F-1 1 ea138629-f1_chansoninter.htm REGISTRATION STATEMENT

Filed with the Securities and Exchange Commission on March 31, 2021.

Registration No. [●]

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

Chanson International Holding

(Exact name of registrant as specified in its charter)

 

Cayman Islands   2000   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

No. 26 Culture Road, Tianshan District

Urumqi, Xinjiang, China

+86-0991-2302709

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

George Chanson (NY) Corp.

20 West 23rd St

New York, NY 10010

917-545-1575

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

With a Copy to:

 

Ying Li, Esq.

Guillaume de Sampigny, Esq.

Hunter Taubman Fischer & Li LLC
800 Third Avenue, Suite 2800
New York, NY 10022
212-530-2206

Mengyi “Jason” Ye, Esq.

Ortoli Rosenstadt LLP

366 Madison Avenue, 3rd Floor

New York, NY 10017

212-588-0022

 

Approximate date of commencement of proposed sale to the public: Promptly after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.
   
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
   
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
   
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
   
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.  
   
Emerging growth company
   
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to Be Registered  Amount to
Be
Registered
   Proposed
Maximum
Offering
Price per
Share
   Proposed
Maximum
Aggregate
Offering
Price(1)
   Amount of
Registration
Fee(2)
 
Class A ordinary shares, par value $0.001 per share(3)   3,450,000    6.00   $20,700,000   $2,258.37 
Underwriter warrants(4)                
Class A ordinary shares underlying the Underwriter warrants   180,000    6.60   $1,188,000   $129.61 
Total   3,630,000       $21,888,000   $2,387.98 

 

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended (the “Securities Act”). Includes the offering price attributable to up to 450,000 additional shares that Univest Securities, LLC (the “Underwriter”) has the option to purchase to cover over-allotments, if any.
   
(2) Calculated pursuant to Rule 457(a) under the Securities Act, based on an estimate of the proposed maximum aggregate offering price.
   
(3) In accordance with Rule 416(a), we are also registering an indeterminate number of additional Class A ordinary shares that shall be issuable pursuant to Rule 416 to prevent dilution from share splits, share dividends, or similar transactions.
   
(4) The Registrant will issue to the Underwriter warrants to purchase a number of Class A ordinary shares equal to an aggregate of 6% of the Class A ordinary shares (the “Underwriter Warrants”) sold in the offering, excluding any Class A ordinary shares sold as a result of the exercise of the Underwriter’s over-allotment option. The exercise price of the Underwriter Warrants is equal to 110% of the offering price of the Class A Ordinary Shares offered hereby. The Underwriter Warrants are exercisable at any time, and from time to time, in whole or in part, within five years after the date of commencement of sales of the offering.

 

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

 

 

 

 

 

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

 

SUBJECT TO COMPLETION

 

PRELIMINARY PROSPECTUS DATED MARCH 31, 2021

 

3,000,000 Class A Ordinary Shares

 

 

Chanson International Holding

 

This is an initial public offering of our Class A ordinary shares, par value $0.001 per share (“Class A Ordinary Shares”). We are offering our Class A Ordinary Shares on a firm commitment basis by Univest Securities, LLC (the “Underwriter”). See “Underwriting.” Prior to this offering, there has been no public market for our Class A Ordinary Shares or Class B ordinary shares, par value $0.001 per share (“Class B Ordinary Shares”). We currently expect that the initial public offering price for our Class A Ordinary Shares will be in the range of $4.00 to $6.00 per share.

 

Our authorized share capital is $50,000 divided into 44,000,000 Class A Ordinary Shares and 6,000,000 Class B Ordinary Shares, and we have 3,060,000 Class A Ordinary Shares and 5,940,000 Class B Ordinary Shares issued and outstanding, respectively. Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each holder of Class A Ordinary Shares will be entitled to one vote per one Class A Ordinary Share and each holder of Class B Ordinary Shares will be entitled to 10 votes per one Class B Ordinary Share. The Class A Ordinary Shares are not convertible into shares of any other class. The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time after issuance at the option of the holder on a one-to-one basis.

 

We have reserved the symbol “CHSN” for purposes of listing our Class A Ordinary Shares on the Nasdaq Capital Market and plan to apply to list our Class A Ordinary Shares on the Nasdaq Capital Market. It is a condition to the closing of this offering that our Class A Ordinary Shares qualify for listing on a national securities exchange.

 

Investing in our Class A Ordinary Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 12 to read about factors you should consider before buying our Class A Ordinary Shares.

 

We are an “emerging growth company” as defined under the federal securities laws and will be subject to reduced public company reporting requirements. Please read the disclosures beginning on page 8 of this prospectus for more information.

