20-F 1 ea0204406-20f_chanson.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2023

 

OR

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

 SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report

 

For the transition period from              to               

 

Commission file number: 001-41663

 

Chanson International Holding

(Exact name of Registrant as specified in its charter)

 

N/A

(Translation of Registrant’s name into English)

 

Cayman Islands

(Jurisdiction of incorporation or organization)

 

 No. 26 Culture Road, Tianshan District

Urumqi, Xinjiang, China

+86-0991-2302709

(Address of principal executive offices)

 

Jihong Cai, Chief Financial Officer

Telephone: + 86-0991-2302709

Email: jihong.cai@chansoninternational.com

At the address of the Company set forth above

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Class A Ordinary Shares   CHSN   The Nasdaq Stock Market LLC

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

(Title of Class)

 

 

 

 

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 6,485,319 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, 2023.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes  No 

 

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.

 

Yes  No 

 

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.

 

Yes  No 

 

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).

 

Yes  No 

 

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.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 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:

 

U.S. GAAP 

International Financial Reporting Standards as issued by the

International Accounting Standards Board 

Other 

 

*If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17   Item 18

 

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 

 

 

 

 

 

 

TABLE OF CONTENTS

 

INTRODUCTION   ii
     
FORWARD-LOOKING INFORMATION   iii
         
PART I   1
         
ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   1
         
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE   1
         
ITEM 3.   KEY INFORMATION   1
         
ITEM 4.   INFORMATION ON THE COMPANY   46
         
ITEM 4A.   UNRESOLVED STAFF COMMENTS   77
         
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS   77
         
ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   97
         
ITEM 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   103
         
ITEM 8.   FINANCIAL INFORMATION   104
         
ITEM 9.   THE OFFER AND LISTING   105
         
ITEM 10.   ADDITIONAL INFORMATION   105
         
ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   114
         
ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   116
     
PART II   117
         
ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   117
         
ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   117
         
ITEM 15.   CONTROLS AND PROCEDURES   117
         
ITEM 16.   [RESERVED]   118
         
ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT   118
         
ITEM 16B.   CODE OF ETHICS   118
         
ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES   119
         
ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   119
         
ITEM 16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   119
         
ITEM 16F.   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   119
         
ITEM 16G.   CORPORATE GOVERNANCE   120
         
ITEM 16H.   MINE SAFETY DISCLOSURE   120
         
ITEM 16I.   DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS   120
     
ITEM 16J.   INSIDER TRADING POLICIES   121
     
ITEM 16K.   CYBERSECURITY   121
     
PART III   122
         
ITEM 17.   FINANCIAL STATEMENTS   122
         
ITEM 18.   FINANCIAL STATEMENTS   122
         
ITEM 19.   EXHIBITS   122

 

i

 

 

INTRODUCTION

 

In this annual report on Form 20-F, unless the context otherwise requires, references to:

 

“Chanson 23rd Street” are to Chanson 23rd Street LLC, a New York limited liability company, which is wholly owned by Chanson NY (as defined below);

 

“Chanson 3rd Ave” are to Chanson 1293 3rd Ave LLC, a New York limited liability company, which is wholly owned by Chanson NY;

 

“Chanson Broadway” are to Chanson 2040 Broadway LLC, a New York limited liability company, which is wholly owned by Chanson NY;

 

“Chanson Greenwich” are to Chanson 355 Greenwich LLC, a New York limited liability company, which is wholly owned by Chanson NY;

 

“Chanson International,” “we,” “us,” “our Company,” or the “Company” are to Chanson International Holding, an exempted company with limited liability incorporated and registered under the laws of Cayman Islands;

 

“Chanson NY” are to George Chanson (NY) Corp., a New York corporation, which is wholly owned by Xinjiang United Family (as defined below);

 

“China” or the “PRC” are to the People’s Republic of China;

 

“Class A Ordinary Shares” are to Class A ordinary shares of Chanson International, par value $0.001 per share;

 

“Class B Ordinary Shares” are to Class B ordinary shares of Chanson International, par value $0.001 per share;

 

“Deen Global” are to our wholly owned subsidiary, Deen Global Limited, a British Virgin Islands company;

 

“Jenyd” are to Deen Global’s wholly owned subsidiary, Jenyd Holdings Limited, a Hong Kong corporation;

 

“ordinary shares” or “Ordinary Shares” are to Class A Ordinary Shares and Class B Ordinary Shares, collectively;

 

“the operating entities” are to Xinjiang United Family and its branch offices, the VIEs, and the U.S. Stores (as defined below);

 

the “PRC Stores” are to a bakery chain consisting of 37 stores operated by Xinjiang United Family and the VIEs under our “George ChansonTM” brand in Xinjiang;

 

the “U.S. Stores” are to Chanson 23rd Street, Chanson Broadway, Chanson 3rd Ave, and Chanson Greenwich (the Chanson Greenwich store has been permanently closed since October 31, 2023 and Chanson 355 Greenwich LLC is expected to be dissolved by July 31, 2024);

 

the “VIEs,” the “United Family Group,” or “UFG” are to 32 individually-owned businesses organized under the laws of the PRC, 30 of which are owned independently by our Chairman, Mr. Gang Li, and two of which are owned independently by Ms. Hui Wang, the Marketing Director of Xinjiang United Family;

 

“U.S. GAAP” are to generally accepted accounting principles in the United States;

 

“VIE” are to variable interest entity;

 

“Xinjiang” are to the Xinjiang Uygur Autonomous Region of the PRC; and

 

“Xinjiang United Family” or “our PRC subsidiary” are to Xinjiang United Family Trading Co., Ltd., a limited liability company organized under the laws of the PRC, which is wholly owned by Jenyd.

 

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 the U.S. Stores 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).

 

ii

 

 

FORWARD-LOOKING INFORMATION

 

This annual report contains forward-looking statements that reflect our current expectations and views of future events, all of which are subject to risks and uncertainties. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by the use of words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “will,” “would,” “should,” “could,” “may,” or other similar expressions in this annual report. These statements are likely to address our growth strategy, financial results, and product and development programs. You must carefully consider any such statements and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

assumptions about our future financial and operating results, including revenue, income, expenditures, cash balances, and other financial items;

 

our ability to execute our growth and expansion plan, including our ability to meet our goals;

 

current and future economic and political conditions;

 

our ability to compete in an industry with low barriers to entry;

 

our ability to continue to operate through the VIE structure;

 

our capital requirements and our ability to raise any additional financing which we may require;

 

our ability to attract customers and further enhance our brand awareness;

 

our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;

 

trends and competition in the bakery industry;

 

future developments of the COVID-19 pandemic; and

 

other assumptions described in this annual report underlying or relating to any forward-looking statements.

 

We describe certain material risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.” We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what is expressed, implied, or forecast by our forward-looking statements. Accordingly, you should be careful about relying on any forward-looking statements. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this annual report, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

iii

 

 

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 of the date of this annual report, as a holding company with no material operations of our own, we conduct our business through:

 

  (i) an association between Xinjiang United Family and the VIEs known as the “United Family Group” or “UFG”: 30 of the entities that comprise UFG (each a “UFG Entity” and, collectively, the “UFG Entities”) are owned independently by the chairman of our board of directors (“the Chairman”), Mr. Gang Li, and two of the entities are 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;
     
  (ii) Xinjiang United Family and its three branch offices; and
     
  (iii) Chanson 23rd Street, Chanson 3rd Ave, and Chanson Broadway. The Chanson Greenwich store has been permanently closed since October 31, 2023 and Chanson 355 Greenwich LLC is expected to be dissolved by July 31, 2024.

 

1

 

The following diagram illustrates our corporate structure as of the date of this annual report:

 

 

Note: 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 beneficially owned by Gang Li, the 100% owner of Danton Global Limited, as of the date of this annual report.

 

(2)Represents 270,000 Class A Ordinary Shares beneficially owned by Jihong Cai, the 100% owner of Haily Global Limited, 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.

