | |
| 300,027 | | |
| 5.8 | % | |
| 43,328 | | |
| 14.4 | % |
Subtotal: cost of revenue from the United States | |
| 1,177,410 | | |
| 15.1 | % | |
| 753,890 | | |
| 14.6 | % | |
| 423,520 | | |
| 56.2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Cost of Revenue | |
$ | 7,759,872 | | |
| 100.0 | % | |
$ | 5,164,178 | | |
| 100.0 | % | |
$ | 2,595,694 | | |
| 50.3 | % |
China
Cost of revenue from China increased by $2,172,174,
or 49.3%, from $4,410,288 for the year ended December 31, 2020 to $6,582,462 for the year ended December 31, 2021. The increase was due
to increased cost of revenue of bakery products and other products, as discussed below.
Cost of revenue from sales of bakery products
increased by $1,996,950, or 48.2%, from $4,147,151 for the year ended December 31, 2020 to $6,144,101 for the year ended December 31,
2021 due to the increase in sales of bakery products. The percentage of increase in cost of revenue was more than that in revenue during
the same period, due to increased prices of imported raw materials, such as butter and cream, and increased cost of fruit cakes made with
fresh fruit instead of canned fruit. Meanwhile, the increase was attributable to the increased promotion activities and price discounts
given to customers of the PRC Stores as mentioned above.
Cost of revenue from other products increased
by $175,224, or 66.6%, from $263,137 for the year ended December 31, 2020 to $438,361 for the year ended December 31, 2021. The cost of
revenue from seasonal products increased by $181,478, or 91.8%, from $197,735 for the year ended December 31, 2020 to $379,213 for the
year ended December 31, 2021 due to the increase in sales of seasonal products. The percentage of increase in cost of revenue of seasonal
products was more than that in revenue during the same period, due to the increased promotion activities and price discounts given to
customers of the PRC Stores, and the increased packing cost as a result of updated packaging of seasonal products. The cost of revenue
from beverage products decreased by $6,254, or 9.6%, from $65,402 for the year ended December 31, 2020 to $59,148 for the year ended December
31, 2021 due to the decrease in sales of beverage products. The decrease in cost of revenue from beverage products was in line with the
decrease in the revenue from beverage products in the PRC Stores.
United States
Cost of revenue from the U.S. increased by $423,520,
or 56.2%, from $753,890 for the year ended December 31, 2020 to $1,177,410 for the year ended December 31, 2021. The increase was due
to the increased cost of revenue from beverage products and eat-in services, which was partially offset by the deceased cost of revenue
from bakery products as discussed below.
Cost of revenue from sales of bakery products
decreased by $19,408, or 6.0%, from $324,636 for the year ended December 31, 2020 to $305,228 for the year ended December 31, 2021. The
percentage of decrease in cost of revenue was less than that in revenue during the same period, mainly due to the increased cost of ingredient
materials and inventory spoilage, as discussed in “—Gross Profit and Gross Margin” below in more details.
Cost of revenue from sales of beverage products
increased by $399,600, or 309.2%, from $129,227 for the year ended December 31, 2020 to $528,827 for the year ended December 31, 2021
due to the increase in sales of new cocktail products. The percentage of increase in cost of revenue was less than that in revenue during
the same period, due to the increased sale of new cocktail products that have higher gross margin.
The cost of revenue from eat-in services increased
by $43,328, or 14.4%, from $300,027 for the year ended December 31, 2020 to $343,355 for the year ended December 31, 2021. The increase
was mainly attributable to the increased cost of ingredient materials and inventory spoilage, and the increased wage costs as a result
of Chanson Greenwich’s trial operation in December 2021 as discussed in “—Gross Profit and Gross Margin” below
in more details.
Gross Profit and Gross Margin
Our gross profit increased by $1,781,089, or 34.6%,
from $5,149,334 for the year ended December 31, 2020 to $6,930,423 for the year ended December 31, 2021. The increase was mainly attributable
to the overall increase in revenue. Our gross margin decreased by 2.7 percentage points from 49.9% for the year ended December 31, 2020
to 47.2% for the year ended December 31, 2021.
The following table sets forth the breakdown of
our gross profit for the years ended December 31, 2021 and 2020, respectively:
| |
For the Years Ended December 31, | | |
Variance | |
| |
2021 | | |
Margin % | | |
2020 | | |
Margin % | | |
Amount | | |
% | |
China | |
| | |
| | |
| | |
| | |
| | |
| |
Bakery products | |
$ | 5,550,817 | | |
| 47.5 | % | |
$ | 4,098,204 | | |
| 49.7 | % | |
$ | 1,452,613 | | |
| 35.4 | % |
Other products | |
| 662,810 | | |
| 60.2 | % | |
| 465,251 | | |
| 63.9 | % | |
| 197,559 | | |
| 42.5 | % |
Subtotal: gross margin and margin % from China | |
| 6,213,627 | | |
| 48.6 | % | |
| 4,563,455 | | |
| 50.9 | % | |
| 1,650,172 | | |
| 36.2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Bakery products | |
| 168,686 | | |
| 35.6 | % | |
| 272,436 | | |
| 45.6 | % | |
| (103,750 | ) | |
| (38.1 | )% |
Beverage products | |
| 471,212 | | |
| 47.1 | % | |
| 104,709 | | |
| 44.8 | % | |
| 366,503 | | |
| 350.0 | % |
Eat-in services | |
| 76,898 | | |
| 18.3 | % | |
| 208,734 | | |
| 41.0 | % | |
| (131,836 | ) | |
| (63.2 | )% |
Subtotal: gross margin and margin % from the United States | |
| 716,796 | | |
| 37.8 | % | |
| 585,879 | | |
| 43.7 | % | |
| 130,917 | | |
| 22.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Gross Margin and Margin % | |
$ | 6,930,423 | | |
| 47.2 | % | |
$ | 5,149,334 | | |
| 49.9 | % | |
$ | 1,781,089 | | |
| 34.6 | % |
China
Gross profit from China increased by $1,650,172,
or 36.2%, from $4,563,455 for the year ended December 31, 2020 to $6,213,627 for the year ended December 31, 2021. The increase was mainly
attributable to the overall increase in sales. The gross margin decreased by 2.3 percentage points from 50.9% for the year ended December
31, 2020 to 48.6% for the year ended December 31, 2021.
The gross profit of bakery products increased
by $1,452,613, or 35.4%, from $4,098,204 for the year ended December 31, 2020 to $5,550,817 for the year ended December 31, 2021, and
the gross margin of bakery products decreased by 2.2 percentage points from 49.7% for the year ended December 31, 2020 to 47.5% for the
year ended December 31, 2021. As mentioned above, the PRC Stores improved ingredients of fruit cakes by using fresh fruit instead of canned
fruit, and high-quality and expensive strawberries instead of kiwi, which made their products taste better. Therefore, their product costs
increased slightly in 2021, while the prices were not able to catch up at the same time. Meanwhile, since the start of fiscal year 2021,
the PRC Stores have focused more on increasing their market share and there have been increased promotion activities and price discounts
given to their customers. Hence, the gross margin of bakery products slightly decreased during the year ended December 31, 2021 as compared
to the same period of last year.
The gross profit of other products increased by
$197,559, or 42.5%, from $465,251 for the year ended December 31, 2020 to $662,810 for the year ended December 31, 2021, and the gross
margin decreased by 3.7 percentage points from 63.9% for the year ended December 31, 2020 to 60.2% for the year ended December 31, 2021.
The decrease in gross margin was mainly due to a decrease in gross margin of seasonal products by 5.6 percentage points from 66.4% for
the year ended December 31, 2020 to 60.8% for the year ended December 31, 2021. The decrease was mainly due to the increased promotion
activities and price discounts given to existing and new customers of the PRC Stores, and the increased packing cost as a result of the
updated packaging of seasonal products. Meanwhile, the gross margin of beverage products increased by 2.5 percentage points from 53.2%
for the year ended December 31, 2020 to 55.7% for the year ended December 31, 2021. The increase was mainly due to termination of beverage
sales in bakery stores with relatively low profitability.
United States
Gross profit from the U.S. increased by $130,917,
or 22.3%, from $585,879 for the year ended December 31, 2020 to $716,796 for the year ended December 31, 2021. The increase was mainly
attributable to the overall increase in revenue. The gross margin decreased by 5.9 percentage points from 43.7% for the year ended December
31, 2020 to 37.8% for the year ended December 31, 2021.
The gross profit of bakery products decreased
by $103,750, or 38.1%, from $272,436 for the year ended December 31, 2020 to $168,686 for
the year ended December 31, 2021, and the gross margin of bakery products decreased by 10.0 percentage points from 45.6% for the year
ended December 31, 2020 to 35.6% for the year ended December 31, 2021. During the year ended December 31, 2021, the cost of some of the
U.S. Stores’ main ingredient materials increased by around 30% as a result of shortage in supply due to the impact of COVID-19 pandemic.
Meanwhile, the U.S. Stores incurred higher inventory spoilage as the customer demand of their products was harder to estimate, which resulted
in excess raw materials and bakery products that were spoiled due to their short storage life.
The gross profit of beverage products increased
by $366,503, or 350.0%, from $104,709 for the year ended December 31, 2020 to $471,212 for the year ended December 31, 2021, and the gross
margin of beverage products increased by 2.3 percentage points from 44.8% for the year ended December 31, 2020 to 47.1% for the year ended
December 31, 2021. The slight increase in gross margin was mainly due to the increased revenue in our new cocktail products that have
higher gross margin. The increase was partially offset by the bottled wine damage of approximately $38,500 by accident during the year
ended December 31, 2021.
The gross profit of eat-in services decreased
by $131,836, or 63.2%, from $208,734 for the year ended December 31, 2020 to $76,898 for the year ended December 31, 2021, and the gross
margin of eat-in services decreased by 22.7 percentage points from 41.0% for the year ended December 31, 2020 to 18.3% for the year ended
December 31, 2021. The decrease was mainly attributable to the increased cost of ingredient materials and inventory spoilage during the
year ended December 31, 2021 as mentioned above.
Operating Expenses
The following table sets forth the breakdown of
our operating expenses for the years ended December 31, 2021 and 2020.
| |
For the Years Ended December 31, | |
| |
2021 | | |
2020 | | |
Variance | |
| |
Amount | | |
% of revenue | | |
Amount | | |
% of revenue | | |
Amount | | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Total revenue | |
$ | 14,690,295 | | |
| 100.0 | % | |
$ | 10,313,512 | | |
| 100.0 | % | |
$ | 4,376,783 | | |
| 42.4 | % |
Total operating expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 4,126,126 | | |
| 28.1 | % | |
| 2,947,088 | | |
| 28.6 | % | |
| 1,179,038 | | |
| 40.0 | % |
General and administrative expenses | |
| 3,249,181 | | |
| 22.1 | % | |
| 2,230,893 | | |
| 21.6 | % | |
| 1,018,288 | | |
| 45.6 | % |
Total operating expenses | |
$ | 7,375,307 | | |
| 50.2 | % | |
$ | 5,177,981 | | |
| 50.2 | % | |
$ | 2,197,326 | | |
| 42.4 | % |
Selling Expenses
Our selling expenses primarily include payroll
and sales commission expenses paid to our sales and marketing personnel, store operating expenses, store rental, store decoration and
maintenance expenses, utility expenses, and other expenses related to sales activities. Selling expenses increased by $1,179,038, or 40.0%,
from $2,947,088 for the year ended December 31, 2020 to $4,126,126 for the year ended December 31, 2021. The increase in selling expenses
was primarily due to the increase in salary and social security expenses of $472,729. During the PRC Stores’ store closure periods
in China in the year ended December 31, 2020, little sales commissions were generated, and the PRC Stores paid their employees base salaries
to satisfy their basic living expenditure needs. In addition, the PRC Stores were exempted from paying work-related injury insurance,
endowment insurance, and unemployment insurance for their employees between February 2020 and December 2020, a measurement taken by the
Chinese government to support the economy during the pandemic. These expenses increased as the PRC Stores resumed paying full salary and
social security during the year ended December 31, 2021. The increase in selling expenses was also due to an increase in rental expenses
of $380,815 as we had more stores and received less lease concessions from our landlords during the year ended December 31, 2021 as compared
to the year ended December 31, 2020. During the years ended December 31, 2021 and 2020, we received rent concessions of $141,499 and $598,990,
respectively. In addition, the PRC Stores’ business operation gradually recovered from the pandemic during the year ended December
31, 2021, which resulted in an increase in utility expenses of $32,934, property management fees of $35,396, and handling fees of $43,636
paid to the take-out platforms. Meanwhile, the increase in selling expenses was also attributable to Chanson Greenwich’s trial operation
in December 2021 with selling expenses of $121,029 incurred. Our selling expenses accounted for 28.1% and 28.6% of our revenue for the
years ended December 31, 2021 and 2020, respectively.