 

    Legal Name of Entity   Commercial Name   Nature of Entity
1   Urumqi Midong District George Chanson Bakery   Midong   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
             
2   Shayibake District Yining Rd. George Chanson Bakery   Dehui Wanda   Same as above
             
3   Changji George Chanson Bakery   Changji Huijia   Same as above
             
4   Tianshan District Xinhua North Rd. George Chanson Bakery   Hongshan   Same as above
             
5   Tianshan District Xinmin Rd. George Chanson Bakery   Beimen   Same as above

 

2

 

6   Tianshan District Minzhu Rd. George Chanson Bakery   Minzhu   Same as above
             
7   Tianshan District Jianquan No.3 Rd. George Chanson Bakery   Riyue Xingguang   Same as above
             
8   Tianshan District Jiefang North Rd. George Chanson Bakery   Wanyancheng   Same as above
             
9   Urumqi Economics and Technology Development District George Chanson Bakery on Kashi West Rd.   Huarun Wanjia   Same as above
             
10   Xinshi District Changchun South Rd. George Chanson Bakery   Changchun   Same as above
             
11   Xinshi District Beijing Middle Rd. United Family Chanson Bakery   Huijia Third Floor   Same as above
             
12   Xinshi District Suzhou East Rd. Chanson Bakery   Baishang   Same as above
             
13   Xinshi District South No.3 Rd. Chanson Bakery   Railway Bureau   Same as above
             
14   Urumqi Economics and Technology Development District George Chanson Bakery on Xuanwuhu Rd.   Economics Development Wanda   Same as above
             
15   Shayibake District Youhao South Rd. Chanson Bakery   Hongshan Lifestyle Store   Same as above
             
16   Shuimogou District South Nanhu Rd. George Chanson Bakery   Nanhu   Same as above
             
17   Xinshi District Hebei East Rd. George Chanson Bakery   Hebei Road Huarun   Same as above
             
18   Urumqi Toutunhe District George Chanson Bakery on Zhongya South Rd.   Degang Wanda   Same as above

 

3

 

19   Shayibake District Karamay West Rd. Chanson Bakery   Xinbei Yuanchun   Same as above
             
20   Shayibake District Qitai Rd. Hemeijia Chanson Bakery   Dehui Wangda Fourth Floor   Same as above
             
21   Tianshan District Qingnian Rd. Chanson Bakery   Qingnian Road Haojiaxiang   Same as above
             
22   Xinshi District Liyushan North Rd. Hemeijia Bakery   Vanke Jincheng Huafu   Same as above
             
23   Xinshi District Changchun North Rd. Chanson Bakery   Gaoxin Wanda   Same as above
             
24   Shayibake District Youhao North Rd. Chanson Coffee Bakery   Soul●Song Meimei No. 2   Same as above
             
25   Tianshan District Jiefang North Rd. Chanson Coffee Bakery   Soul●Song Wanyan Cheng   Same as above
             
26   Tianshan District Wenhua Rd. Chanson Coffee Bakery   Soul●Song Wenhua Road   Same as above
             
27   Tianshan District Minzhu Rd. Heimeijie Coffee and Food Store   Soul●Song Minzhu Road   Same as above
             
28   Tianshan District Cuiquan Rd. George Chanson Bakery   Vanke Tianshanli   Same as above
             
29   Tianshan District Cuiquan Rd. Coffee and Food Store   Soul●Song Vanke Tianshanli   Same as above
             
30   Xinshi District Changchun North Rd. Chanson Coffee and Food Store   Soul●Song Gaoxin Wanda   Same as above

 

4

 

31   Shuimogou District Hongguangshan Rd. Chanson Bakery   Wuyue Square   Part of UFG – owned 100% by Ms. Hui Wang and operated under agreements among Ms. Hui Wang, this entity, and Xinjiang United Family
             
32   Xinshi District Beijing South Rd. George Chanson Bakery   Xidan   Same as above
             
33   Xinjiang United Family Trading Co., Ltd. Tianshan District Chanson Bakery   Tianbai   A branch office of Xinjiang United Family
             
34   Xinjiang United Family Trading Co., Ltd. Chanson Bakery Urumqi Branch   Wenhua   A branch office of Xinjiang United Family
             
35   Xinjiang United Family Trading Co., Ltd. Urumqi Meimei Chanson Bakery   Meimei   A branch office of Xinjiang United Family
             
36   Xinjiang United Family Trading Co., Ltd. Coffee Bakery Branch   Meimei No. 3   A branch office of Xinjiang United Family
             
37   Xinjiang United Family Trading Co., Ltd. Ruitai Chanson Bakery   Ruitai   A store operated by Xinjiang United Family, not a separate legal entity
             
38   Chanson 23rd Street LLC   Chanson 23rd Street   A wholly owned indirect subsidiary of Xinjiang United Family
             
39   Chanson 1293 3rd Ave LLC   Chanson 3rd Ave   Same as above.
             
40   Chanson 2040 Broadway LLC   Chanson Broadway   Same as above.

 

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 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.

 

5

 

UFG’s revenue accounted for 54%, 39%, and 56% of our total revenue for the years ended December 31, 2023, 2022, and 2021, respectively. UFG consists of 32 VIEs. Our Chairman, Mr. Gang Li, is the sole owner of 30 UFG Entities, and Ms. Hui Wang, the Marketing Director of Xinjiang United Family, is the sole owner of two UFG Entities.

 

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.

 

6

 

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.

 

7

 

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.”

 

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, as of the date of this annual report, we 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, 2023, 2022, and 2021, cash transfers and transfers of other assets between our Company, our subsidiaries, and the VIEs were as follows:

 

For the Year Ended December 31, 2023
No.  Transfer From  Transfer To  Approximate
Value ($)
   Note
1  VIEs  Xinjiang United Family   1,542,178   Cash (as working capital)
2  VIEs  Xinjiang United Family   1,400,536   Raw materials
3  Xinjiang United Family  VIEs   1,845,098   Raw materials
4  Xinjiang United Family  VIEs   3,413,933   Products

 

8

 

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)
2  VIEs  Xinjiang United Family   1,292,682   Raw materials
3  Xinjiang United Family  VIEs   1,419,306   Raw materials
4  Xinjiang United Family  VIEs   2,163,465   Products

 

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)
2  VIEs  Xinjiang United Family   1,953,748   Raw materials
3  Xinjiang United Family  VIEs   1,766,804   Raw materials
4  Xinjiang United Family  VIEs   2,855,345   Products

 

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.

 

9

 

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, 2023, 2022, and 2021. 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, 2023, 2022, and 2021, 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, 2023 
   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  $-   $-   $4,948,427   $2,938,505   $9,365,730   $-   $17,252,662 
Cost of revenue  $-   $-   $2,447,095   $1,909,026   $4,749,216   $-   $9,105,337 
Income from VIEs  $-   $-   $1,765,358   $-   $-   $(1,765,358)  $- 
Loss for equity method investment  $(567,809)  $(567,809)  $-   $-   $-   $1,135,618   $- 
Net income (loss)  $33,588   $(567,809)  $1,716,755   $(2,284,564)  $1,765,358   $(629,740)  $33,588 
Comprehensive income (loss)  $33,588   $(302,426)  $9,892,175   $(10,194,601)  $1,499,301   $(1,025,227)  $(97,190)

 

10

 

   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 

 

11

 

SELECTED CONDENSED CONSOLIDATING BALANCE SHEETS

 

   As of December 31, 2023 
   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  $30,269   $-   $21,340   $562,267   $867,426   $-   $1,481,302 
Intercompany receivable  $4,009,100   $-   $414,424   $746,500   $7,748,737   $(12,918,761)  $- 
Total current assets  $4,039,369   $-   $2,269,219   $3,610,137   $16,386,644   $(16,970,922)  $9,334,447 
Investment in subsidiaries, equity method  $(6,202,086)  $(5,690,844)  $-   $-   $-   $11,892,930   $- 
Financial interest in VIEs  $-   $-   $5,476,107   $-   $-   $(5,476,107)  $- 
Total non-current assets  $2,399,311   $(5,690,844)  $7,224,733   $13,984,265   $4,765,561   $6,416,823   $29,099,849 
Total Assets  $6,438,680   $(5,690,844)  $9,493,952   $17,594,402   $21,152,205   $(10,554,099)  $38,434,296 
Intercompany payable  $1,095,872   $-   $7,632,749   $4,060,036   $-   $(12,788,657)  $- 
Total Liabilities  $1,095,872   $-   $1,075,811   $31,703,387   $9,385,688   $(16,840,818)  $26,419,940 
Total Shareholders’ Equity (Deficit)  $5,342,808   $(5,690,844)  $8,418,141   $(14,108,985)  $11,766,517   $6,286,719   $12,014,356 
Total Liabilities and Shareholders’ Equity (Deficit)  $6,438,680   $(5,690,844)  $9,493,952   $17,594,402   $21,152,205   $(10,554,099)  $38,434,296 

 

   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 
Investment in subsidiaries, equity method  $(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 

 

12

 

SELECTED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS 

 

   For the Year Ended December 31, 2023 
   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 (used in) provided by operating activities  $-   $          -   $(1,345,862)  $(2,476,288)  $868,297   $-   $(2,953,853)
Net cash used in investing activities  $(12,000,100)  $-   $(99,784)  $(1,776,975)  $(586,657)  $4,000,100   $(10,463,416)
Net cash provided by (used in) financing activities  $12,030,369   $-   $960,974   $4,693,811   $(1,626,029)  $(4,000,100)  $12,059,025 

 

   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 (used in) provided by 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 (used in) provided by 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)

 

13

 

ROLL-FORWARD OF INVESTMENT IN SUBSIDIARIES AND VIES

 

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)
Comprehensive loss for the year   (567,809)
Balance, December 31, 2023  $(6,202,086)

 

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 are 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, own 100% of the equity interests in 30 and two UFG Entities, respectively, as of the date of this annual report, 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.