General and Administrative Expenses
Our general and administrative expenses primarily
consist of administrative employee salaries, welfare and insurance expenses, depreciation, and professional service expenses. General
and administrative expenses increased by $1,018,288, or 45.6%, from $2,230,893 for the year ended December 31, 2020 to $3,249,181 for
the year ended December 31, 2021, primarily due to an increase in salaries by $520,768, as we paid full salary and social security during
the year ended December 31, 2021. The increase was also due to the increased rental expenses of $234,152 as well as $185,079 professional
service, maintenance, and other miscellaneous expenses incurred during the renovation period of our new store, Chanson Greenwich in the
U.S. during the year ended December 31, 2021. Our general and administrative expenses accounted for 22.1% and 21.6% of our revenue for
the years ended December 31, 2021 and 2020, respectively.
Other Income (Expenses), Net
Our other income (expenses), net primarily consists
of interest expenses on our short-term bank loans, gain or loss from disposal of fixed assets, and government subsidies. Other income,
net increased by $1,088,728, or 901.3%, from other expenses, net of $120,798 for the year ended December 31, 2020 to other income, net
of $967,930 for the year ended December 31, 2021. The increase was mainly due to the funding of $531,992 Chanson 23rd Street received
from the SBA under the SBA Restaurant Revitalization Fund program and the forgiveness of two loans totaling $502,298 under the SBA Paycheck
Protection Program. We filed applications for forgiveness of the loans’ principal and interests, and the applications were approved
by the bank and the SBA in May 2021 and November 2021, respectively.
Provision for Income Taxes
Our provision for income taxes was $16,277 and
$14,584 for the years ended December 31, 2021 and 2020, respectively. Under the EIT Law, domestic enterprises and foreign investment enterprises
are usually subject to a unified 25% EIT rate while preferential tax rates, tax holidays, or exemptions may be granted on a case-by-case
basis.
Xinjiang United Family and its three branch offices
were incorporated in the PRC. During the years ended December 31, 2021 and 2020, Xinjiang United Family and all its three branch offices
qualified as small-scaled minimal profit enterprises. Based on the EIT Law, from January 1, 2019 to December 31, 2021, the portion of
its taxable income not more than RMB1 million is subject to a reduced rate of 5% and the portion above RMB1 million was subject to a reduced
rate of 10%. According to the Announcement on Implementing the Preferential Income Tax Policies for Small-Scale Minimal Profit Enterprise
and Individually-Owned Businesses on April 2, 2021, the tax rate for the portion of its taxable income not more than RMB1 million is further
reduced to 2.5% during the period from January 1, 2021 to December 31, 2022 and the tax rate for the portion above RMB1 million remains
at a reduced rate of 10%. Xinjiang United Family and all its three branch offices will continue enjoying the favorable tax rate as long
as they are qualified as small-scaled minimal profit enterprises.
The UFG Entities are individually-owned businesses,
which are not subject to the EIT Law, but Individual Income Tax. The Measures for Individual Income Tax Calculation of Individual Industrial
and Commercial Households, or the “Measures,” were adopted by the SAT on December 19, 2014 and promulgated on December 27,
2014, and amended on June 15, 2018. According to Article 7 of the Measures, for the income from production and operation of individually-owned
businesses, the amount of taxable income shall be the balance of the total income of each tax year after deducting costs, expenses, taxes,
losses and other expenditures, and allowable compensation for losses in previous years. Income tax for an individually-owned business
can generally be assessed on an actual basis or a deemed basis, which the UFG Entities apply. Therefore, income tax for the UFG Entities
is levied as a fixed-rate income tax at 1% of the deemed Taxable Net Income (“TNI”) as assessed by the local tax authority.
According to Announcement No. 12 [2021] of the SAT, the tax rate is reduced by half to 0.5% during the period from January 1, 2021 to
December 31, 2022. For the year ended December 31, 2021, 13 of these UFG entities were subject to income tax assessed at 0.5% of TNI that
ranged from RMB25,000 to RMB180,000 per month. For the year ended December 31, 2020, 11 of these UFG Entities were subject to income
tax assessed at 1% of TNI that ranged from RMB33,000 to RMB120,000 per month. The rest of these UFG Entities were exempted from paying
income tax. As of December 31, 2021, the tax years ended December 31, 2017 through December 31, 2021 for the UFG Entities remained open
for statutory examination by PRC tax authorities. In addition, the TNI and tax rate of the UFG Entities are subject to periodical reassessment
by the local tax authority. If the local tax authority determined that income tax for the UFG Entities should be levied at a higher TNI
or higher tax rate, the UFG Entities would be obligated to pay additional income tax. Along with the continuing growth of business, we
expect that the tax rates of these UFG Entities are likely to increase in the future in the annual assessment by the local tax authority
based on past performance. If these UFG Entities change their forms of organization from individually-owned businesses to other corporate
forms (such as limited liability company) as a result of their business development requirement, they will no longer enjoy the favorable
tax rates and will be subject to the EIT Law, though we currently do not expect their forms of organization to change in the foreseeable
future.
For the years ended December 31, 2021 and 2020,
tax savings as the result of the favorable tax rates and tax exemptions amounted to $494,744 and $358,406, respectively, and the per share
effect of the favorable tax rate and tax exemptions was $0.05 and $0.04, respectively.
Net Income (Loss)
As a result of the foregoing, we reported net
income of $506,769 for the year ended December 31, 2021 as compared to a net loss of $164,029 for the year ended December 31, 2020.
Key Factors that Affect Our Results of Operations
We believe the following key factors may affect
our financial condition and results of operations:
The operating entities’ business is
affected by changes in consumer preferences and discretionary spending.
The operating entities’ success depends,
in part, upon the popularity of their bakery products and their ability to develop new bakery products that appeal to consumers. Shifts
in consumer preferences away from their bakery stores or their product offerings and mix, their inability to develop new products that
appeal to consumers could harm the operating entities’ business. The operating entities’ success depends in large part on
their customers’ continued belief that food made with high-quality ingredients, including selected proteins raised without antibiotics,
their artisan breads, cakes, pastries, and other bakery treats made without artificial preservatives, flavors, sweeteners, or colors from
artificial sources are worth the prices charged at the operating entities’ bakery stores relative to the lower prices offered by
some of their competitors. The operating entities’ inability to successfully educate customers about the quality of their bakery
products or their customers’ rejection of the operating entities’ pricing approach could result in decreased demand for their
products or require the operating entities to change their pricing, marketing, or promotional strategies, which could materially and adversely
affect our consolidated financial results or the brand identity that the operating entities have created. In addition, the operating entities’
success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the
availability of discretionary income. Accordingly, the operating entities may experience declines in sales during economic downturns or
during periods of uncertainty. Any material decline in the amount of discretionary spending could have a material adverse effect on the
operating entities’ sales, results of operations, business, and financial condition.
The operating entities’
revenue and growth could be adversely affected if their comparable store sales are less than expected.
The operating entities’
success depends on increasing comparable store sales. To increase sales and profits, and therefore comparable store sales growth, the
operating entities must focus on delivering value and generating customer excitement by strengthening opportunistic purchasing, optimizing
inventory management, maintaining strong store conditions, and effectively marketing current products and new product offerings. The operating
entities may not be able to maintain or improve the levels of comparable store sales that they have experienced in the past, and the operating
entities’ comparable store sales growth is a significant driver of their profitability and overall business results. In addition,
competition and pricing pressures from competitors may materially adversely impact the operating entities’ operating margins. The
operating entities’ comparable store sales growth could be lower than their historical average or their future target for many reasons,
including general economic conditions, operational performance, price inflation or deflation, new competitive entrants near their stores,
price changes in response to competitive factors, the impact of new stores entering the comparable store base, possible supply shortages
or other operational disruptions, the number and dollar amount of customer transactions in their stores, and their ability to provide
product or service offerings that generate new and repeat visits to their stores. Opening new stores in the operating entities’
established markets may result in inadvertent oversaturation, temporarily or permanently diverting customers and sales from their existing
stores to new stores and reduce comparable store sales, thus adversely affecting their overall financial performance. These factors may
cause the operating entities’ comparable store sales results to be materially lower than in recent periods, which could harm their
profitability and business. Changes in their average store sales or their inability to increase their average store sales could cause
their operating results to vary adversely from expectations, which could adversely affect their results of operations.
Fluctuations in
various food and supply costs, including dairy, could adversely affect the operating entities’ operating results.
Supplies and prices of
the various ingredient materials that are used to prepare the operating entities’ bakery products (including flour, milk, sugar,
and eggs) can be affected by a variety of factors, such as weather, seasonal fluctuations, demand, politics, and economics factors, and
such prices may fluctuate. An increase in pricing of any ingredient that is used in the operating entities’ bakery products could
result in an increase in costs from their suppliers, and the operating entities may not be able to increase prices to cover increased
costs which would have an adverse effect on their operating results and profitability.
The geographic concentration of the operating
entities’ stores primarily in Xinjiang and New York City subjects the operating entities to an increased risk of loss of revenue
from events beyond their control or conditions affecting that region.
Currently, our PRC subsidiary and the VIEs operate
33 bakery stores exclusively located in Xinjiang. In addition, the U.S. Stores’ current operations are limited to New York City.
As a result, they are particularly susceptible to adverse trends, severe weather, competition, and economic conditions in these areas.
Any unforeseen events or circumstances that negatively affect these areas could materially adversely affect the operating entities’
sales and profitability. These factors include, among other things, epidemics, changes in demographics, population and employee bases,
wage increases, changes in economic conditions, severe weather conditions, and climate change. Such conditions may result in reduced customer
traffic and spending in the operating entities’ stores, physical damage to their stores, loss of inventory, closure of one or more
of their stores, inadequate workforce in their markets, temporary disruption in the supply of products, delays in the delivery of goods
to their stores, increased expenses, and a reduction in the availability of products in their stores. Any of these factors may disrupt
the operating entities’ business and materially adversely affect their financial condition and results of operations.
If the operating
entities are unable to compete successfully, their financial condition and results of operations may be harmed.
The industry in which the operating entities conduct
their business is intensely competitive. The operating entities’ bakery stores compete with well-established national, regional,
and locally-owned traditional bakeries, cafés, and other companies providing bakery products. Additionally, the operating entities
also compete with certain quick-service restaurants, specialty food stores, supermarkets, and convenience stores. The principal factors
on which they compete are taste, quality, prices of products offered, customer service, atmosphere, location, convenience, and overall
customer experience. The operating entities also compete for retail space in desirable locations. Many competitors or potential competitors
have substantially greater financial and other resources, which may allow them to react more quickly to changes in pricing, marketing,
and other changing tastes of consumers. In the event that the operating entities cannot effectively compete on a continuing basis or competitive
pressures arise, such inability to compete or competitive pressures could have a material adverse effect on their business, results of
operations and financial condition.
COVID-19 Affecting Our Results of Operations
Our business has been adversely affected by the
COVID-19 pandemic. The World Health Organization declared the COVID-19 a pandemic on March 11, 2020, after the virus speeded from China
to other countries around the world. Given the high public health risks associated with the disease, governments around the world have
imposed various degrees of restrictions and other quarantine measures, including lockdowns, closures, quarantines, and travel bans, to
intended to contain the spread of COVID-19. Our business in China was adversely affected due to the store closure between late January
and early March of 2020, and between late July 2020 and late September 2020. After the PRC Stores resumed their normal activities, the
business of the PRC Stores located at shopping centers, school areas, and other commercial districts were still affected by reduced customer
traffic due to tightened safety control. In the U.S., Chanson 23rd Street in New York City provided only delivery and pickup services
between the end of February 2020 and the end of June 2020, and resumed outdoor dining services at the end of June 2020 and limited indoor
dining services at the end of September 2020. Chanson 23rd Street suspended its indoor dining services again between December 14, 2020
and February 11, 2021 according to an indoor dining ban issued by the Governor of New York State. In addition, the renovation of Chanson
Greenwich was delayed and the store opened in December 2021. Chanson 23rd Street resumed its indoor dining services on February 12, 2021
at 25 percent capacity, which was increased to 35 percent on February 26, 2021 and further increased to 50 percent and 75 percent on March
19, 2021 and May 7, 2021, respectively. Starting from May 19, 2021, Chanson 23rd Street has been allowed to provide indoor dining services
at full capacity, provided that either diners are seated at least six feet apart or tables are separated by physical barriers. The six-feet
rule was later lifted for fully vaccinated people and eventually for all people. As of the date of this annual report, the U.S. Stores
are providing indoor dining services at their full capacity.