 

14

 

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. As of the date of this annual report, there are 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 United States Securities and Exchange Commission (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. As of the date of this annual report, 30 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.

 

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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, 2023, 2022, and 2021, approximately 54%, 39%, and 56% 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.

 

As of the date of this annual report, 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.

 

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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. For example, on December 29, 2023, the Standing Committee of the National People’s Congress promulgated the amended PRC Company Law, which will come into effect on July 1, 2024 and supersede the existing PRC Company Law. The amended PRC Company Law provides stricter requirements on capital contribution of a company established in mainland China. On February 6, 2024, the State Administration for Market Regulation of PRC (“SAMR”) issued a draft of the Provisions of the State Council on Implementing the Registered Capital Registration and Management System under the PRC Company Law for public comments until March 5, 2024, which further specify the detailed requirements and measures of the registration and management of registered capital under the amended PRC Company Law. Pursuant to the amended PRC Company Law, we may be required to fulfill the obligations of capital contribution to our PRC subsidiary and the VIEs in China or to provide financial support to the nominee shareholders of the VIEs within a five-year contribution term, while the current PRC Company Law has no time limit for subscribed contribution period. However, since the amended PRC Company Law is still relatively new and the foregoing draft implementation measures were released for public comment only, there is still uncertainty regarding the implementation and interpretation of the amended PRC Company Law and the adoption and effective date of such implementation measures.

 

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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 an exempted company with limited liability incorporated and registered 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 as of the date of this annual report. 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 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.

 

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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.

  

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 Cyberspace Administration of China (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.

 

On July 7, 2022, the CAC promulgated the Measures for the Security Assessment of Cross-border Data Transfer, which took effect on September 1, 2022. In accordance with such measures, data processors will be subject to security assessment conducted by the CAC prior to any cross-border transfer of data if the transfer involves (i) important data; (ii) personal information transferred overseas by operators of critical information infrastructure or a data processor that has processed personal data of more than one million persons; (iii) personal information transferred overseas by a data processor which has already provided personal data of 100,000 persons or sensitive personal data of 10,000 persons overseas since January 1 of the preceding year; or (iv) other circumstances as required by the CAC. In addition, any cross-border data transfer activities conducted in violation of the Measures for the Security Assessment of Cross-border Data Transfer before the effectiveness of such measures are required to be rectified within six months of the effectiveness date thereof.

 

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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. According to the Trial Measures, a domestic enterprise involved in offering securities and listing shall comply with laws, administrative regulations, and relevant national provisions, when it comes to providing personal information and important data to foreign entities.

 

On March 22, 2024, the CAC promulgated the Provisions on Regulating and Facilitating Cross-Border Data Flow, together with two guideline documents separately named the Second Version of Declaration For Security Assessment of Data Outbound and the Second Version of Filing for Personal Information Outbound Standard Contract. According to the above regulations, data processors who provide important data overseas or have transferred the non-sensitive personal information of over one million individuals overseas or the sensitive personal information of over 10,000 individuals since the beginning of a given year must declare the data for security assessment. Critical information infrastructure operators must declare data when providing personal information or important data overseas. In addition, if a data processor has not been notified by relevant government departments or local authorities, or if data has not been publicly released as important data, the data processor does not need to declare its data for security assessment as important data to exit the country.

 

As of the date of this annual report, we have not received any notice from any PRC 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. We believe that the operations of our PRC subsidiary and the VIEs will not be affected and that we are not subject to cybersecurity review and network data security review by the CAC, given that: (i) our PRC subsidiary and the VIEs mainly manufacture and sell bakery products and are unlikely to be classified as CIIOs by the PRC authorities; (ii) our PRC subsidiary and the VIEs make substantially all of their bakery product sales through physical stores and make only a small amount of their bakery product sales through online stores, mostly on third-party online food ordering platforms. Regarding the physical stores, our PRC subsidiary and the VIEs do not require customers to provide their personal data who use their membership cards, which function as reloadable prepaid cards, for purchase, and our PRC subsidiary and the VIEs do not collect personal data from customers who do not use membership cards. Regarding the online platforms, our PRC subsidiary and the VIEs only require customers to provide their cellphone numbers as necessary personal data when customers become online members to purchase products on third-party online food ordering platforms. 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; (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 PRC authorities; and (iv) our PRC subsidiary and the VIEs have not transferred important data or personal data overseas as of the date of this annual report. There remains uncertainty, however, as to how the Cybersecurity Review Measures, the Measures for the Security Assessment of Cross-border Data Transfer, the Trial 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 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 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. 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.”

 

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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. In the event that we undertake new offerings or fundraising activities in the future, we may be required to complete necessary filing procedures pursuant to the Trial Measures.

 

On February 24, 2023, the CSRC, together with the Ministry of Finance of the PRC (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, 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.

 

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.

  

Joint statement by the SEC and the Public Company Accounting Oversight Board (United States) (the “PCAOB”), rule changes by Nasdaq, and the Holding Foreign Companies Accountable Act (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 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 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.

 

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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 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 will consider the need to issue a new determination.

 

Our auditor prior to September 29, 2022, Friedman LLP (“Friedman”), had been inspected by the PCAOB on a regular basis in the audit period, our auditor from September 29, 2022 to July 9, 2023, Marcum Asia CPAs LLP (“Marcum Asia”), had been inspected by the PCAOB on a regular basis in the audit period, and our new auditor, ASSENTSURE PAC (“Assentsure”), as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Assentsure is headquartered in Singapore, and will be inspected by the PCAOB on a regular basis. None of Friedman, Marcum Asia, or Assentsure is subject to the determinations issued 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 or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s 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.

 

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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 and one branch office of Xinjiang United Family 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.”

 

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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. 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. 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.

 

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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 subsidiary, 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. As of the date of this annual report, 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.

 

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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 2021, RMB depreciated approximately 2.6% against the U.S. dollar; in 2022, RMB depreciated approximately 5.5% against the U.S. dollar; and in 2023, RMB depreciated approximately 2.6% 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.

  

As of the date of this annual report, 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. As of the date of this annual report, 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.

 

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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.

 

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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. As of the date of this annual report, 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.

 

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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.

 

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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 identify target markets, taking into account numerous factors such as the locations of their current stores, demographics, traffic patterns and known consumer patterns. 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:

 

  epidemics, such as the COVID-19 pandemic;
     
  the operating entities’ ability to increase brand awareness and bakery product consumption in areas where they open stores;

 

  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;
     
  competition in existing and new markets, including competition for store sites;
     
  the negotiation of acceptable lease terms;
     
  the operating entities’ ability to obtain all required governmental permits on a timely basis;
     
  the operating entities’ ability to control construction and development costs of new stores;
     
  the maintenance of adequate distribution capacity, information systems, and other operational system capabilities;
     
  integrating new stores into the operating entities’ existing procurement, manufacturing, distribution, and other support operations;
     
  the hiring, training, and retention of store management and other qualified personnel;
     
  assimilating new store employees into the operating entities’ corporate culture;
     
  the effective management of inventory to meet the needs of the operating entities’ stores on a timely basis; and
     
  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.

 

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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 were 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 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 COVID-19 pandemic has minimal impact on our PRC Stores’ operations as of the date of this annual report. In the U.S., the U.S. Stores are providing indoor dining services at their full capacity as of the date of this annual report.

 

See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—COVID-19 Affecting Our Results of Operations.” The extent to which the COVID-19 pandemic impacts our results of operations in the future 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.

  

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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, 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.

 

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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.

 

As of the date of this annual report, 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. See note 2 of our consolidated financial statements included elsewhere in this annual report. 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. 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.

 

As of the date of this annual report, the operations of our PRC subsidiary and the VIEs are geographically limited to two cities in Xinjiang, and 36 of the 37 PRC Stores are located in Urumqi, the capital city of Xinjiang. The PRC Stores derived 96.6%, 95%, and 95% of their revenue from stores in Urumqi in the years ended December 31, 2023, 2022, and 2021, 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.

 

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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 and the armed conflict between Israel and Hamas. 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 these conflicts 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 conflicts. 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. On October 7, 2023, Hamas launched a series of coordinated attacks from the Gaza Strip onto Israel. On October 8, 2023, Israel formally declared war on Hamas, and the armed conflict is ongoing as of the date of this annual report.

 

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, Ukraine, Israel, or Hamas. Although the ongoing military conflict between Russia and Ukraine and the armed conflict between Israel and Hamas have 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 intensity and duration of Israel’s current war against Hamas is difficult to predict, as are such war’s global economic impact, which could include further sanctions, embargoes, regional instability, energy shortages, geopolitical shifts, and adverse effects on macroeconomic conditions, security conditions, currency exchange rates, and financial markets.

 

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. As of the date of this annual report, 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.