During the year ended December 31, 2022, due to
the 2022 Outbreak, the operations of the PRC Stores and the production of the PRC Stores’ central factory were affected starting
from August 10, 2022 and all of the PRC Stores and the central factory were closed between October 5, 2022 and November 30, 2022. The
PRC Stores only managed to generate limited online sales and group sales during the period. The PRC Stores and the central factory stared
to reopen in early December 2022 and resumed their normal business activities on December 10, 2022. As a result, our revenue generated
in China decreased significantly by approximately $3.3 million, or 25.8%, during the year ended December 31, 2022 as compared to the same
period of last year. Our revenue generated in United States increased by approximately $1.9 million, or 99.6%, during the year ended December
31, 2022 as compared to the same period of last year, because starting from May 19, 2021, Chanson 23rd Street has been allowed to provide
indoor dining services at full capacity with certain restrictions, and Chanson Greenwich opened in December 2021 as mentioned above. Overall,
our total revenue decreased by approximately $1.4 million, or 9.7%, during the year ended December 31, 2022 as compared to the same period
of last year. See “—Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021.”
In early December 2022, China announced a nationwide loosening of its
zero-COVID policy, and the country faced a wave in infections after the lifting of these restrictions, but the spread of the COVID-19
appeared to be under control currently. Our PRC Stores have fully recovered from the 2022 Outbreak as of the date of this annual report.
For the three-month period from January 2023 to March 2023, our revenue generated in China increased by approximately $0.6 million, or
19.0%, as compared to the same period in 2022. Our revenue generated in the U.S. remained relatively stable with a slight increase by
approximately $0.1 million, or 8.0%, as compared to the same period in 2022. As a result, our total revenue increased by approximately
$0.7 million, or 16.9%, as compared to the same period in 2022. However, the impact of COVID-19 pandemic still depends on the future developments
of the pandemic, including new information concerning the global severity of and actions taken to contain the pandemic, or the appearance
of new or more severe strains of the virus, which are highly uncertain and unpredictable. Therefore, while we expect the COVID-19 pandemic
to continue negatively impacting our business, results of operations, and financial position, the related financial impact cannot be reasonably
estimated at this time.
During the time the stores were closed, the operating
entities paid all their employees base salaries in order to satisfy their basic living expenditure needs. After the reopening, the operating
entities have taken various preventative and quarantine measures across their stores, including conducting regular nucleic acid tests
in accordance with the government requirement, monitoring their employees’ health conditions daily, and distributing face masks
to all their employees. The operating entities also limit the customer flows in their stores and customers who visit their stores are
required to measure temperature and wear masks. In the U.S., Chanson 23rd Street kept its store in New York City open and provided takeout
and delivery services. To fulfill its social responsibility, Chanson 23rd Street has offered special discounts on its products to all
hospital workers and free pastries to all frontline workers, drivers, and delivery people as a gesture to show its appreciation for what
they contributed to the society during the pandemic.
The operating entities have taken actions to preserve
their liquidity during the COVID-19 pandemic. On May 7, 2020, Xinjiang United Family entered into a loan agreement with Huaxia Bank, which
provided it funding of RMB15 million (approximately $2.3 million) through May 2021 with a favorable fixed interest rate of 4.98%. On May
31, 2021, Xinjiang United Family entered into a new loan agreement with Huaxia Bank to borrow RMB10 million (approximately $1.6 million)
as working capital for one year, with a maturity date of May 31, 2022. The loan bore a fixed interest rate of 5.54%. On March 12, 2021,
Xinjiang United Family borrowed RMB2.3 million (approximately $0.4 million) from China Construction Bank, with a maturity date on September
22, 2021. The loan bore a fixed interest rate of 4.2525%. All these above-mentioned loans were repaid in full upon maturity. On December
23, 2022, Xinjiang United Family entered into a new loan agreement with Huaxia Bank to borrow RMB3 million (approximately $0.4 million)
as working capital for a year, with a maturity date of December 23, 2023. The loan bore a fixed interest rate of 3.95%. On April 29, 2020
and February 11, 2021, our subsidiary Chanson 23rd Street received funding for loans totaling $209,291 and $293,007 from Cathay Bank under
the U.S. Small Business Administration (the “SBA”) Paycheck Protection Program (“PPP”), respectively, which is
part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020. Chanson 23rd
Street filed applications for forgiveness of the loans’ principal and interests, and the applications were approved by the bank
and the SBA in May 2021 and November 2021, respectively. On May 24, 2021, Chanson 23rd Street received funding of $531,992 under the SBA
Restaurant Revitalization Fund program.
In addition, we have increased efforts to collect our accounts receivable.
As of the date of this annual report, approximately 42.6%, or $0.6 million, of our accounts receivable balance as of December 31, 2022
has been collected. The remaining balance is expected to be collected before December 31, 2023. As of December 31, 2022, we had a negative
working capital of approximately $7.1 million, including deferred revenue of approximately $7.0 million, which was reported as current
liability, but will not require cash payment in the future.
B. Liquidity and Capital Resources
Cash Flows for the Years Ended December
31, 2022, 2021, and 2020
On April 3, 2023, we closed our IPO
of 3,390,000 Class A ordinary shares at a public offering price of $4.00 per Class A ordinary share for total gross proceeds
of $13.6 million before deducting underwriting discounts and other related expenses. Net
proceeds of our IPO were approximately $12.0 million. In addition, we have granted the underwriters a 45-day option to purchase
up to an additional 508,500 Class A ordinary shares at the public offering price after the closing of this IPO, less underwriting discounts.
Our Class A ordinary shares began trading on the Nasdaq Capital Market under the ticker
symbol “CHSN” on March 30, 2023.
As of December 31, 2022, we had $2,915,470 in cash and cash equivalents
as compared to $3,896,812 as of December 31, 2021. As of December 31, 2022, we also had $1,260,453 accounts receivable balance, approximately
42.6%, or $0.6 million, of which has been subsequently collected. The remaining balance is expected to be collected before December 31,
2023. The collection of such receivables made cash available for use in our operations as working capital, if necessary.
As of December 31, 2022, we had approximately
$0.4 million in a short-term bank loan.
On June 30, 2021, Xinjiang United Family entered
into a 10-year lease agreement for approximately 54,638 square feet of building space, where it constructed a new central factory, to
expand the production capacity. The investment budget for the new central factory is approximately RMB18.1 million (approximately $2.6
million) after VAT deduction. There are two stages for the construction. The first stage includes: 1) construction and renovation that
cost approximately RMB13.1 million (approximately $1.9 million); 2) installation of production equipment of approximately RMB1.4 million
(approximately $0.2 million); and 3) miscellaneous projects of approximately RMB1.1 million (approximately $0.1 million). The first stage
of the construction was completed in June 2022, and passed inspection in July 2022, and the new central factory started the production
in early August 2022. The second stage includes the construction of two new production lines of approximately RMB2.5 million (approximately
$0.4 million), which is expected to start in the second half of fiscal year 2023 and complete by the end of 2023. As of December 31, 2022,
our contractual obligation under the central factory construction was approximately RMB4.1 million (approximately $0.6 million). As of
December 31, 2022, we had spent approximately RMB11.5 million (approximately $1.7 million), and from January 2023 to the date of this
annual report, the subsequent payment was RMB0.3 million (approximately $0.04 million), and the future minimum expenditure is estimated
to be RMB6.3 million (approximately $0.9 million). We plan to use cash flow from the operations of the PRC Stores to fund the future construction.
Our payment made and future payment schedule under the central factory construction project are as follows:
| |
Payment made in | | |
Future payment | | |
| |
| |
Fiscal year 2021 | | |
Fiscal year 2022 | | |
First quarter of fiscal year 2023 | | |
Remainder of fiscal year 2023 | | |
Fiscal year 2024 | | |
Total | |
Contracts signed in fiscal year 2021: | |
| | |
| | |
| | |
| | |
| | |
| |
Construction and renovation cost | |
$ | 719,305 | | |
$ | 465,105 | | |
$ | 40,992 | | |
$ | 483,743 | | |
$ | 50,229 | | |
$ | 1,759,374 | |
Other expenses related to construction | |
| 92,388 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 92,388 | |
Subtotal: | |
| 811,693 | | |
| 465,105 | | |
| 40,992 | | |
| 483,743 | | |
| 50,229 | | |
| 1,851,762 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Contracts signed in fiscal year 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Construction and renovation cost | |
| - | | |
| 122,299 | | |
| - | | |
| 14,745 | | |
| - | | |
| 137,044 | |
Other expenses related to construction | |
| - | | |
| 62,124 | | |
| - | | |
| - | | |
| - | | |
| 62,124 | |
Purchase of production equipment | |
| - | | |
| 204,004 | | |
| - | | |
| - | | |
| - | | |
| 204,004 | |
Subtotal: | |
| - | | |
| 388,427 | | |
| - | | |
| 14,745 | | |
| - | | |
| 403,172 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Contracts expected to be signed in fiscal year 2023: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Two production lines construction | |
| - | | |
| - | | |
| - | | |
| 362,466 | | |
| - | | |
| 362,466 | |
Subtotal: | |
| - | | |
| - | | |
| - | | |
| 362,466 | | |
| - | | |
| 362,466 | |
Total | |
$ | 811,693 | | |
$ | 853,532 | | |
$ | 40,992 | | |
$ | 860,954 | | |
$ | 50,229 | | |
$ | 2,617,400 | |
We planned to open two bakery stores in New York
City, Chanson 3rd Ave and Chanson Broadway, with a total budget of approximately $1.0 million in fiscal year 2023. Chanson 3rd Ave opened
a store in March 2023, and the renovation of Chanson Broadway was delayed and the store is expected to be open in May 2023. We plan to
support the remaining renovation using our cash on hand and cash flows from operations.
We also intend to open six additional new stores
in the U.S. by the end of the fiscal year 2023, and the expected expenses related to opening these stores are approximately $3.0 million.
We plan to use our cash on hand, cash flows
from operations, and the net proceeds we received
from the IPO to open the new stores in the U.S.
We opened one store in PRC in March 31, 2023,
and we currently plan to open another four bakery stores and renovate two existing stores in the PRC during fiscal year 2023, with a total
budget of approximately RMB2.7 million (approximately $0.4 million). We plan to use our cash on hand and cash flows from operations to
fund the new stores.
As of December 31, 2022, we had a negative working
capital of approximately $7.1 million, including deferred revenue of approximately $7.0 million, which was reported as current liability,
but will not require cash payment in the future. We expect to spend about $2.8 million when we produce and sell the products and realize
the deferred revenue. As of December 31, 2021, we had a negative working capital of approximately $5.6 million, including deferred revenue
of approximately $6.1 million, which was reported as current liability. We expect to spend about $2.4 million when we produce and sell
the products and realize the deferred revenue.
In assessing our liquidity, our management monitors and analyzes our
cash on hand, our ability to generate sufficient revenue sources in the future, and our operating and capital expenditure commitments.
As of December 31, 2022, we had cash and cash equivalents of approximately $2.9 million. The future capital expenditure on the central
factory construction is expected to be approximately $0.86 million and $0.05 million in the remainder of fiscal year 2023 and in fiscal
year 2024, respectively. We believe that we would be able to make additional borrowings from banks based on past experience and our good
credit history when necessary. Due to the impact from the 2022 Outbreak in Xinjiang as mentioned above, our revenue was negatively impacted
and decreased by 9.7% in fiscal year 2022 as compared to fiscal year 2021, and the Company also incurred a net loss of approximately $1.3
million in fiscal year 2022. However, all of the PRC stores resumed their normal business activities on December 10, 2022 and have fully
recovered from the 2022 Outbreak as of the date of this annual report. In addition, the Company will further implement initiatives to
control costs and improve its operating efficiency in fiscal year 2023. Therefore, revenue and net income are expected to increase significantly
in fiscal year 2023 as compared to fiscal year 2022. On April 3, 2023, we closed our IPO and the net proceeds of our IPO were approximately
$12.0 million. In addition, we have granted the underwriters a 45-day option to purchase up to an additional 508,500 Class A ordinary
shares at the public offering price after the closing of this IPO, less underwriting discounts. Furthermore, our controlling shareholder,
Mr. Gang Li, has made pledges to provide continuous financial support to our Company for at least 12 months from the issuance of our consolidated
financial statements as of and for the years ended December 31, 2022. We believe our cash and cash equivalents on hand, our operating
cash flows, the available bank facilities, the continuous support from our shareholder, and the proceeds we received from the IPO will
be sufficient to meet our working capital needs over the next 12 months.
Currently, our main operations are conducted in
China and a large portion of our revenue, expenses, cash and cash equivalents are denominated in RMB. Our holding company, however, may
need dividends and other distributions on equity from our PRC subsidiary and the VIEs to satisfy its liquidity requirements. Although
dividends may be freely remitted in or out of China in RMB or foreign currency according to the PRC regulations, our PRC subsidiary and
the VIEs are restricted in their ability to transfer a portion of their net assets, equivalent to their reserves and their share capital,
to the holding company in the form of loans, advances, or cash dividends. See “Risk Factors—Risks Relating to Doing Business
in the PRC—Our PRC subsidiary is 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.” As of December 31, 2022 and 2021, the total restricted net assets equivalent
amounted to $1,325,631 and $1,325,631, respectively.
The following table sets forth summary of our
cash flows for the periods indicated:
| |
For the Years Ended December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
Net cash provided by operating activities | |
$ | 551,348 | | |
$ | 1,778,246 | | |
$ | 1,245,677 | |
Net cash used in investing activities | |
| (860,034 | ) | |
| (2,030,921 | ) | |
| (574,333 | ) |
Net cash provided by (used in) financing activities | |
| 9,929 | | |
| (178,240 | ) | |
| (849,379 | ) |
Effect of exchange rate change on cash | |
| (682,585 | ) | |
| 206,659 | | |
| 413,812 | |
Net increase (decrease) in cash and cash equivalents, and restricted cash | |
| (981,342 | ) | |
| (224,256 | ) | |
| 235,777 | |
Cash and cash equivalents, and restricted cash at beginning of year | |
| 3,896,812 | | |
| 4,121,068 | | |
| 3,885,291 | |
Cash and cash equivalents, and restricted cash at end of year | |
$ | 2,915,470 | | |
$ | 3,896,812 | | |
$ | 4,121,068 | |
Operating Activities
Net cash provided by operating activities was
$551,348 for the year ended December 31, 2022, mainly derived from net loss of $1,288,205 for the year, and net changes in our operating
assets and liabilities, which mainly included an increase in deferred revenue of $1,411,004 due to the growing prepaid membership cards
sales during the year ended December 31, 2022. Accounts payable increased by $247,015 due to higher outstanding payments to our suppliers.
Net cash provided by operating activities was
$1,778,246 for the year ended December 31, 2021, mainly derived from net income of $506,769 for the year, and net changes in our operating
assets and liabilities, which mainly included an increase in deferred revenue of $1,252,776 due to the growing prepaid membership cards
sales during the year ended December 31, 2021.
Net cash provided by operating activities was
$1,245,677 for the year ended December 31, 2020, mainly derived from a net loss of $164,029 for the year, and net changes in our operating
assets and liabilities, which mainly included an increase in deferred revenue of $964,663, primarily due to increased membership cards
sales. Amounts loaded onto our membership cards are initially recorded at deferred revenue, and recognized as revenue upon redemption,
at which point, we also reduce the deferred revenue liability. Trade payable increased by $181,852 due to higher outstanding payments
to our suppliers.
Investing Activities
Net cash used in investing activities amounted
to $860,034 for the year ended December 31, 2022, due to purchases of property and equipment and leasehold improvement for the new stores,
and payment for construction in progress.
Net cash used in investing activities amounted
to $2,030,921 for the year ended December 31, 2021, due to purchases of property and equipment and leasehold improvement for the new stores,
and payment for construction in progress.
Net cash used in investing activities amounted
to $574,333 for the year ended December 31, 2020 due to purchases of property and equipment and leasehold improvement for the new stores.
Financing Activities
Net cash provided by financing activities was
$9,929 for the year ended December 31, 2022, which primarily consisted of repayments of short-term bank loans of $1,474,129 and was partially
offset by proceeds from short-term bank loans of $445,831 and funds provided by a shareholder of $1,076,717.
Net cash used in financing activities was $178,240
for the year ended December 31, 2021, which primarily consisted of repayments of short-term bank loans of $2,683,814 and was partially
offset by proceeds from short-term bank loans of $1,903,563 and funds provided by a shareholder of $572,712.
Net cash used in financing activities was $849,379
for the year ended December 31, 2020, which primarily consisted of repayments of short-term bank loans of $2,168,388 and repayment of
a shareholder loan of $791,036 and was partially offset by proceeds from short-term bank loans of $2,175,000.
Contractual Obligations
As of December 31, 2022, our contractual obligations
were as follows:
Contractual obligations | |
Total | | |
Less than 1 year | | |
1-2 years | | |
2-3 years | | |
3-4 years | | |
4-5 years | | |
Thereafter | |
Short-term bank loan (1) | |
$ | 434,959 | | |
$ | 434,959 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Future lease payments (2) | |
| 17,543,166 | | |
| 2,433,761 | | |
| 2,151,340 | | |
| 1,924,110 | | |
| 1,793,273 | | |
| 1,761,804 | | |
| 7,478,878 | |
Central factory construction (3) | |
| 589,709 | | |
| 539,480 | | |
| 50,229 | | |
| - | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 18,567,834 | | |
$ | 3,408,200 | | |
$ | 2,201,569 | | |
$ | 1,924,110 | | |
$ | 1,793,273 | | |
$ | 1,761,804 | | |
$ | 7,478,878 | |
(1) |
Repayment of a short-term bank loan: as of December
31, 2022, our contractual obligation to repay an outstanding short-term bank loan totaled $434,959 and related to the following bank loan:
On December 23, 2022, Xinjiang United Family entered
into a new loan agreement with Huaxia Bank to borrow RMB3 million ($434,959) as working capital for a year, with a maturity date of December
23, 2023. The loan bore a fixed interest rate of 3.95%. The loan is guaranteed by Ms. Baolin Wang, the legal representative of Xinjiang
United Family, and Urumqi Plastic Surgery Hospital Co., Ltd., a related party that is controlled by the Chairman of the
Company. |
(2) |
We lease office spaces, bakery stores facilities, and employee dormitories, which are classified as operating leases in accordance with ASC Topic 842. As of December 31, 2022, our future lease payments totaled $17,543,166. |
(3) |
Payment for central factory construction work: as of December 31, 2022, our contractual obligation to pay for central factory construction totaled $589,709, as discussed above in more details. |
Off-Balance Sheet Arrangements
As of December 31, 2022 and 2021, we had not entered
into any financial guarantees or other commitments to guarantee the payment obligations of any third parties.
C. Research and Development, Patents and Licenses, etc.
See “Item 4. Information on the Company—B.
Business Overview—R&D” and “Item 4. Information on the Company—B. Business Overview—Intellectual Property.”
D. Trend Information
Other than as disclosed elsewhere in this annual
report on Form 20-F, we are not aware of any trends, uncertainties, demands, commitments, or events for the period from January 1,
2022 to December 31, 2022 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity,
or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results
or financial condition.
E. Critical Accounting Estimates
Our discussion and analysis of our financial condition
and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance
with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and
revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose
the reported amounts of revenue and expenses incurred during the financial reporting period. The most significant estimates and assumptions
include the valuation of accounts receivable, advances to suppliers, useful lives of property and equipment, the recoverability of long-lived
assets, provision necessary for contingent liabilities, and revenue recognition. We continue to evaluate these estimates and assumptions
that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component
of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees
of judgment than others in their application. We believe critical accounting policies as disclosed in this annual report reflect the more
significant judgments and estimates used in preparation of our consolidated financial statements.
The following critical accounting policies rely
upon assumptions and estimates and were used in the preparation of our consolidated financial statements:
Uses of estimates
In preparing the consolidated financial statements
in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant
estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, the useful lives of
long-lived assets, which include property, plant, and equipment, the recoverability of long-lived assets, provision necessary for contingent
liabilities, and revenue recognition. Actual results could differ from those estimates.
Accounts receivable, net
Accounts receivable are recognized and carried
at original invoiced amount less an estimated allowance for uncollectible accounts.
We determine the adequacy of reserves for doubtful
accounts based on individual account analysis and historical collection trend. We establish a provision for doubtful receivables when
there is objective evidence that we may not be able to collect amounts due. The allowance is based on management’s best estimate
of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against
accounts receivable balances, with a corresponding charge recorded in the consolidated statements of operations and comprehensive income
(loss). Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent
account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection
is not probable. As of December 31, 2022 and 2021, there was no allowance recorded as we consider all of the accounts receivable fully
collectible.
Inventories
Inventories consist of ingredient materials, finished
goods, packing materials and other materials. Inventories are stated at the lower of cost or net realizable value, on a weighted average
basis. Costs include the cost of ingredient materials, direct labor, and related production overhead. Any excess of the cost over the
net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories. Net realizable
value is the estimated selling price in the normal course of business less any costs to complete and sell products. We periodically evaluate
inventories for their net realizable value adjustments, and reduces the carrying value of those inventories that are obsolete or in excess
of the forecasted usage to their estimated net realizable value based on various factors including aging and expiration dates, as applicable,
taking into consideration historical and expected future product sales. For the years ended December 31, 2022, 2021, and 2020, no inventory
reserve was recorded because no slow-moving, obsolete, or damaged inventory was identified.
Revenue recognition
We follow Accounting Standards Codification 606,
Revenue from Contracts with Customers (“ASC 606”), for revenue recognition. ASC 606 establishes principles for reporting
information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts to provide
goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services
to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services
recognized, as performance obligations are satisfied.
We currently generate our revenue through our
bakery/café stores as well as through online sales. We recognize revenue from bakery/café sales upon delivery of the related
food and other products to the customer and fulfillment of all performance obligations. Revenue is recognized net of any discounts, sales
incentives, sales taxes, and value added taxes that are collected from customers and remitted to tax authorities.
The PRC Stores sell membership cards that do not
have an expiration date and from which the PRC Stores do not deduct non-usage fees from outstanding card balances. Membership cards are
reloadable and redeemable at any of our store locations. Amounts loaded into these cards are initially recorded as deferred revenue. When
membership cards are redeemed at stores, the PRC Stores recognize revenue and reduce the deferred revenue. While the PRC Stores continue
to honor all membership cards presented for payments, management determines the likelihood of redemption to be remote for certain cards
with long periods of inactivity (“breakage”), which is five years after the last usage based upon our historical redemption
patterns. Membership card breakage is recorded as revenue in the consolidated statements of operations and comprehensive income (loss).
Membership card breakage was immaterial for the years ended December 31, 2022, 2021, and 2020.
The PRC Stores maintain a customer loyalty program
in which customers earn free cash vouchers when purchasing or reloading membership cards at certain amount. These cash vouchers typically
do not expire, except for certain vouchers given out at special occasions, which usually state an expiration date and can only be exchanged
for certain seasonal products or specialty cakes. We establish corresponding liabilities in deferred revenue for the membership cards
and the free cash vouchers upon issuance. We allocate the consideration received proportionately between the membership cards and cash
vouchers based on their face values. Revenue is recognized at the allocated amount upon redemption of membership cards and cash vouchers,
at which point the PRC Stores deliver products to customers and reduce the deferred revenue. Unredeemed cash vouchers will be recognized
as revenue upon their expiration dates, if any, or five years after their issuance if there are no stated expiration dates, when management
determines the likelihood of redemption to be remote.
Contract balances and remaining performance
obligations
Contract balances typically arise when a difference
in timing between the transfer of control to the customer and receipt of consideration occurs. We did not have contract assets as of December
31, 2022 and 2021. Our contract liabilities, which are reflected in its consolidated balance sheets as deferred revenue of $6,958,160
and $6,051,683 as of December 31, 2022 and 2021, respectively, consist primarily of customer payments for the membership cards and the
fair value of the cash vouchers under our customer loyalty programs. These amounts represent our unsatisfied performance obligations as
of the balance sheet dates. The amount of revenue recognized in the years ended December 31, 2022, 2021, and 2020 that was included in
the opening deferred revenue was $4,920,442, $4,823,134, and $2,936,748, respectively. As of December 31, 2022, the aggregate amount of
unredeemed membership cards and cash vouchers was $6,958,160. We will recognize revenue when customers redeem the membership cards or
cash vouchers in store purchases. Based on our historical experience, a significant portion of the redemption is expected to occur during
the first two years after December 31, 2022 and the remaining between the third and fifth year.
Income taxes
We account for current income taxes in accordance
with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases
of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
An uncertain tax position is recognized as a benefit
only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income
tax are classified as income tax expense in the period incurred. No penalties or interest relating to income taxes were incurred during
the years ended December 31, 2022, 2021, and 2020. We do not believe there was any uncertain tax provision at December 31, 2022 and 2021.