 

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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 will 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. As of the date of this annual report, the PRC Stores do not have insurance to cover claims for damages, and two of the U.S. Stores, Chanson 23rd Street and Chanson 3rd Ave, have general liability insurance to cover certain loss due to the discovery of or the suspicion of food contamination, subject to the terms of their respective insurance policies. If the PRC Stores and the U.S. Stores choose to purchase or renew 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.

 

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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.

 

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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:

 

  the steps they take to prevent circumvention, misappropriation, or infringement of our proprietary rights may not be successful;
     
  confidentiality agreements may be intentionally or unintentionally breached, be deemed unenforceable, or not provide adequate recourse against the disclosing party;
     
  intellectual property laws may not sufficiently support their proprietary rights or may change in the future in a manner adverse to them; and
     
  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.

 

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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.

 

As of the date of this annual report, 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:

 

  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;
     
  increasing their vulnerability to adverse general economic and industry conditions;
     
  limiting their flexibility to plan for or react to changes in their business or in the industry in which they compete; and
     
  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.

 

As of the date of this annual report, 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. 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.

 

We 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.

 

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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.

 

As of the date of this annual report, the operating entities’ stores are mainly 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:

 

  economic downturns in Xinjiang or New York City;
     
  high fuel prices;
     
  changes in customer demographics;
     
  a decrease in popularity of shopping malls or centers in which a significant number of their stores are located;
     
  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;
     
  the closing of the “anchor” store of a shopping mall or center or the stores of other key tenants; or
     
  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. As of the date of this annual report, we do not carry 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.

 

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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:

 

  possible environmental liabilities;
     
  construction cost overruns and delays;

  

  the decline in revenue while stores are out of service due to capital improvement projects;
     
  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;
     
  uncertainties as to market demand or a loss of market demand after capital improvements have begun; and
     
  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.

 

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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, 2023, 2022, and 2021, we have identified a material weakness in our internal control over financial reporting, as defined in the standards established by the PCAOB, and other control deficiencies. The material weakness identified was that we do not have sufficient in-house personnel in our accounting department with sufficient knowledge of the U.S. GAAP and SEC reporting rules. See “Item 15. Controls and Procedures.” Our management is currently in the process of evaluating the steps necessary to remediate the material weakness. 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, 2023. 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 Mr. Gang Li, 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 approximately 39.97% of our issued Class A Ordinary Shares, and 5,670,000, or 100%, of our issued Class B Ordinary Shares, representing approximately 93.61% 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, indirectly 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.

 

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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 6,755,319 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.

 

As of the date of this annual report, we 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.

 

The trading price of our Class A Ordinary Shares is likely 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:

 

  actual or anticipated fluctuations in our revenue and other operating results;
     
  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
     
  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
     
  announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
     
  lawsuits threatened or filed against us; and
     
  other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

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.

 

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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.

 

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If we cannot continue to satisfy the continued listing requirements and other rules of the Nasdaq Capital Market, our securities 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. 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:

 

  a limited availability for market quotations for our securities;
     
  reduced liquidity with respect to our securities;
     
  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;
     
  limited amount of news and analyst coverage; and
     
  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 (Revised) 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. Appeals from the Cayman Islands Courts to the Privy Council (which is the final Court of Appeal for British overseas territories such as the Cayman Islands) are binding on the courts 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. Pursuant to our articles of association, shareholders will not have any right to inspect any account or book or document of the Company except as conferred by Companies Act (Revised) of the Cayman Islands or as authorized by our directors or by ordinary resolution of 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.

 

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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 within 21 clear days’ from the date of receipt of a requisition. If our directors fail to call a properly requisitioned meeting, the requisitioners or any of them may call a general meeting within three months. 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:

 

  At least 75% of our gross income for the year is passive income; or
     
  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. 

 

Based on the amount of cash we have and any other assets held for the production of passive income, it appears our current taxable year will not cause us to be a PFIC. However, 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 Consequences.”

 

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:

 

  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
     
  provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings.

 

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Item 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

  

The Chanson Greenwich store has been permanently closed since October 31, 2023 and Chanson 355 Greenwich LLC is expected to be dissolved by July 31, 2024.

 

Corporate Information

 

We are an exempted company with limited liability incorporated and registered 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 www.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 37 stores operated by Xinjiang United Family and the VIEs, under the “George●Chanson” brand in Xinjiang, and the U.S. Stores, which consist of three stores in the U.S., 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 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 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.

 

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As of December 31, 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 2023, and the U.S. Stores had 108 types of eat-in menu items and bakery products on sale, including 20 types of new products introduced to the market since 2023. The PRC Stores and the U.S. Stores also offer a large number of beverage products.

  

For the years ended December 31, 2023, 2022, and 2021, we had total revenue of $17,252,662, $13,272,075, and $14,690,295, respectively, and net income of $33,588, net loss of $1,288,205, and net income of $506,769, respectively. The PRC Stores accounted for 82.9%, 71.6%, and 87.1% of our total revenue for those fiscal years, respectively, and the U.S. Stores accounted for 17.1%, 28.4%, and 12.9%, respectively.

 

The PRC Stores primarily generate revenue through sale of bakery products, seasonal products, and beverage products. For the years ended December 31, 2023, 2022, and 2021, revenue derived from sale of bakery products accounted for 87.6%, 91.7%, and 91.4% of the PRC Stores’ revenue, respectively, revenue derived from sale of seasonal products accounted for 9.1%, 7.3%, and 7.6%, respectively, and revenue derived from sale of beverage products accounted for 3.3%, 1.0%, and 1.0%, 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, 2023, 2022, and 2021, revenue derived from offering eat-in services accounted for 27.0%, 29.6%, and 22.2% of the U.S. Stores’ revenue, respectively, revenue derived from sale of bakery products accounted for 15.1%, 16.2%, and 25.0%, respectively, and revenue derived from sale of beverage products accounted for 57.9%, 54.2%, and 52.8%, 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.

 

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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, which has enabled them to introduce new products periodically. The PRC Stores and the U.S. Stores keep separate product lines. As of December 31, 2023, the PRC Stores had introduced over 145 types of new products and the U.S. Stores had introduced 20 types of new products since 2023. 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. As of the date of this annual report, the PRC Stores consist of 37 stores in two well-developed cities of Xinjiang, namely Urumqi and Changji. 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 third-party online food ordering platforms. 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.

 

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Experienced Management and Professional Teams

 

Our senior management team, led by Mr. Gang Li, our Chief Executive Officer and Chairman, 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. 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. As of the date of this annual report, the U.S. Stores are negotiating with potential business partners for the opening of new stores, however, they have not entered into any agreements in connection with such new stores that have not been previously disclosed by the Company.

  

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 seek to renovate their stores when needed. 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.

 

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The PRC Stores

 

Products

 

The PRC Stores currently offer more than 707 types of bakery products and seasonal products, together with more than 40 types of beverage products. 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, cheesecakes, 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 Americano, latte, coconut latte, oatmeal latte, cappuccino, and orange flavored tea and lemon flavored tea. 

 

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 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.

 

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. 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.

 

Product transportation to the PRC Stores is carried out by their own transportation team. As of April 1, 2024, their transportation team had the capacity of transporting an aggregate of 13 tons of goods per transition per day. 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

 

PRC Stores

 

The PRC Stores consist of 37 stores in two cities of Xinjiang, namely Urumqi and Changji. 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.

 

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Digital Platforms

  

The PRC Stores operate an online store that is linked to the official account of the PRC Stores on WeChat and focuses on selling cakes. For the year ended December 31, 2023, the product sales made through the online store of the PRC Stores accounted for approximately 0.05% of their total sales.

 

Third-Party Platforms

 

The PRC Stores list their bakery products on third-party online food ordering platforms such as Meituan-Dianping. Customers can order through 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, 2023, 2022, and 2021, the sales made through these third-party platforms accounted for approximately 6.69%, 5.32%, and 4.19% of our total sales, respectively.

 

Store Experience

 

Approximately 37 of the PRC Stores have seats, with an average capacity of approximately eight guests. For further details on the size of each PRC Store, see “—Properties—Properties in the PRC.” 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.

 

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 31, 2023, the PRC Stores had approximately 582,000 members. For the years ended December 31, 2023, 2022, and 2021, the sales to members collectively accounted for 51.47%, 54%, and 52% of our total sales, respectively.

 

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 and third-party 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.

 

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.

 

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The U.S. Stores

 

The U.S. Stores currently consist of three stores in New York City. The Chanson Greenwich store has been permanently closed since October 31, 2023.

 

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. 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.

 

Chanson 3rd Ave, which is located in New York City’s Upper East Side, operates Patisserie Chanson (3rd Ave). Patisserie Chanson (3rd Ave) opened in March 2023 and serves freshly prepared bakery products and extensive beverage products.