Our operating subsidiary in China is subject to
the income tax laws of the PRC. Our operating subsidiaries in United States are subject to the tax law of the United States. As of December
31, 2022, the tax years ended December 31, 2018 through December 31, 2022 for our PRC subsidiary remain open for statutory examination
by PRC tax authorities, and the tax years ended December 31, 2020 through December 31, 2022 for our United States subsidiaries remain
open for statutory examination by U.S. tax authorities.
Recent accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments—Credit Losses,” which will require the measurement of all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Further,
the FASB issued ASU No. 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2020-02 to provide additional guidance on the credit losses
standard. The new effective date for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition,
as well as private companies and not-for-profit entities is for annual and interim periods in fiscal years beginning after December 15,
2022. Adoption of the ASUs is on a modified retrospective basis. We adopted ASU 2016-13 on April 1, 2023, and the adoption of this ASU
did not have a material impact on our consolidated financial statements.
Except for the above-mentioned pronouncements,
there are no new recently issued accounting standards that will have material impact on our consolidated financial position, statements
of operations, and cash flows.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding
our directors and executive officers as of the date of this annual report. The business address of all of our directors and executive
officers is No. 26 Culture Road, Tianshan District, Urumqi, Xinjiang, China.
Name |
|
Age |
|
Position(s) |
Gang Li |
|
56 |
|
Chairman and Chief Executive Officer |
Jihong Cai |
|
52 |
|
Chief Financial Officer |
Yong Du |
|
50 |
|
Independent Director |
Zhiyuan Wang |
|
38 |
|
Independent Director |
Shouhua Nie |
|
42 |
|
Independent Director |
Yuchen Liu |
|
30 |
|
Independent Director |
The following is a brief biography of each of the executive officers
and directors listed above:
Mr. Gang Li has been our chief executive
officer since September 2022, our Chairman since September 2020, and our director since July 2019. Mr. Li served as the chief executive
officer of Xinjiang United Family from May 2016 to January 2018 and from August 2015 to January 2016. Mr. Li has been the chief executive
officer of Urumqi Plastic Surgery Hospital Co., Ltd. since July 2011 and the chief executive officer of Urumqi Marie Gynecological and
Obstetrical Hospital (Limited) since August 2009, responsible for the operations and investment of the companies. Mr. Li received his
bachelor’s degree in Chinese Literature from Xinjiang University in 1989.
Ms. Jihong Cai has been our chief financial
officer since September 2020. Ms. Cai has served as the chief financial officer of Xinjiang United Family since September 2018. Prior
to joining Xinjiang United Family, Ms. Cai served as the chief financial officer of Xinjiang Dongbao Group from June 2016 to August 2018,
as the chief financial officer of Xinjiang Fudiyuan Real Estate Development Co., Ltd. from June 2011 to May 2016, and as the chief financial
officer of Xinjiang Osman Biotechnology Co., Ltd. from July 2002 to January 2011. Ms. Cai is a Chinese Certified Tax Agent, accountant,
and financial planner. Ms. Cai received her bachelor’s degree in Accounting from Hubei University in 1991.
Mr. Yong Du has served as our independent
director since March 2023. Mr. Du has been an accounting professor, doctorial supervisor, and academic leader in the field of accounting
and the director of the New Economics and Management Research Institute at Guangdong University of Foreign Studies South China Business
College since September 2019. His research focuses in areas such as accounting and investor protection, budget management, capital market
accounting and finance, and capital market auditing. From July 2004 to August 2019, Mr. Du taught at Xinjiang University of Finance and
Economics and had been an accounting professor since December 2017, a doctorial supervisor since August 2018, and the academic leader
in the field of accounting since March 2019. From October 2013 to November 2015, Mr. Du served as a postdoctoral researcher of Peking
University. Mr. Du has served as an expert on the Academic Committee of Silk Road Economics and Management Research Institute at Xinjiang
University of Finance and Economics since March 2019, an expert on the Academic Committee of the Commerce Economy Association of China
since June 2017, a senior researcher of the Audit Research Institute of WUYIGE Certified Public Accountants LLP since July 2016, a part-time
researcher of Financial Analysis and Investment Research Center at Peking University, a researcher of Beijing State-Owned Asset Management
and Innovation Center, and a special researcher of Accounting and Investor Protection Research Center at Beijing Technology and Business
University since October 2013. Mr. Du received his doctoral degree in Accounting from Central University of Finance and Economics in 2011.
Mr. Zhiyuan Wang has served as our independent
director since March 2023. Mr. Wang founded Sheng De Han Hua (Beijing) Human Resource Limited Corporation, a human resource online service
firm, and has served as its chief executive officer and director since January 2020. Mr. Wang founded Beijing Unique Way Technology Limited
Corporation, a company providing customized travel planning, management, and advisory services, served as its chief executive officer
from January 2013 to December 2019, and has served as its director since January 2013. From July 2007 to October 2013, Mr. Wang served
as a manager at China Development Bank. Mr. Wang has served as a director of Beijing Mission Ding Dong Management Consulting Center (L.P.)
since January 2020. Mr. Wang received his bachelor’s degree in Communication Engineering from Beijing University of Posts and Telecommunications
in 2007.
Mr. Shouhua Nie has served as our independent
director since March 2023. Mr. Nie is a founding partner of Shenzhen Hanrong Investment Management Co., Ltd., an investment management
company, and has served as its chief executive officer since April 2019. Prior to founding Shenzhen Hanrong Investment Management Co.,
Ltd., Mr. Nie served as a portfolio manager and head of the Derivatives Department of Zhejiang Egret Asset Management Co., Ltd., a hedge
fund, from January 2018 to January 2019, and as a portfolio manager at the Quantitative Investment Group of First Seafront Fund Management
Co., Ltd., an investment management company. Mr. Nie also worked at BNP Paribas (OTCMKTS: BNPQY), a French international banking group,
serving as an interest rate trader from November 2013 to September 2015 and as a quantitative analyst from June 2010 to November 2013.
Mr. Nie received his bachelor’s degree in Physics from Fudan University in 2003, his Ph.D. in Physics from Florida State University
in 2008, and his master’s degree in Computational Finance from Carnegie Mellon University, Tepper School of Business, in 2009.
Mr. Yuchen Liu has served as our independent
director since March 2023. Mr. Liu has been an angel investor of Chenxin Technology Co., Ltd since April 2020, an angel investor of Beijing
Xuanyi Technology Limited Corporation since August 2018, the co-founder and chief operating officer of Beijing Dongyishengda Investment
Limited Corporation (Farrington International Pre-School) since June 2018, and an angel investor and partner of ICZOOM Electronic Components
Exchange since December 2017. Mr. Liu received his bachelor’s degree in Electrical Engineering from Beijing Technology and Business
University in 2015 and his Master in Science in Financial Management from Boston University in 2017.
Board Diversity
The table below provides certain information regarding
the diversity of our board of directors as of the date of this annual report.
Board Diversity Matrix |
Country of Principal Executive Offices: |
China |
Foreign Private Issuer |
Yes |
Disclosure Prohibited under Home Country Law |
No |
Total Number of Directors |
5 |
|
Female |
Male |
Non-
Binary |
Did Not
Disclose
Gender |
Part I: Gender Identity |
|
Directors |
0 |
5 |
0 |
0 |
Part II: Demographic Background |
|
Underrepresented Individual in Home Country Jurisdiction |
0 |
LGBTQ+ |
0 |
Did Not Disclose Demographic Background |
0 |
Family Relationships
None of our directors or executive officers has
a family relationship as defined in Item 401 of Regulation S-K.
Controlled Company
Mr. Gang Li, our chief executive officer, director,
and chairman, currently beneficially own approximately 90.21% of the aggregate voting power of our outstanding ordinary shares. As a result,
we are a “controlled company” within the meaning of the Nasdaq listing rules. As a controlled company, we are permitted to
elect to rely on certain exemptions from the obligations to comply with certain corporate governance requirements, including:
|
● |
the requirement that a majority of the board of directors consist of independent directors; |
|
|
|
|
● |
the requirement that our director nominees be selected or recommended solely by independent directors; and |
|
|
|
|
● |
the requirement that we have a nominating and corporate governance committee and a compensation committee that are composed entirely of independent directors with a written charter addressing the purposes and responsibilities of the committees. |
Although we do not intend to rely on the controlled
company exemptions under the Nasdaq listing rules even if we are a controlled company, we could elect to rely on these exemptions in the
future, and if so, you would not have the same protection afforded to shareholders of companies that are subject to all of the corporate
governance requirements of Nasdaq.
B. Compensation
For the year ended December 31, 2022, we paid
an aggregate of $206,693 as compensation to our executive officers and directors. None of our non-employee directors have any service
contracts with us that provide for benefits upon termination of employment. We have not set aside or accrued any amount to provide pension,
retirement, or other similar benefits to our directors and executive officers. Our PRC subsidiary and the VIEs are required by law to
make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment
insurance, and other statutory benefits and a housing provident fund.
C. Board Practices
Board of Directors
Our board of directors consists of five directors.
Our board of directors have determined that our four independent directors, Yong Du, Zhiyuan Wang, Shouhua Nie, and Yuchen Liu satisfy
the “independence” requirements of the Nasdaq corporate governance rules.
Duties of Directors
Under Cayman Islands law, all of our directors
owe three types of duties to us: (i) statutory duties, (ii) fiduciary duties, and (iii) common law duties. The Companies Act (2021 Revision)
of the Cayman Islands imposes a number of statutory duties on a director. A Cayman Islands director’s fiduciary duties are not codified,
however the courts of the Cayman Islands have held that a director owes the following fiduciary duties: (a) a duty to act in what the
director bona fide considers to be in the best interests of the company, (b) a duty to exercise their powers for the purposes they
were conferred, (c) a duty to avoid fettering his or her discretion in the future and (d) a duty to avoid conflicts of interest and of
duty. The common law duties owed by a director are those to act with skill, care and diligence that may reasonably be expected of a person
carrying out the same functions as are carried out by that director in relation to the company and, also, to act with the skill, care
and diligence in keeping with a standard of care commensurate with any particular skill they have which enables them to meet a higher
standard than a director without those skills. In fulfilling their duty of care to us, our directors must ensure compliance with our articles
of association, as amended and restated from time to time. We have the right to seek damages if a duty owed by any of our directors is
breached.
The functions and powers of our board of directors
include, among others:
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appointing officers and determining the term of office of the officers; |
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exercising the borrowing powers of the company and mortgaging the property of the company; and |
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maintaining or registering a register of mortgages, charges, or other encumbrances of the company. |
Terms of Directors and Executive Officers
Our officers are appointed by and serve at the
discretion of our board of directors and the shareholders voting by ordinary resolution. Our directors are not subject to a set term of
office and hold office until the next general meeting called for the election of directors and until their successor is duly appointed
or such time as they die, resign, or are removed from office by a shareholders’ ordinary resolution. The office of a director will
be vacated automatically if, among other things, the directors resign in writing, becomes bankrupt or makes any arrangement or composition
with his/her creditors generally, or is found to be or becomes of unsound mind.
Qualification
There is currently no shareholding qualification
for directors, although a shareholding qualification for directors may be fixed by our shareholders by ordinary resolution.
Employment Agreements
We have entered into employment agreements with
each of our executive officers. Pursuant to employment agreements, we agree to employ each of our executive officers for a specified time
period, which will be automatically renewed unless either party gives the other party a written notice to terminate the agreement six
months prior to the end of the current employment term. We may terminate the employment for cause, at any time, without notice or remuneration,
for certain acts of the executive officer, including but not limited to the commitments of any serious or persistent breach or non-observance
of the terms and conditions of the employment, conviction of a criminal offense, willful disobedience of a lawful and reasonable order,
fraud or dishonesty, receipt of bribery, or severe neglect of his or her duties. An executive officer may terminate his or her employment
at any time with a three-month prior written notice. Each executive officer agrees to hold, both during and after the employment agreement
expires, in strict confidence and not to use or disclose to any person, corporation or other entity without written consent, any confidential
information.
Insider Participation Concerning Executive
Compensation
Prior to March 2023, our Chairman, Mr. Gang Li,
was making all determinations regarding executive officer compensation. After our Compensation Committee was set up in March 2023, it
is making all determination regarding executive officer compensation (please see below).
Committees of the Board of Directors
We have established three committees under the
board of directors: an audit committee, a compensation committee, and a nominating and corporate governance committee. Each of the committees
is comprised of our independent directors. We have adopted a charter for each of the three committees. Each committee’s members
and functions are described below.