 

Chanson Broadway, which is located in New York City’s Upper West Side, operates Patisserie Chanson (Broadway). Patisserie Chanson (Broadway) opened in July 2023 and serves freshly prepared bakery products and extensive beverage products.

 

Products

 

The U.S. Stores currently offer 108 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’ eat-in menu includes sandwiches, salads, toasts, croissants, soups, and desserts. Their bestselling menu items include Jambon Egg & Cheese, Tomato Soup, and Avocado Toast. The U.S. Stores’ bakery products include cakes, bread, sweets, birthday cakes, and pastries. Their bestselling bakery products include Croissant Au Beurre, Passionfruit Tart, and Cinnamon Kouign Amann. 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 a variety of cocktails.

 

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 3rd Ave has two floors with an aggregate size of approximately 2,461 square feet. Seating in Chanson 3rd Ave is comprised of table seats with a capacity of 14 guests.

 

Chanson Broadway has one floor with an aggregate size of approximately 850 square feet. Seating in Chanson Broadway is comprised of table seats with a capacity of ten guests.

 

For further details on the U.S. Stores, see “—Properties—Properties in the U.S.”

 

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 Sunday, and its bar is open from 6 p.m. to 2 a.m. from Tuesday to Sunday. 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. Chanson Broadway 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.

 

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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.us, and through third-party delivery partners, including Grubhub, Uber Eats, and Doordash. As of December 31, 2023, the transportation team of the U.S. Stores had a cargo van capable of transporting up to one ton of goods per transition per day.

 

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 15.2%, 15.5%, and 12.8% of the total revenue of the U.S. Stores for the years ended December 31, 2023, 2022, and 2021, respectively.

 

Customers

 

Substantially all 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 100% of their revenue from sales to individual customers and 0%, 0%, and 0% from sales to corporate customers during the years ended December 31, 2023, 2022, and 2021, respectively.

 

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. 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, 2023 included Urumqi Yuxin Jiayuan Commerce and Trade Co., Ltd., Urumqi Junxin Hongye Commerce and Trade Co., Ltd., Xinjiang Meishifu Food Co., Ltd. (“Meishifu”), and Pengcheng Fruit Company. Their supply constituted 11.93%, 6.85%, 6.27%, and 6.05% 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, 2022 included Urumqi Yuxin Commerce and Trade Co., Ltd. (“Yuxin”), 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 fiscal year, respectively. Top suppliers of the PRC Stores during the year ended December 31, 2021 included Meishifu, Urumqi Jinda Food Raw Material Co., Ltd., 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.

 

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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, 2023 included Baldor Specialty Foods, Inc. (“Baldor”), Southern Glazers of NY Metro, and The Chefs’ Warehouse. Their supply constituted 28%, 12%, 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, 2022 included 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 fiscal year, 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.

 

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. 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.

 

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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 generally 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 generally 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 online food ordering platforms, and (iii) discounting benefits enjoyable only through using credit cards issued by Shanghai Pudong Development Bank Co., Ltd; in Chanson 23rd Street, (i) $1 Barista Beverage with purchase of any sandwiches to help increase lunch sales, (ii) 50% off on all desserts after 3 p.m. on Wednesday, Friday and Sunday to help reduce waste and increase foot traffic, and (iii) 20% off on the first catering order, and (iv) discounts to employees of nearby corporations.

 

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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 31, 2023, 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 75,000 followers in total, and four official Facebook accounts, which had over 25,600 followers, as of December 31, 2023. 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 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.

 

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 without charge. The term of the agreement is from January 1, 2020 to June 25, 2028, unless otherwise terminated by either party.

 

On June 30, 2021, Xinjiang United Family entered into a lease agreement for approximately 54,638 square feet of building space for the central factory. The term of the lease agreement is from June 15, 2021 to June 14, 2031, unless otherwise terminated by either party. 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 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. The investment budget for the central factory is approximately RMB17.8 million (approximately $2.5 million) after VAT deduction. As of December 31, 2023, we had spent approximately RMB14.7 million (approximately $2.1 million), and the future minimum expenditure is estimated to be RMB2.2 million (approximately $0.3 million). Xinjiang United Family plans to use cash flow from the operations of the PRC Stores to fund the future construction. For additional information on our past and expected capital expenditures on the central factory, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”

 

Our PRC subsidiary and the VIEs currently operate 37 stores in Xinjiang. 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.

 

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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 Huijia   Changji    861     September 2015
4  Hongshan   Urumqi    2,422     November 2017
5  Beimen   Urumqi    942     May 2018
6  Minzhu   Urumqi    1,830     April 2014
7  Riyue Xingguang   Urumqi    1,428     May 2014
8  Wanyancheng   Urumqi    1,152     October 2017
9  Huarun Wanjia   Urumqi    482     January 2015
10  Changchun   Urumqi    1,335     March 2014
11  Huijia Third Floor   Urumqi    920     September 2012
12  Baishang   Urumqi    1,276     February 2019
13  Railway Bureau   Urumqi    1,830     May 2019
14  Economics Development Wanda   Urumqi    1,253     July 2019
15  Hongshan Lifestyle Store   Urumqi    2,640     November 2019
16  Nanhu   Urumqi    1,507     September 2020
17  Hebei Road Huarun   Urumqi    1,033     October 2020
18  Degang Wanda   Urumqi    1,163     December 2020
19  Xinbei Yuanchun   Urumqi    814     October 2021
20  Dehui Wangda Fourth Floor   Urumqi    215     November 2021
21  Qingnian Road Haojiaxiang   Urumqi    861     November 2021
22  Vanke Jincheng Huafu   Urumqi    910     November 2021
23  Gaoxin Wanda   Urumqi    1,481     December 2021
24  Soul●Song Meimei No. 2  Urumqi    239    March 2023
25  Soul●Song Wanyan Cheng   Urumqi    206    May 2023
26  Soul●Song Wenhua Road   Urumqi    100    July 2023
27  Soul●Song Minzhu Road   Urumqi    20    July 2023
28  Vanke Tianshanli   Urumqi    190    September 2023
29  Soul●Song Vanke Tianshanli   Urumqi    170    September 2023
30  Soul●Song Gaoxin Wanda   Urumqi    188    September 2023
31  Wuyue Square   Urumqi    164.5    August 2023
32  Xidan   Urumqi    112    January 2024
33  Tianbai   Urumqi    807     October 2015
34  Wenhua   Urumqi    1,184     October 2012
35  Meimei   Urumqi    1,442     November 2012
36  Meimei No. 3   Urumqi    162     August 2023
37  Ruitai   Urumqi    1,076     May 2015

 

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Subject to specific terms of each lease agreement, lease terms generally range from one to six years. 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. 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. Chanson 23rd Street may extend the lease for an additional five years upon its expiration.

 

Chanson 3rd Ave leases 1,420 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.

   

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.

 

Chanson NY rents one office in New York City from a third party for a lease term that expires in April 2024. Chanson NY does not intend to renew the lease and has moved to a new location under a one-year lease starting from April 1, 2024.  

 

Tangible properties of the U.S. Stores include production, transportation, and electronic equipment.

  

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.

 

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. 

 

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Intellectual Property

 

Trademarks  

 

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  
   
2 17999258 43   11/07/2016-11/06/2026  
   
3 17999032 31   11/07/2016-11/06/2026  
   
4 17999068 33   11/14/2016-11/13/2026  
   
5 17998952 5   11/14/2016-11/13/2026  
   
6 17998971 29   11/14/2016-11/13/2026  
   
7 13241648 30   04/14/2015-04/13/2025  
   
8 13241661 32   04/14/2015-04/13/2025  
   
9 13241679 39   03/28/2015-03/27/2025  
   
10 12911052 35   08/07/2017-08/06/2027  

 

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Registration Number Category   Effective Period   Trademark Logo
11 39954090 35   10/28/2020-10/27/2030  
   
12 39954063 30   11/07/2020-11/06/2030  
   
13 44626303 30   12/07/2020-12/06/2030  
   
14 44629314 32   12/07/2020-12/06/2030  
   
15 44623341 33   12/07/2020-12/06/2030  
   
16 44639541 35   12/21/2020-12/20/2030  
   
17 53288503 8   08/28/2021-08/27/2031  
   
18 53317617 11   08/28/2021-08/27/2031  
   
19 53296291 21   08/28/2021-08/27/2031  
   
20 53302745 16   09/07/2021-09/06/2031  

 

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Registration Number Category   Effective Period   Trademark Logo
21 53157597 36   09/07/2021-09/06/2031  
   
22 53310418 44   09/07/2021-09/06/2031  
   
23 53141021 41   09/14/2021-09/13/2031  
   
24 53140661 3   09/21/2021-09/20/2031  
   
25 56986085 25   12/28/2021-12/27/2031  
   
26 53129642 30   03/28/2022-03/27/2032  
   
27 53145548 32   03/28/2022-03/27/2032  
   
28 53145551 33   03/28/2022-03/27/2032  
   
29 53145555 35   03/28/2022-03/27/2032  
                 
30 57960943 30   05/07/2022-05/06/2032  
                 
31 60683235 32   06/07/2022-06/06/2032  

 

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Registration Number Category   Effective Period   Trademark Logo
32 60681958 35   06/07/2022-06/06/2032  
                 
33 60676076 32   05/21/2022-05/20/2032  
                 
34 60707165 30   05/21/2022-05/20/2032  
                 
35 60676442 30   06/07/2022-06/06/2032  
                 
36 60707345 35   06/07/2022-06/06/2032  

 

Trademarks Registered in the U.S.