Audit Committee. Our audit committee consists
of our three independent directors, Yong Du, Shouhua Nie, and Zhiyuan Wang. Yong Du is the chairperson of our audit committee. We have
determined that each of our independent directors also satisfy the “independence” requirements of Rule 10A-3 under the Securities
Exchange Act. Our board also has determined that Yong Du qualifies as an audit committee financial expert within the meaning of the SEC
rules or possesses financial sophistication within the meaning of the Nasdaq listing rules. The audit committee oversees our accounting
and financial reporting processes and the audits of the financial statements of our Company. The audit committee is responsible for, among
other things:
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appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
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reviewing with the independent auditors any audit problems or difficulties and management’s response; |
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discussing the annual audited financial statements with management and the independent auditors; |
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reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures; |
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reviewing and approving all proposed related party transactions; |
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meeting separately and periodically with management and the independent auditors; and |
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monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
Compensation Committee. Our compensation
committee consists of our three independent directors, Yong Du, Shouhua Nie, and Zhiyuan Wang. Shouhua Nie is the chairperson of our compensation
committee. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of
compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting
during which his compensation is deliberated. The compensation committee is responsible for, among other things:
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reviewing and approving the total compensation package for our most senior executive officers; |
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approving and overseeing the total compensation package for our executives other than the most senior executive officers; |
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reviewing and recommending to the board with respect to the compensation of our directors; |
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reviewing periodically and approving any long-term incentive compensation or equity plans; |
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selecting compensation consultants, legal counsel or other advisors after taking into consideration all factors relevant to that person’s independence from management; and |
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reviewing programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. |
Nominating and Corporate Governance Committee.
Our nominating and corporate governance committee consists of our three independent directors, Yong Du, Shouhua Nie, and Zhiyuan Wang.
Zhiyuan Wang is the chairperson of our nominating and corporate governance committee. The nominating and corporate governance committee
assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board
and its committees. The nominating and corporate governance committee is responsible for, among other things:
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identifying and recommending nominees for election or re-election to our board of directors or for appointment to fill any vacancy; |
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reviewing annually with our board of directors its current composition in light of the characteristics of independence, age, skills, experience and availability of service to us; |
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identifying and recommending to our board the directors to serve as members of committees; |
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advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any corrective action to be taken; and |
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monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
D. Employees
See “Item 4. Information on the Company—B.
Business Overview—Employees.”
E. Share Ownership
The following table sets forth information with
respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our Class A Ordinary Shares and Class
B Ordinary Shares as of the date of this annual report for:
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each of our directors and executive officers; and |
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each person known to us to own beneficially more than 5% of our Class A Ordinary Shares or Class B Ordinary Shares. |
Beneficial ownership includes voting or investment
power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named
in the table have sole voting and investment power with respect to all Class A Ordinary Shares or Class B Ordinary Shares shown as beneficially
owned by them. Percentage of beneficial ownership of each listed person is based on 6,450,000 Class A Ordinary Shares and 5,940,000 Class
B Ordinary Shares outstanding as of the date of this annual report.
Information with respect to beneficial ownership
has been furnished by each director, officer, or beneficial owner of 5% or more of our Class A Ordinary Shares or Class B Ordinary Shares.
Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment
power with respect to securities. In computing the number of Class A Ordinary Shares beneficially owned by a person listed below and the
percentage ownership of such person, Class A Ordinary Shares underlying options, warrants, or convertible securities, including Class
B Ordinary Shares, held by each such person that are exercisable or convertible within 60 days of the date of this annual report are deemed
outstanding, but are not deemed outstanding for computing the percentage ownership of any other person.
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Class A Ordinary Shares Beneficially Owned | | |
Class B Ordinary Shares Beneficially Owned | | |
Voting Power* | |
| |
Number | | |
% | | |
Number | | |
% | | |
% | |
Directors and Executive Officers(1): | |
| | |
| | |
| | |
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Gang Li(2) | |
| 2,700,000 | | |
| 41.86 | % | |
| 5,670,000 | | |
| 95.45 | % | |
| 90.21 | % |
Jihong Cai(3) | |
| — | | |
| — | | |
| 270,000 | | |
| 4.55 | % | |
| 4.10 | % |
Yong Du | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Zhiyuan Wang | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Shouhau Nie | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Yuchen Liu | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
All directors and executive officers as a group (six individuals): | |
| 2,700,000 | | |
| 41.86 | % | |
| 5,940,000 | | |
| 100 | % | |
| 94.31 | % |
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| | | |
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5% Shareholders: | |
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Danton Global Limited(2) | |
| 2,700,000 | | |
| 41.86 | % | |
| 5,670,000 | | |
| 95.45 | % | |
| 90.21 | % |
Yvan Global Limited(4) | |
| 180,000 | | |
| 2.79 | % | |
| — | | |
| — | | |
| 0.27 | % |
Yetta Global Limited(5) | |
| 180,700 | | |
| 2.79 | % | |
| — | | |
| — | | |
| 0.27 | % |
* |
Represents the voting power with respect to all
of our Class A Ordinary Shares and Class B Ordinary Shares, voting as a single class. Each holder of Class A Ordinary Shares is entitled
to one vote per one Class A Ordinary Share and each holder of Class B Ordinary Shares is entitled to 10 votes per one Class B Ordinary
Share.
The Class B Ordinary Shares are convertible into
Class A Ordinary Shares at any time after issuance at the option of the holder on a one-to-one basis. The number and percentage of Class
A Ordinary Shares exclude Class A Ordinary Shares convertible from Class B Ordinary Shares as the beneficial ownership of Class B Ordinary
Shares is presented separately. |
(1) |
Unless otherwise indicated, the business address of each of the individuals is No. 26 Culture Road, Tianshan District, Urumqi, Xinjiang, China. |
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(2) |
Represents 2,700,000 Class A Ordinary Shares and 5,670,000 Class B Ordinary Shares held by Danton Global Limited, a British Virgin Islands company, which is 100% owned by Mr. Gang Li. The registered address of Danton Global Limited is 3rd Floor, J & C Building, Road Town, Tortola, British Virgin Islands, VG1110. |
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(3) |
Represents 270,000 Class B Ordinary Shares held by Haily Global Limited, a British Virgin Islands company, which is 100% owned by Ms. Jihong Cai. The registered address of Haily Global Limited is 3rd Floor, J & C Building, Road Town, Tortola, British Virgin Islands, VG1110. |
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(4) |
Represents 180,000 Class A Ordinary Shares held by Yvan Global Limited, a British Virgin Islands company, which is 100% owned by Ms. Xinxia Hu. The registered address of Yvan Global Limited is 3rd Floor, J & C Building, Road Town, Tortola, British Virgin Islands, VG1110. |
(5) |
Represents 180,000 Class A Ordinary Shares held by Yetta Global Limited, a British Virgin Islands company, which is 100% owned by Ms. Hui Wang. The registered address of Yetta Global Limited is 3rd Floor, J & C Building, Road Town, Tortola, British Virgin Islands, VG1110. |
As of the date of this annual report, approximately
94.42% of our issued and outstanding Class A Ordinary Shares are held in the United States by two record holders, Mr. Gang Li and Cede
and Company, and 95.45% of our issued and outstanding Class B Ordinary Shares are held by one record holder, Mr. Gang Li, in the United
States.
We are not aware of any arrangement that may,
at a subsequent date, result in a change of control of our Company.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
See “Item 6. Directors, Senior Management
and Employees—E. Share Ownership.”
B. Related Party Transactions
The VIE Agreements
See “Item 3. Key Information—Our Corporate
Structure—The United Family Group.”
Material Transactions with Related Parties
The relationship and the nature of related party
transactions are summarized as follow:
Name of Related Party |
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Relationship to Us |
Gang Li |
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Our chief executive officer, director, and chairman of the board of directors |
Urumqi Plastic Surgery Hospital Co., Ltd. |
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Controlled by Mr. Gang Li |
Rongdi Zhang |
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Our former chief financial officer |
Premises Use Agreement
Pursuant to a Premises Use Agreement dated April
30, 2020 and a Supplemental Agreement dated June 18, 2020, Urumqi Plastic Surgery Hospital Co., Ltd., a PRC company controlled by our
Chairman, Mr. Gang Li, provided approximately 5,382 square feet office space for our headquarters and 10,763 square feet for the old central
factory of the PRC Stores without charge. The term of the agreement is from January 1, 2020 to June 25, 2028, unless otherwise terminated
by either party.
Due to a Related Party
As of December 31, 2022, due to a related party
of $1,798,605 primarily represented advances provided by our Chairman, Mr. Gang Li, to fund our operations. These payables were unsecured,
non-interest bearing, and due on demand. All expenses and liabilities were paid by Mr. Gang Li on behalf of our Company, and recorded
in our unaudited condensed consolidated financial statements in a timely manner. The outstanding amount is expected to be repaid before
June 30, 2023.
Guarantees by Related Parties
Our Chairman, Mr. Gang Li, together with his wife,
Ms. Ying Xiong, and the legal representative of Xinjiang United Family, Ms. Baolin Wang, provided guarantees in connection with Xinjiang
United Family’s loans borrowed from Huaxia Bank in 2022. See “Note 9—Short-term Bank Loans” of our consolidated
financial statements.
C. Interests of Experts and Counsel
Not applicable.
Item 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial
Information
We have appended consolidated financial statements
filed as part of this annual report. See “Item 18. Financial Statements.”
Legal and Administrative Proceedings
From time to time, we may become a party to various
legal or administrative proceedings arising in the ordinary course of our business, including actions with respect to intellectual property
infringement, violation of third-party licenses or other rights, breach of contract, and labor and employment claims. We are currently
not a party to, and we are not aware of any threat of, any legal or administrative proceedings that, in the opinion of our management,
are likely to have any material and adverse effect on our business, financial condition, cash flow, or results of operations.
Dividend Policy
See “Item 3. Key Information—Asset Transfers Between Our
Company, Our Subsidiaries, and the VIEs” and “Item 3. Key Information—Dividends or Distributions Made to our Company
and U.S. Investors and Tax Consequences.”
B. Significant Changes
Except as disclosed elsewhere in this annual report,
we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual
report.
Item 9. THE OFFER AND LISTING
A. Offer and Listing Details.
Our Class A Ordinary Shares have been listed on
the Nasdaq Capital Market since March 30, 2023 under the symbol “CHSN.”
B. Plan of Distribution
Not applicable.
C. Markets
Our Class A Ordinary Shares have been listed on
the Nasdaq Capital Market since March 30, 2023 under the symbol “CHSN.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this annual report
the description of our amended and restated memorandum and articles of association, Exhibit 3.1, and the description of differences in
corporate laws contained in our registration statement on Form F-1 (File No. 333-254909), as amended, initially filed with the SEC
on March 31, 2021.
C. Material Contracts
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere
in this annual report.
D. Exchange Controls
See “Item 4. Information on the Company—B.
Business Overview—Regulations—Regulations on Foreign Exchange.”
E. Taxation
People’s Republic of China Enterprise
Taxation
The following brief description of Chinese enterprise
income taxation is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends, if
any, we are ultimately able to pay to our shareholders. See “Item 8. Financial Information—A. Consolidated Statements and
Other Financial Information—Dividend Policy.”
According to the EIT Law, which was promulgated
by the SCNPC on March 16, 2007, became effective on January 1, 2008, amended on February 24, 2017, and most recently amended on December
29, 2018, and the Implementation Rules of the EIT Law, which were promulgated by the State Council on December 6, 2007, and became
effective on January 1, 2008, enterprises are divided into resident enterprises and non-resident enterprises. Resident enterprises pay
enterprise income tax on their incomes obtained in and outside the PRC at the rate of 25%. Non-resident enterprises setting up institutions
in the PRC pay enterprise income tax on the incomes obtained by such institutions in and outside the PRC at the rate of 25%. Non-resident
enterprises with no institutions in the PRC, and non-resident enterprises with income having no substantial connection with their institutions
in the PRC, pay enterprise income tax on their income obtained in the PRC at a reduced rate of 10%.
We are a holding company incorporated in the Cayman
Islands and we gain substantial income by way of dividends paid to us from our PRC subsidiary. The EIT Law and its implementation rules
provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its equity holders that are non-resident
enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor’s jurisdiction of
incorporation has a tax treaty with China that provides for a preferential tax rate or a tax exemption.