 

    Registration Number   Registration Date   Trademark Logo
1   5785931   June 25, 2019   CHANSONTM
             
2   5768100   June 4, 2019  
             
3   5768096   June 4, 2019  

 

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.

 

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Domain Names

 

The operating entities own the internet domain names ir.chanson-international.net, www.patisseriechanson.us, and www.thymebarnyc.com in the U.S.

 

Patents

 

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, 2023, 2022, and 2021, our PRC subsidiary and the VIEs had 356, 294, and 305 employees and our subsidiaries in the U.S. had 54, 60, and 41 employees, respectively. The following table sets forth the number of employees of our subsidiaries and the VIEs on December 31, 2023 by area of business:

 

Employees based in the PRC

 

   Number of
Employees
 
Management   4 
Finance   16 
Production and R&D   77 
General and Administration   4 
Logistics   5 
Marketing and Sales   250 
Total   356 

 

Employees based in the U.S.

 

   Number of
Employees
 
Management   2 
Cooking and Baking   6 
Finance   1 
Logistics   5 
General and Administration   2 
General Store Operation   38 
Total   54 

 

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.

 

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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.

 

None of the employees are currently represented by labor unions. In the year ended December 31, 2023, the operating entities did not hire any temporary employees. 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.

 

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The Measures for the Administration of Food Trade Licensing and Registration, or the “Food Trade Licensing and Filing”, were promulgated by SAMR on June 15, 2023, and became effective on December 1, 2023. According to the Food Trade Licensing and Filing, whoever plans to engage in food sales and provide catering services within the PRC shall obtain the food business permits in accordance with the law. However, the food business permits are not required under any of the following circumstances: (i) sale of edible agricultural products; (ii) sale of prepackaged food only; (iii) sale of specific total nutrition formula food in the formula food for special medical purposes by medical institutions and drug retailers; (iv) sale of food produced by a food producer that has obtained a food production permit at its production and processing place or through the Internet; and (v) any other circumstances where the food business permits are not required in accordance with the applicable laws and regulations. Besides the above circumstances, the food enterprise that operates other food business items shall obtain the food business permit in accordance with the PRC law. In addition, the food enterprise who sells prepackaged food only shall file with the relevant market regulatory department.

 

As of the date of this annual report, (i) the four branch offices of Xinjiang United Family have obtained the food business permits, (ii) two UFG Entities and one branch office of Xinjiang United Family 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, a fine ranging from RMB50,000 to RMB100,000, shall be imposed; where the value of foodstuffs is RMB10,000 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 as of the date of this annual report, 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.

 

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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. Pursuant to the Regulations on the Administration of Pollutant Discharge Permits, which were adopted by the State Council on December 9, 2020, and became effective on March 1, 2021, pollutant discharging entities are subject to the classified management of pollutant discharge permits based on the factors such as the amount of pollutants produced and discharged, and the extent of impact on the environment. 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.

 

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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 Administrative Measures for Internet Advertising, which was promulgated by the SAMR on February 24, 2023, and came into effect on May 1, 2023, governs all advertisements published on the Internet, including but not limited to advertisements in the form of text, image, audio, video or other forms which are published through websites, web pages, internet applications and other internet media. Advertisers shall be responsible for the authenticity of the content of Internet advertisements. Internet advertisement operators and publishers shall establish, improve and implement systems of registration, examination and archives management in respect of Internet advertising business according to the following provisions: (i) verifying and registering the real identity, address, valid contact details and other information of advertisers, establishing advertisement archives and checking and updating them on a regular basis, and recording and keeping the electronic data relating to advertising activities; the relevant archives shall be kept for at least three years from the date of end of advertisement publishing; (ii) verifying relevant supporting documents and checking the content of advertisements, and for advertisements with inconsistent content or incomplete supporting documents, advertising agencies shall not provide design, production and agency services, and advertisement publishers shall not publish such advertisements; and (iii) employing advertisement reviewers who are familiar with advertising laws and regulations or establishing an advertisement review organization.

 

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: (i) use the Internet to market fake and substandard products or carry out false publicity for any commodity or service; (ii) use the Internet for the purpose of damaging the commercial goodwill and product reputation of any other person; (iii) use the Internet for the purpose of infringing on the intellectual property of any person; (iv) 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 (v) 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.

 

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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 on August 3, 2002, and amended on April 29, 2014. The PRC Trademark Office under the SAMR 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 the date of this annual report, Xinjiang United Family holds 36 registered trademarks in the PRC and enjoys 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.

 

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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, 2018 and 2023. On December 29, 2023, the Standing Committee of the National People’s Congress promulgated the amended PRC Company Law, or the Amended PRC Company Law, which will come into effect on July 1, 2024, to supersede the existing PRC Company Law which was amended in October 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.

 

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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.

 

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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.

 

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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.

 

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. In the event that we undertake new offerings or fundraising activities in the future, we may be required to complete necessary filing procedures pursuant to the Trial Measures.

 

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.”

 

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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.”

 

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%. According to the Announcement the Preferential Income Tax Policies for Small and Low Profit Enterprises and Individual Business Households issued by the Ministry of Finance and the SAT on March 26, 2023, effective from January 1, 2023, to December 31, 2024, for small low-profit enterprises, the portion of the annual taxable income that does not exceed RMB1 million will be reduced by 25% for the purpose of calculating the taxable income, and the enterprise income tax will be levied at a rate of 20%. For individual business households, the individual income tax on the portion of the annual taxable income that does not exceed RMB1 million will be collected at a rate that is half of the current preferential rate.

 

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 income tax rate of the UFG Entities, see the relevant information in “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Comparison of Results of Operations for the Years Ended December 31, 2023, 2022, and 2021.”

 

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.

 

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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. Three of the UFG Entities are currently paying VAT at the rate of 1% and the rest of the UFG Entities are exempted from paying VAT. If customers need to obtain a special VAT invoice, the UFG Entities that are exempted from paying VAT would apply to the local tax authority to issue the special VAT invoice on their behalf, with the tax authority levying VAT at a rate of 1%. 

  

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 came into effect on 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%. Three of the UFG Entities 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.

 

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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 with 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 as of the date of this annual report, 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.

 

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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. As of the date of this annual report, 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. As of the date of this annual report, 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.

 

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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. As of December 31, 2023, the operating entities managed and operated 37 PRC Stores and three U.S. Stores. 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 in “—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. 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.

 

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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.

 

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, 2023, the comparable store sales in China (excluding the impact of foreign currency translation) increased by 48.7%, as the PRC Stores have fully recovered from the COVID-19 pandemic. During the year ended December 31, 2023, the comparable store sales in the U.S. decreased by 29.2%, mainly due to increased competition from rivals operating in the same area.

 

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.

 

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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 promote 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.

 

Operating Income

 

Operating income is the difference between gross profit and SG&A expenses. Operating income excludes interest income (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.

 

Comparison of Results of Operations for the Years Ended December 31, 2023, 2022, and 2021

    

The following table summarizes the results of our operations during the years ended December 31, 2023, 2022, and 2021, respectively, and provides information regarding the dollar and percentage increase or decrease during such years.

 

   For the years ended
December 31,
 
   2023   2022   2021 
Revenue  $17,252,662   $13,272,075   $14,690,295 
Cost of revenue   9,105,337    7,169,404    7,759,872 
Gross profit   8,147,325    6,102,671    6,930,423 
                
OPERATING EXPENSES               
Selling expenses   4,882,958    3,697,909    4,126,126 
General and administrative expenses   3,874,868    3,842,787    3,249,181 
Total operating expenses   8,757,826    7,540,696    7,375,307 
                
LOSS FROM OPERATIONS   (610,501)   (1,438,025)   (444,884)
                
OTHER INCOME (EXPENSES)               
Interest income (expense), net   35,505    (35,457)   (98,033)
Other income, net   193,425    194,824    1,065,963 
Interest income from long term debt investment   534,575    -    - 
Total other income, net   763,505    159,367    967,930 
                
INCOME (LOSS) BEFORE INCOME TAX EXPENSE   153,004    (1,278,658)   523,046 
                
INCOME TAX EXPENSE   119,416    9,547    16,277 
                
NET INCOME (LOSS)  $33,588   $(1,288,205)  $506,769 

 

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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 $3,980,587, or 30.0%, from $13,272,075 for the year ended December 31, 2022 to $17,252,662 for the year ended December 31, 2023. The increase in our revenue was due to increased revenue from the PRC Stores, which was partially offset by decreased revenue from the U.S. Stores.

 

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 the PRC Stores, which was partially offset by increased revenue from the U.S. Stores.

 

The following table sets forth the breakdown of our revenue for the years ended December 31, 2023, 2022, and 2021, respectively:

 

   For the Years Ended December 31, 
   2023   %   2022   %   2021   % 
China                        
Bakery products  $12,532,127    72.6%  $8,705,218    65.7%  $11,694,918    79.6%
Other products   1,782,030    10.3%   785,990    5.9%   1,101,171    7.5%
Subtotal: revenue from China   14,314,157    82.9%   9,491,208    71.6%   12,796,089    87.1%
                               
United States                              
Bakery products   444,958    2.6%   612,819    4.6%   473,914    3.2%
Beverage products   1,700,974    9.9%   2,047,670    15.4%   1,000,039    6.8%
Eat-in services   792,573    4.6%   1,120,378    8.4%   420,253    2.9%
Subtotal: revenue from the United States   2,938,505    17.1%   3,780,867    28.4%   1,894,206    12.9%
                               
Total Revenue  $ 17,252,662    100.0%  $13,272,075    100.0%  $14,690,295    100.0%

 

China

 

The PRC Stores accounted for 82.9%, 71.6% and 87.1% of our total revenue for the years ended December 31, 2023, 2022 and 2021, respectively.

 

Revenue from China increased by $4,822,949, or 50.8%, from $9,491,208 for the year ended December 31, 2022 to $14,314,157 for the year ended December 31, 2023. The increase was mainly due to the increased revenue from bakery products as well as from other products. Revenue from bakery products increased by $3,826,909, or 44.0%, from $8,705,218 for the year ended December 31, 2022 to $12,532,127 for the year ended December 31, 2023, mainly because the PRC Stores’ business operations fully recovered from the COVID-19 pandemic during the year ended December 31, 2023. Due to 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 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 time the PRC Stores only managed to generate limited online sales and group sales. In early December 2022, China announced a nationwide loosening of its zero-COVID policy and experienced a wave in infections after the lifting of these restrictions, but the spread of the COVID-19 has appeared to be under control since January 2023, and the PRC Stores’ business operations have gradually recovered and the revenue from bakery products increased significantly thereafter. Revenue from other products increased by $996,040, or 126.7%, from $785,990 for the year ended December 31, 2022 to $1,782,030 for the year ended December 31, 2023, due to increased revenue from seasonal products and beverage products. As the PRC Stores’ business operations fully recovered from the negative impact of the 2022 Outbreak, revenue from seasonal products and beverage products both increased. Revenue from seasonal products increased by $615,792, or 89.1%, from $691,030 for the year ended December 31, 2022 to $1,306,822 for the year ended December 31, 2023, mainly due to increased customer orders of seasonal products. As the PRC Stores upgraded packaging for seasonal products, the seasonal products were more appealing to the customers. Revenue from beverage products significantly increased by $380,248, or 400.4%, from $94,960 for the year ended December 31, 2022 to $475,208 for the year ended December 31, 2023, mainly due to the increased revenue from freshly brewed coffee products, as the PRC Stores are focusing on expanding the business of coffee beverages. As of December 31, 2023, seven coffee bakery stores were opened, including one store opened in June 2022 and six stores opened in the year ended December 31, 2023.

 

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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. 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. Such decrease was due to impact by the 2022 Outbreak. 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. Such decrease was due to the 2022 Outbreak as mentioned above.

 

United States

 

Revenue from the U.S. decreased by $842,362, or 22.3%, from $3,780,867 for the year ended December 31, 2022 to $2,938,505 for the year ended December 31, 2023. The decrease was mainly due to decreased revenue from beverage products, bakery products, and eat-in services. Revenue from bakery products decreased by $167,861, or 27.4%, from $612,819 for the year ended December 31, 2022 to $444,958 for the year ended December 31, 2023, primarily due to increased competition from rivals operating in the same area. After the COVID-19 pandemic, many famous bakery brands have opened new stores in New York City, customers now have more choices and revenue from bakery products of Chanson 23rd Street and Chanson Greenwich were affected. With the increased competition, Chanson Greenwich closed its business operation in the second half of fiscal year 2023, which resulted in the decrease in revenue from bakery products. The decrease was partially offset by the increased revenue from bakery products of approximately $140,000, generated by Chanson 3rd Ave and Chanson Broadway, the new stores opened in March 2023 and July 2023, respectively. Revenue from beverage products decreased by $346,696, or 16.9%, from $2,047,670 for the year ended December 31, 2022 to $1,700,974 for the year ended December 31, 2023. After the cocktail bars of the U.S. Stores launched several new types of cocktail products with new flavors and styles, such products became popular among customers and the cocktail bars were often fully booked by reservation. However, during the year ended December 31, 2023, our rivals operating in the same area also launched many types of attractive cocktail products, so customers currently have more choices and revenue from beverage products were adversely affected. In addition, the decrease in revenue from beverage products was attributable to the closure of Chanson Greenwich as mentioned above. Revenue from eat-in services decreased by $327,805, or 29.3%, from $1,120,378 for the year ended December 31, 2022 to $792,573 for the year ended December 31, 2023. The decrease was mainly due to the decreased revenue from Chanson Greenwich of approximately $345,000 as a result of the closure of its business as mentioned above. Moreover, the decrease was due to the slightly decreased revenue from Chanson 23rd Street of approximately $24,000, as Chanson 23rd Street adjusted its menu items and customers were adjusting to the new products. The decrease in revenue from eat-in services was partially offset by the increased revenue from eat-in services of approximately $41,000, generated by the two newly opened stores, Chanson 3rd Ave and Chanson Broadway.

 

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. 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, 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. 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 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 Chanson Greenwich.

 

Cost of Revenue

 

Our cost of revenue consists of food ingredient costs, packaging 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 $1,935,933, or 27.0%, from $7,169,404 for the year ended December 31, 2022 to $9,105,337 for the year ended December 31, 2023. The increase in our cost of revenue was mainly due to increased cost of revenue from the PRC Stores.

 

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 PRC Stores, which was partially offset by the increased cost of revenue from the U.S. Stores.

 

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The following table sets forth the breakdown of our cost of revenue for the years ended December 31, 2023, 2022, and 2021, respectively:

 

   For the Years Ended December 31, 
   2023   %   2022   %   2021   % 
China                        
Bakery products  $6,459,617    70.9%  $4,686,808    65.4%  $6,144,101    79.3%
Other products   736,694    8.1%   393,808    5.5%   438,361    5.6%
Subtotal: cost of revenue from China   7,196,311    79.0%   5,080,616    70.9%   6,582,462    84.9%
                               
United States                              
Bakery products   409,552    4.5%   404,535    5.6%   305,228    3.9%
Beverage products   891,033    9.8%   1,013,181    14.1%   528,827    6.8%
Eat-in services   608,441    6.7%   671,072    9.4%   343,355    4.4%
Subtotal: cost of revenue from the United States   1,909,026    21.0%   2,088,788    29.1%   1,177,410    15.1%
                               
Total Cost of Revenue  $9,105,337    100.0%  $7,169,404    100.0%  $7,759,872    100.0%

 

China

 

Cost of revenue from China increased by $2,115,695, or 41.6%, from $5,080,616 for the year ended December 31, 2022 to $7,196,311 for the year ended December 31, 2023. The increase was primarily due to the increased cost of revenue of other products and bakery products. Cost of revenue from sales of bakery products increased by $1,772,809, or 37.8%, from $4,686,808 for the year ended December 31, 2022 to $6,459,617 for the year ended December 31, 2023, mainly due to the increase in sales of bakery products. The percentage of increase in cost of revenue was less than that in revenue during the same period, due to less spoilage and wastage of inventory incurred in the year ended December 31, 2023, as discussed in “—Gross Profit and Gross Margin” below in more details. Cost of revenue from other products increased by $342,886, or 87.1%, from $393,808 for the year ended December 31, 2022 to $736,694 for the year ended December 31, 2023. Cost of revenue from seasonal products increased by $165,616, or 49.3%, from $335,615 for the year ended December 31, 2022 to $501,231 for the year ended December 31, 2023, mainly due to the increase in sales of seasonal products. The percentage of increase in cost of revenue was less than that in revenue during the same period, due to more discounts offered to our customers in the year ended December 31, 2022 as discussed in “—Gross Profit and Gross Margin” below. The cost of revenue from beverage products increased by $177,270, or 304.6%, from $58,193 for the year ended December 31, 2022 to $235,463 for the year ended December 31, 2023, mainly due to the increase in sales of coffee products. The percentage of increase in cost of revenue was less than that in revenue during the same period, due to the higher gross margin of coffee products, as discussed in “—Gross Profit and Gross Margin” below.