Under the EIT Law, an enterprise established outside
of China with a “de facto management body” within China is considered a “resident enterprise,” which means that
it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the
EIT Law define “de facto management body” as a managing body that in practice exercises “substantial and overall management
and control over the production and operations, personnel, accounting, and properties” of the enterprise, the only official guidance
for this definition currently available is set forth in SAT Notice 82, which provides guidance on the determination of the tax residence
status of a PRC-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign
country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although Chanson International
does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a PRC-controlled offshore
incorporated enterprise within the meaning of SAT Notice 82, in the absence of guidance specifically applicable to us, we have applied
the guidance set forth in SAT Notice 82 to evaluate the tax residence status of Chanson International and its subsidiaries organized outside
the PRC.
According to SAT Notice 82, a PRC-controlled offshore
incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and
will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (i) the places where
senior management and senior management departments that are responsible for daily production, operation and management of the enterprise
perform their duties are mainly located within the territory of China; (ii) financial decisions (such as money borrowing, lending, financing
and financial risk management) and personnel decisions (such as appointment, dismissal and salary and wages) are decided or need to be
decided by organizations or persons located within the territory of China; (iii) main property, accounting books, corporate seal, the
board of directors and files of the minutes of shareholders’ meetings of the enterprise are located or preserved within the territory
of China; and (iv) one half (or more) of the directors or senior management staff having the right to vote habitually reside within the
territory of China.
We believe that we do not meet some of the conditions
outlined in the immediately preceding paragraph. For example, as a holding company, the key assets and records of Chanson International,
including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are
located and maintained outside the PRC. For the same reasons, we believe our other entities outside China are not PRC resident enterprises
either. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed
a PRC “resident enterprise” by the PRC tax authorities. Accordingly, we believe that Chanson International and its offshore
subsidiaries should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management
body” as set forth in SAT Notice 82 were deemed applicable to us. However, the tax resident 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” as applicable to our offshore entities, we will continue to monitor our tax status.
The implementation rules of the EIT Law provide
that, (i) if an enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from transferring equity interests
of enterprises domiciled in the PRC, then such dividends or gains are treated as PRC-sourced income. It is not clear how “domicile”
may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore,
if we are considered as a PRC tax resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are
non-resident enterprises as well as gains realized by such shareholders from the transfer of our shares may be regarded as PRC-sourced
income and as a result become subject to PRC withholding tax at a rate of up to 10%. Dentons, our PRC counsel, is unable to provide a
“will” opinion because it believes that it is more likely than not that we and our offshore subsidiaries would be treated
as non-resident enterprises for PRC tax purposes because we do not meet some of the conditions outlined in SAT Notice 82. In addition,
Dentons is not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed a PRC “resident
enterprise” by the PRC tax authorities as of the date of this annual report. Therefore, Dentons believes that it is possible but
highly unlikely that income received by our overseas shareholders will be regarded as PRC-sourced income.
See “Item 3. Key Information—D. Risk
Factors—Risks Relating to Doing Business in the PRC—Under the EIT Law, we may be classified as a PRC ‘resident enterprise’
for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC
shareholders and have a material adverse effect on our results of operations and the value of your investment.”
If the PRC tax authorities determine that Chanson
International is a PRC resident enterprise for enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we will be subject to the uniform 25% enterprise income tax on our world-wide income. In addition, we will also be subject to PRC
enterprise income tax reporting obligations. Finally, 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 a 10% PRC tax on gains
realized on the sale or other disposition of Class A Ordinary Shares or Class B Ordinary Shares, if such income is treated as sourced
from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on dividends or gains obtained
by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to
such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty.
It is also unclear whether non-PRC shareholders of Chanson International would be able to claim the benefits of any tax treaties between
their country of tax residence and the PRC in the event that Chanson International is treated as a PRC resident enterprise.
Hong Kong Taxation
Entities incorporated in Hong Kong are subject
to profits tax in Hong Kong at the rate of 16.5%.
British Virgin Islands Taxation
The British Virgin Islands currently levies no
taxes on individuals or corporations based upon profits, income, gains, or appreciation and there is no taxation in the nature of inheritance
tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the British Virgin Islands except
for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the British
Virgin Islands. No stamp duty is payable in the British Virgin Islands on the issue of shares by, or any transfers of shares of, British
Virgin Islands companies (except those which hold interests in land in the British Virgin Islands). The British Virgin Islands is not
party to any double tax treaties that are applicable to any payments made to or by us. There are no exchange control regulations or currency
restrictions in the British Virgin Islands.
Payments of dividends and capital in respect of
our Class A Ordinary Shares or Class B Ordinary Shares will not be subject to taxation in the British Virgin Islands and no withholding
will be required on the payment of a dividend or capital to any holder of our Class A Ordinary Shares or Class B Ordinary Shares, as the
case may be, nor will gains derived from the disposal of our Class A Ordinary Shares or Class B Ordinary Shares be subject to British
Virgin Islands income or corporation tax.
Cayman Islands Taxation
The following is a discussion on certain Cayman
Islands income tax consequences of an investment in the Class A Ordinary Shares or Class B Ordinary Shares. The discussion is a general
summary of the present law, which is subject to prospective and retroactive changes. It is not intended as tax advice, does not consider
any investor’s particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
The Cayman Islands currently levies no taxes on
individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax
or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties
which may be applicable on instruments executed in, or, after execution, brought within the jurisdiction of the Cayman Islands. No stamp
duty is payable in the Cayman Islands on the issue of shares by, or any transfers of shares of, Cayman Islands companies (except those
which hold interests in land in the Cayman Islands). There are no exchange control regulations or currency restrictions in the Cayman
Islands.
Payments of dividends and capital in respect of
our Class A Ordinary Shares or Class B Ordinary Shares will not be subject to taxation in the Cayman Islands and no withholding will be
required on the payment of a dividend or capital to any holder of our Class A Ordinary Shares or Class B Ordinary Shares, as the case
may be, nor will gains derived from the disposal of our Class A Ordinary Shares or Class B Ordinary Shares be subject to Cayman Islands
income or corporation tax.
United States Federal Income Taxation
The following does not address the tax consequences
to any particular investor or to persons in special tax situations such as:
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banks; |
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financial institutions; |
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insurance companies; |
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regulated investment companies; |
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real estate investment trusts; |
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broker-dealers; |
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persons that elect to mark their securities to market; |
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U.S. expatriates or former long-term residents of the U.S.; |
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governments or agencies or instrumentalities thereof; |
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tax-exempt entities; |
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persons liable for alternative minimum tax; |
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persons holding our Class A Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction; |
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persons that actually or constructively own 10% or more of our voting power or value (including by reason of owning our Class A Ordinary Shares); |
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persons who acquired our Class A Ordinary Shares pursuant to the exercise of any employee share option or otherwise as compensation; |
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persons holding our Class A Ordinary Shares through partnerships or other pass-through entities; |
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beneficiaries of a Trust holding our Class A Ordinary Shares; or |
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persons holding our Class A Ordinary Shares through a trust. |
The discussion set forth below is addressed only
to U.S. Holders that purchase Class A Ordinary Shares. Prospective purchasers are urged to consult their own tax advisors about the application
of the U.S. federal income tax rules to their particular circumstances as well as the state, local, foreign, and other tax consequences
to them of the purchase, ownership, and disposition of our Class A Ordinary Shares.
Material Tax Consequences Applicable to
U.S. Holders of Our Class A Ordinary Shares
The following sets forth the material U.S. federal
income tax consequences related to the ownership and disposition of our Class A Ordinary Shares. It is directed to U.S. Holders (as defined
below) of our Class A Ordinary Shares and is based upon laws and relevant interpretations thereof in effect as of the date of this annual
report, all of which are subject to change. This description does not deal with all possible tax consequences relating to ownership and
disposition of our Class A Ordinary Shares or U.S. tax laws, other than the U.S. federal income tax laws, such as the tax consequences
under non-U.S. tax laws, state, local, and other tax laws.
The following brief description applies only to
U.S. Holders that hold Class A Ordinary Shares as capital assets and that have the U.S. dollar as their functional currency. This brief
description is based on the federal income tax laws of the United States in effect as of the date of this annual report and on U.S. Treasury
regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations
thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively
and could affect the tax consequences described below.
The brief description below of the U.S. federal
income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of Class A Ordinary Shares and you
are, for U.S. federal income tax purposes,
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an individual who is a citizen or resident of the United States; |
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia; |
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an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
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a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
If a partnership (or other entities treated as
a partnership for United States federal income tax purposes) is a beneficial owner of our Class A Ordinary Shares, the tax treatment of
a partner in the partnership will depend upon the status of the partner and the activities of the partnership. Partnerships and partners
of a partnership holding our Class A Ordinary Shares are urged to consult their tax advisors regarding an investment in our Class A Ordinary
Shares.
An individual is considered a resident of the
U.S. for federal income tax purposes if he or she meets either the “Green Card Test” or the “Substantial Presence Test”
described as follows:
The Green Card Test: You are a lawful permanent
resident of the United States, at any time, if you have been given the privilege, according to the immigration laws of the United States,
of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services
issued you an alien registration card, Form I-551, also known as a “green card.”
The Substantial Presence Test: If an alien is
present in the United States on at least 31 days of the current calendar year, he or she will (absent an applicable exception) be classified
as a resident alien if the sum of the following equals 183 days or more (See §7701(b)(3)(A) of the Internal Revenue Code and
related Treasury Regulations):
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The actual days in the United States in the current year; plus |
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One-third of his or her days in the United States in the immediately preceding year; plus |
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One-sixth of his or her days in the United States in the second preceding year. |
Taxation of Dividends and Other Distributions
on Our Class A Ordinary Shares
Subject to the PFIC rules discussed below, the
gross amount of distributions made by us to you with respect to the Class A Ordinary Shares (including the amount of any taxes withheld
therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent
that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles).
With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received deduction allowed to corporations
in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including
individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that
(1) the Class A Ordinary Shares are readily tradable on an established securities market in the United States, or we are eligible for
the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2)
we are not a PFIC for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period
requirements are met. Because there is no income tax treaty between the United States and the Cayman Islands, clause (1) above can be
satisfied only if the Class A Ordinary Shares are readily tradable on an established securities market in the United States. Under U.S.
Internal Revenue Service authority, Class A Ordinary Shares are considered for purpose of clause (1) above to be readily tradable on an
established securities market in the United States if they are listed on certain exchanges, which presently include the NYSE and the Nasdaq
Stock Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect
to our Class A Ordinary Shares, including the effects of any change in law after the date of this annual report.
Dividends will constitute foreign source income
for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of
the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the
dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign
taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed
by us with respect to our Class A Ordinary Shares will constitute “passive category income” but could, in the case of certain
U.S. Holders, constitute “general category income.”
To the extent that the amount of the distribution
exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated
first as a tax-free return of your tax basis in your Class A Ordinary Shares, and to the extent the amount of the distribution exceeds
your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income
tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would
otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Class A Ordinary
Shares
Subject to the PFIC rules discussed below, you
will recognize taxable gain or loss on any sale, exchange, or other taxable disposition of a share equal to the difference between the
amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the Class A Ordinary Shares. The gain or loss
will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the Class A Ordinary
Shares for more than one year, you will generally be eligible for reduced tax rates. The deductibility of capital losses is subject to
limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax
credit limitation purposes which will generally limit the availability of foreign tax credits.
PFIC
A non-U.S. corporation is considered a PFIC, as
defined in Section 1297(a) of the US Internal Revenue Code, for any taxable year if either:
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at least 75% of its gross income for such taxable year is passive income; or |
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at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”). |
Passive income generally includes dividends, interest,
rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition
of passive assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income
of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In determining the value and composition
of our assets for purposes of the PFIC asset test, (1) the cash we raise in our offerings will generally be considered to be held for
the production of passive income and (2) the value of our assets must be determined based on the market value of our Class A Ordinary
Shares from time to time, which could cause the value of our non-passive assets to be less than 50% of the value of all of our assets
on any particular quarterly testing date for purposes of the asset test.