 

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. 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. 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. 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.

 

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United States

 

Cost of revenue from the U.S. decreased by $179,762, or 8.6%, from $2,088,788 for the year ended December 31, 2022 to $1,909,026 for the year ended December 31, 2023. The decrease was due to the decreased cost of revenue from beverage products and eat-in services, which was partially offset by the increased cost of revenue from bakery products. Cost of revenue from sales of bakery products increased by $5,017, or 1.2%, from $404,535 for the year ended December 31, 2022 to $409,552 for the year ended December 31, 2023. The increase was primarily due to the increased cost of revenue from bakery products of approximately $240,000, generated by the two newly opened stores, Chanson 3rd Ave and Chanson Broadway. The increase in cost of revenue from sales of bakery products was partially offset by the decreased cost of revenue from Chanson 23rd Street and Chanson Greenwich, which was in line with their decreased revenue from bakery products. The cost of revenue increased despite the decreased revenue during the same period, due to the increased spoilage and wastage of inventory, and the fixed costs of the two new stores with higher proportion, as discussed in “—Gross Profit and Gross Margin” below. Cost of revenue from sales of beverage products decreased by $122,148, or 12.1%, from $1,013,181 for the year ended December 31, 2022 to $891,033 for the year ended December 31, 2023, due to the decrease in sales of beverage products from the U.S. Stores. 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 in the year ended December 31, 2023, as discussed in “—Gross Profit and Gross Margin” below. The cost of revenue from eat-in services decreased by $62,631, or 9.3%, from $671,072 for the year ended December 31, 2022 to $608,441 for the year ended December 31, 2023. The percentage of decrease in cost of revenue was less than that in revenue, due to the increased spoilage and wastage of inventory, and the fixed costs of the two new stores with higher proportion, as discussed in “—Gross Profit and Gross Margin” below.

 

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. 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 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 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. 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 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.

 

Gross Profit and Gross Margin

 

Our gross profit increased by $2,044,654, or 33.5%, from $6,102,671 for the year ended December 31, 2022 to $8,147,325 for the year ended December 31, 2023. The increase was mainly attributable to the increase in revenue from the PRC Stores, and partially offset by the decrease in revenue from the U.S. Stores. Our gross margin remained relatively stable with a slight increase by 1.2 percentage points from 46.0% for the year ended December 31, 2022 to 47.2% for the year ended December 31, 2023.

 

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.

 

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The following table sets forth the breakdown of our gross profit for the years ended December 31, 2023, 2022, and 2021, respectively:

 

  

For the Years Ended December 31,

 
   2023   Margin %   2022   Margin %   2021   Margin % 
China                        
Bakery products  $6,072,510    48.5%  $4,018,410    46.2%  $5,550,817    47.5%
Other products   1,045,336    58.7%   392,182    49.9%   662,810    60.2%
Subtotal: gross margin and margin % from China   7,117,846    49.7%   4,410,592    46.5%   6,213,627    48.6%
                               
United States                              
Bakery products   35,406    8.0%   208,284    34.0%   168,686    35.6%
Beverage products   809,941    47.6%   1,034,489    50.5%   471,212    47.1%
Eat-in services   184,132    23.2%   449,306    40.1%   76,898    18.3%
Subtotal: gross margin and margin % from the United States   1,029,479    35.0%   1,692,079    44.8%   716,796    37.8%
                               
Total Gross Margin and Margin %  $8,147,325    47.2%  $6,102,671    46.0%  $6,930,423    47.2%

 

China

 

Gross profit from China increased by $2,707,254, or 61.4%, from $4,410,592 for the year ended December 31, 2022 to $7,117,846 for the year ended December 31, 2023. The increase was mainly attributable to the overall increase in sales. The gross margin increased by 3.2 percentage points from 46.5% for the year ended December 31, 2022 to 49.7% for the year ended December 31, 2023. The gross profit of bakery products increased by $2,054,100, or 51.1%, from $4,018,410 for the year ended December 31, 2022 to $6,072,510 for the year ended December 31, 2023, and the gross margin of bakery products increased by 2.3 percentage points from 46.2% for the year ended December 31, 2022 to 48.5% for the year ended December 31, 2023. During the year ended December 31, 2022, the PRC Stores experienced temporary closures in compliance with the COVID-19 regional lockdowns and the difficulty in estimating customer demand, which resulted in spoilage and wastage of excess bakery products, fresh ingredients, and ingredients with shorter storage life. During the year ended December 31, 2023, the PRC Stores gradually returned to normal operation, and less spoilage and wastage of inventory was incurred. The gross profit of other products increased by $653,154, or 166.5%, from $392,182 for the year ended December 31, 2022 to $1,045,336 for the year ended December 31, 2023, and the gross margin increased by 8.8 percentage points from 49.9% for the year ended December 31, 2022 to 58.7% for the year ended December 31, 2023. The gross margin of seasonal products increased by 10.2 percentage points from 51.4% for the year ended December 31, 2022 to 61.6% for the year ended December 31, 2023. As the Mid-autumn Festival fell in September 2022, the PRC Stores’ sales of mooncakes were adversely affected by the 2022 Outbreak. In order to increase the sales and clear our stocks, the PRC Stores had to offer more discounts to customers, which resulted in a decrease in gross margin of seasonal products for the year ended December 31, 2022 as compared to the fiscal year of 2023. The gross margin of beverage products increased by 11.8 percentage points from 38.7% for the year ended December 31, 2022 to 50.5% for the year ended December 31, 2023. The increase in gross margin of beverage products was primarily due to a decrease in spoilage and wastage of raw materials during the year ended December 31, 2023, as the staff at the PRC stores have become more experienced in preparing coffee products since the launch of the coffee business in the year ended December 31, 2022. Moreover, due to the increased prices of raw materials such as fresh fruit and the increased inventory spoilage of fresh ingredients caused by the irregular opening hours and store closure during the 2022 Outbreak, the gross margin of beverage products decreased in the year ended December 31, 2022.

  

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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. 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. 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. decreased by $662,600, or 39.2%, from $1,692,079 for the year ended December 31, 2022 to $1,029,479 for the year ended December 31, 2023. The decrease was mainly attributable to the overall decrease in revenue. The gross margin decreased by 9.8 percentage points from 44.8% for the year ended December 31, 2022 to 35.0% for the year ended December 31, 2023. The gross profit of bakery products decreased by $172,878, or 83.0%, from $208,284 for the year ended December 31, 2022 to $35,406 for the year ended December 31, 2023, and the gross margin of bakery products decreased by 26.0 percentage points, from 34.0% for the year ended December 31, 2022 to 8.0% for the year ended December 31, 2023. The decrease in gross margin was mainly attributable to our two newly opened stores, Chanson 3rd Ave and Chanson Broadway. During the first few months after their opening, there were limited revenue generated, however, the fixed costs incurred, such as rental expense, salaries related expenses as well as other overhead expenses were much higher than the revenue earned, which led to negative gross margin from these two newly opened stores for the year ended December 31, 2023. Meanwhile, due to the increased competition from rivals operating in the same area as mentioned above, customer demand was harder to estimate and higher spoilage of inventory, excess raw materials and bakery products with short storage life was incurred. Together with the increased price of raw materials, the gross margin of bakery products decreased in the year ended December 31, 2023. The gross profit of beverage products decreased by $224,548, or 21.7%, from $1,034,489 for the year ended December 31, 2022 to $809,941 for the year ended December 31, 2023, and the gross margin of beverage products decreased by 2.9 percentage points, from 50.5% for the year ended December 31, 2022 to 47.6% for the year ended December 31, 2023. Due to increased competition from rivals operating in the same area, the U.S. Stores launched more promotions and offered more discounts in order to make their beverage products more appealing to the customers. Therefore, the gross margin of beverage products decreased during the year ended December 31, 2023. The gross profit of eat-in services decreased by $265,174, or 59.0%, from $449,306 for the year ended December 31, 2022 to $184,132 for the year ended December 31, 2023, and the gross margin of eat-in services decreased by 16.9 percentage points from 40.1% for the year ended December 31, 2022 to 23.2% for the year ended December 31, 2023. The decreased gross margin was mainly due to the negative gross margin contributed from Chanson 3rd Ave and Chanson Broadway, higher spoilage of inventory as well as increased price of raw materials as mentioned above.

 

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.

 

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Operating Expenses

 

The following table sets forth the breakdown of our operating expenses for the years ended December 31, 2023, 2022, and 2021.

 

   For the Years Ended December 31, 
   2023   2022   2021 
   Amount   % of
revenue
   Amount   % of
revenue
   Amount   % of
revenue
 
                         
Total revenue  $17,252,662    100.0%  $13,272,075    100.0%  $14,690,295    100.0%