Based on our operations and the composition of
our assets we do not expect to be treated as a PFIC under the current PFIC rules. We must make a separate determination each year as to
whether we are a PFIC, however, and there can be no assurance with respect to our status as a PFIC for our current taxable year or any
future taxable year. Depending on the amount of cash and any other assets held for the production of passive income, it is possible that,
for our current taxable year or for any subsequent taxable year, more than 50% of our assets may be assets held for the production of
passive income. We will make this determination following the end of any particular tax year. Although the law in this regard is unclear,
we are treating the UFG Entities as being owned by us for United States federal income tax purposes, not only because we control their
management decisions, but also because we are entitled to the economic benefits associated with the UFG Entities, and as a result, we
are treating the UFG Entities as our wholly-owned subsidiary for U.S. federal income tax purposes. If we are not treated as owning the
UFG Entities for United States federal income tax purposes, we would likely be treated as a PFIC. In addition, because the value of our
assets for purposes of the asset test will generally be determined based on the market price of our Class A Ordinary Shares and because
cash is generally considered to be an asset held for the production of passive income, our PFIC status will depend in large part on the
market price of our Class A Ordinary Shares and the amount of cash we raise in our offerings. Accordingly, fluctuations in the market
price of the Class A Ordinary Shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty
in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise
in our offerings. We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above,
the determination of the value of our assets will depend upon material facts (including the market price of our Class A Ordinary Shares
from time to time and the amount of cash we raise in our offerings) that may not be within our control. If we are a PFIC for any year
during which you hold Class A Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which you hold
Class A Ordinary Shares. If we cease to be a PFIC and you did not previously make a timely “mark-to-market” election as described
below, however, you may avoid some of the adverse effects of the PFIC regime by making a “purging election” (as described
below) with respect to the Class A Ordinary Shares.
If we are a PFIC for your taxable year(s) during
which you hold Class A Ordinary Shares, you will be subject to special tax rules with respect to any “excess distribution”
that you receive and any gain you realize from a sale or other disposition (including a pledge) of the Class A Ordinary Shares, unless
you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than
125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for
the Class A Ordinary Shares will be treated as an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the Class A Ordinary Shares; |
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the amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and |
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the amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years
prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and
gains (but not losses) realized on the sale of the Class A Ordinary Shares cannot be treated as capital, even if you hold the Class A
Ordinary Shares as capital assets.
A U.S. Holder of “marketable stock”
(as defined below) in a PFIC may make a mark-to-market election under Section 1296 of the US Internal Revenue Code for such stock to elect
out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to
hold) Class A Ordinary Shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal
to the excess, if any, of the fair market value of the Class A Ordinary Shares as of the close of such taxable year over your adjusted
basis in such Class A Ordinary Shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary
loss for the excess, if any, of the adjusted basis of the Class A Ordinary Shares over their fair market value as of the close of the
taxable year. Such ordinary loss, however, is allowable only to the extent of any net mark-to-market gains on the Class A Ordinary Shares
included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the
actual sale or other disposition of the Class A Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies
to any loss realized on the actual sale or disposition of the Class A Ordinary Shares, to the extent that the amount of such loss does
not exceed the net mark-to-market gains previously included for such Class A Ordinary Shares. Your basis in the Class A Ordinary Shares
will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to
distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate
for qualified dividend income discussed above under “—Taxation of Dividends and Other Distributions on our Class A Ordinary
Shares” generally would not apply.
The mark-to-market election is available only
for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each
calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations),
including the Nasdaq Capital Market. If the Class A Ordinary Shares are regularly traded on the Nasdaq Capital Market and if you are a
holder of Class A Ordinary Shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC
may make a “qualified electing fund” election under Section 1295(b) of the U.S. Internal Revenue Code with respect to such
PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect
to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings
and profits for the taxable year. The qualified electing fund election, however, is available only if such PFIC provides such U.S. Holder
with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently
intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold Class A Ordinary
Shares in any taxable year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 in each such year
and provide certain annual information regarding such Class A Ordinary Shares, including regarding distributions received on the Class
A Ordinary Shares and any gain realized on the disposition of the Class A Ordinary Shares.
If you do not make a timely “mark-to-market”
election (as described above), and if we were a PFIC at any time during the period you hold our Class A Ordinary Shares, then such Class
A Ordinary Shares will continue to be treated as stock of a PFIC with respect to you even if we cease to be a PFIC in a future year, unless
you make a “purging election” for the year we cease to be a PFIC. A “purging election” creates a deemed sale of
such Class A Ordinary Shares at their fair market value on the last day of the last year in which we are treated as a PFIC. The gain recognized
by the purging election will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described
above. As a result of the purging election, you will have a new basis (equal to the fair market value of the Class A Ordinary Shares on
the last day of the last year in which we are treated as a PFIC) and holding period (which new holding period will begin the day after
such last day) in your Class A Ordinary Shares for tax purposes.
IRC Section 1014(a) provides for a step-up in
basis to the fair market value for our Class A Ordinary Shares when inherited from a decedent that was previously a holder of our Class
A Ordinary Shares. However, if we are determined to be a PFIC and a decedent that was a U.S. Holder did not make either a timely qualified
electing fund election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) our Class A Ordinary
Shares, or a mark-to-market election and ownership of those Class A Ordinary Shares are inherited, a special provision in IRC Section
1291(e) provides that the new U.S. Holder’s basis should be reduced by an amount equal to the Section 1014 basis minus the decedent’s
adjusted basis just before death. As such if we are determined to be a PFIC at any time prior to a decedent’s passing, the PFIC
rules will cause any new U.S. Holder that inherits our Class A Ordinary Shares from a U.S. Holder to not get a step-up in basis under
Section 1014 and instead will receive a carryover basis in those Class A Ordinary Shares.
You are urged to consult your tax advisors regarding
the application of the PFIC rules to your investment in our Class A Ordinary Shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our Class A
Ordinary Shares and proceeds from the sale, exchange, or redemption of our Class A Ordinary Shares may be subject to information reporting
to the U.S. Internal Revenue Service and possible U.S. backup withholding under Section 3406 of the U.S. Internal Revenue Code with at
a current flat rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification
number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding.
U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service
Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup
withholding rules.
Backup withholding is not an additional tax. Amounts
withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service
and furnishing any required information. We do not intend to withhold taxes for individual shareholders. Transactions effected through
certain brokers or other intermediaries, however, may be subject to withholding taxes (including backup withholding), and such brokers
or intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives to Restore Employment
Act of 2010, certain U.S. Holders are required to report information relating to our Class A Ordinary Shares, subject to certain exceptions
(including an exception for Class A Ordinary Shares held in accounts maintained by certain financial institutions), by attaching a complete
Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they
hold Class A Ordinary Shares. Failure to report such information could result in substantial penalties. You should consult your own tax
advisor regarding your obligation to file a Form 8938.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the periodic reporting and other
informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the
SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year. The SEC maintains
a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants
that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules of the
Exchange Act prescribing, among other things, the furnishing and content of proxy statements to shareholders, and our executive officers,
directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16
of the Exchange Act.
I. Subsidiary Information
For a listing of our subsidiaries and the VIEs,
see “Item 3. Key Information—Our Corporate Structure—Corporate Structure.”
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Foreign Exchange Risk
Most of our business is conducted in the PRC,
and most of our books and records are maintained in RMB. The financial statements that we file with the SEC and provide to our shareholders
are presented in U.S. dollars. Changes in the exchange rates between the RMB and U.S. dollar affect the value of the PRC Stores’
assets and results of operations, when presented in U.S. dollars.
The value of the RMB against the U.S. dollar and
other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions and
perceived changes in the economy of the PRC and the United States. Any significant revaluation of the RMB may materially and adversely
affect our cash flows, revenue, and financial condition. Further, our Class A Ordinary Shares offered in the U.S. are offered in U.S.
dollars, and we need to convert the net proceeds we receive into RMB in order to use the funds for the PRC Stores’ business. Changes
in the conversion rate among the U.S. dollar and the RMB will affect the amount of proceeds we will have available for the PRC Stores’
business.
Very limited hedging options are available in
China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to
reduce our exposure to foreign currency exchange risk. While we may decide to enter into more hedging transactions in the future, the
availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition,
our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign
currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Credit Risk
Financial instruments that potentially subject
us to significant concentrations of credit risk consist primarily of cash. As of December 31, 2022 and 2021, $2,747,940 and $3,647,342
of our cash was on deposit at financial institutions in the PRC, where there currently is no rule or regulation requiring such financial
institutions to maintain insurance to cover bank deposits in the event of bank failure. As of December 31, 2022 and 2021, $115,452 and
$162,018 of our cash was on deposit at financial institutions in the U.S. which were insured by the Federal Deposit Insurance Corporation
subject to certain limitations. While management believes that these financial institutions are of high credit quality, it also continually
monitors their credit worthiness.
Accounts receivable are typically unsecured and
derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by our assessment of its customers’
creditworthiness and its ongoing monitoring of outstanding balances.
Interest Rate Risk
We have not used derivative financial instruments
to hedge interest risk. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate
being exposed to material risks due to changes in market interest rates. However, our future interest income may fall short of expectations
due to changes in market interest rates.
Inflation and Supply Chain Impacts
As of the date of this annual report, the PRC
Stores have not been materially impacted by inflation or supply chain disruptions as their raw material, electricity, and fuel prices
and labor costs remain stable and the PRC Stores have been regularly introducing new products and adjusting the prices for their existing
products.
Rising inflation, geopolitical conflicts, including
the recent war in Ukraine, and the related supply chain disruptions have had a direct or indirect impact on the business and operations
of the U.S. Stores.
The annual inflation rate in the U.S. has been
over 6% since January 2022 and was 6.5% in December 2022. Increases in the inflation rate of prices of commodities that are inputs to
the products and services of the U.S. Stores, such as agricultural and energy commodities, have led to higher raw material, fuel, freight,
warehousing, and labor costs and operating expenses. If the disposable income of the customers of the U.S. Stores does not increase at
a similar rate as inflation does, the U.S. Stores’ sales could suffer, which could materially and adversely affect their business
and financial condition and cause the U.S. Stores to have additional working capital needs. However, the U.S. Stores cannot predict whether
or how long the higher inflation rates will persist. See “Item 3. Key Information—D. Risk Factors—Risks Relating to
Our Business—The operating entities’ inability to source raw materials or other inputs of an acceptable type or quality could
adversely affect their results of operations.”
In addition, although the U.S. Stores do not have
any operations outside of the U.S. nor any business relationships, connections to, or assets in, Russia, Belarus, or Ukraine, their business,
financial condition, and results of operations have been, and could continue to be, indirectly and adversely affected by the ongoing military
conflict between Russia and Ukraine. Such impact arises from: (i) volatility in the global supply of wheat, corn, barley, sunflower oil,
and other agricultural commodities; (ii) higher food prices due to supply constraints and the general inflationary impact of the war;
(iii) increases in energy prices globally, in particular for electricity and fossil fuels, such as crude oil and natural gas, and related
transportation, freight, and warehousing costs; and (iv) disruptions to logistics and supply chains. See “Item 3. Key Information—D.
Risk Factors—Risks Relating to Our Business—The PRC Stores and the U.S. Stores are currently operating in a period of economic
uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military
conflict between Russia and Ukraine. Their business, financial condition, and results of operations may be materially and adversely affected
by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions.”
The impact of supply chains of the U.S. Stores
from rising inflation and geopolitical tensions primarily consists of (i) higher purchase prices and fuel, freight, and warehousing costs
for raw materials and other products, (ii) delays in the manufacturing, processing, and transportation of raw materials and other products;
and (iii) logistics and operational disruptions. Future interruptions or friction in the supply chains of the U.S. Stores, as well as
anticipation of interruptions or friction, may cause them to be unable to meet customer demand, retain extra inventory, and make operational
plans with less precision. Each of these impacts, if the U.S. Stores are affected more than their competitors, could materially and adversely
affect their business, adversely impact their prices and/or margins, and cause them to have additional working capital needs.
In 2022, to mitigate the increases in costs and
expenses described above, the U.S. Stores implemented more stringent and accurate inventory management and upgraded their menus to introduce
new products, such as the cocktail products, with higher prices and increase the prices of existing products. However, if the costs and
expenses described above continue to increase, there can be assurance that the U.S. Stores can continue to increase prices to maintain
their margins. Lower margins could adversely impact the profitability of the businesses of the U.S. Stores. If the amounts the U.S. Stores
charge their customers increase at a rate that is either unaffordable to their customers or insufficient to compensate for the rise in
their material costs and operational expenses, their business may be materially and adversely affected, their product margin may deteriorate,
and they may have additional working capital needs. We do not believe that such mitigation efforts have introduced any other new material
risks, including, but not limited to, those related to product quality or reliability or regulatory approval. See “Item 3. Key Information—D.
Risk Factors—Risks Relating to Our Business—The inability of the PRC Stores and the U.S. Stores to pass on price increases
for materials or other inputs to their customers could adversely affect our results of operations.” In order to mitigate the potential
adverse impact of price increases on their financial condition and results of operations, the U.S. Stores plan to continue to improve
their operating efficiency and further strengthen their bargaining power with their suppliers through the continued expansion of their
store network.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Not applicable.