 

Following the completion of this offering, our largest shareholder will beneficially own approximately 86.62% of the aggregate voting power of our issued and outstanding Class A Ordinary Shares and Class B Ordinary Shares as a group assuming no exercise of the over-allotment option, or approximately 86.03% assuming full exercise of the over-allotment option. As such, we will be deemed a “controlled company” under Nasdaq Marketplace Rules 5615(c). However, even if we are deemed as a “controlled company,” we do not intend to avail ourselves of the corporate governance exemptions afforded to a “controlled company” under the Nasdaq Marketplace Rules. See “Risk Factors” and “Management—Controlled Company.”

 

   Per Share   Total Without Over-Allotment Option   Total With Over-Allotment Option 
Initial public offering price  $                 $                $              
Underwriter’s discounts(1)  $    $    $  
Proceeds to our company before expenses(2)  $    $    $  

 

(1)

See “Underwriting” for more information regarding our compensation arrangements with the Underwriter.

(2) The total estimated expenses related to this offering are set forth in “Underwriting—Discounts and Expenses.”

 

We have granted the Underwriter an option for a period of 45 days after the closing of this offering to purchase up to 15% of the total number of Class A Ordinary Shares to be offered by us pursuant to this offering (excluding Class A Ordinary Shares subject to this option), solely for the purpose of covering over-allotments, at the public offering price less the underwriting discounts.

 

We have agreed to issue to the Underwriter warrants, exercisable upon issuance for a period of five years after the date of commencement of sales of the offering, to purchase Class A Ordinary Shares equal to 6% of the total number of Class A Ordinary Shares sold in this offering at a per share price equal to 110% of the public offering price (the “Underwriter Warrants”). The registration statement of which this prospectus is a part also covers the Underwriter Warrants and the Class A Ordinary Shares issuable upon the exercise thereof.

 

The Underwriter expects to deliver the Class A Ordinary Shares against payment as set forth under “Underwriting,” on page 151.

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Prospectus dated [●]

 

 

 

TABLE OF CONTENTS

 

  Page
   
PROSPECTUS SUMMARY 1
   
SUMMARY CONSOLIDATED FINANCIAL DATA 11
   
RISK FACTORS 12
   
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 44
   
ENFORCEABILITY OF CIVIL LIABILITIES 45
   
USE OF PROCEEDS 46
   
DIVIDEND POLICY 47
   
CAPITALIZATION 48
   
DILUTION 49
   
CORPORATE HISTORY AND STRUCTURE 51
   
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 55
   
INDUSTRY 80
   
BUSINESS 88
   
REGULATIONS 105
   
MANAGEMENT 117
   
PRINCIPAL SHAREHOLDERS 122
   
RELATED PARTY TRANSACTIONS 124
   
DESCRIPTION OF SHARE CAPITAL 125
   
SHARES ELIGIBLE FOR FUTURE SALE 141
   
MATERIAL INCOME TAX CONSIDERATION 143
   
UNDERWRITING 151
   
EXPENSES RELATING TO THIS OFFERING 158
   
LEGAL MATTERS 159
   
EXPERTS 159
   
WHERE YOU CAN FIND MORE INFORMATION 159
   
INDEX TO FINANCIAL STATEMENTS F-1

 

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About this Prospectus

 

We and the Underwriter have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by us or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the Class A Ordinary Shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. For the avoidance of doubt, no offer or invitation to subscribe for Class A Ordinary Shares is made to the public in the Cayman Islands. The information contained in this prospectus is current only as of the date on the front cover of the prospectus. Our business, financial condition, results of operations, and prospects may have changed since that date.

 

Conventions that Apply to this Prospectus

 

Unless otherwise indicated or the context requires otherwise, references in this prospectus to:

 

  “Affiliated Entities” are to our subsidiaries, branch offices, and VIEs (as defined below);
     
  “Chanson Greenwich” are to Chanson 355 Greenwich LLC, a New York limited liability company, which is wholly owned by Chanson NY (as defined below);
     
  “Chanson International” are to Chanson International Holding, an exempted company with limited liability incorporated under the laws of Cayman Islands and formerly known as RON Holding Limited;
     
  “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, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only;
     
  “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;
     
  “Chanson 23rd Street” are to Chanson 23rd Street LLC, a New York limited liability company, which is wholly owned by Chanson NY;
     
  “ordinary shares” are to Class A Ordinary Shares and Class B Ordinary Shares;
     
  “VIE” are to variable interest entity;
     
 

“we,” “us,” “our Company,” or the “Company” are to one or more of Chanson International and its Affiliated Entities, as the case may be; and

     
  “Xinjiang United Family” 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.

 

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the Underwriter of its over-allotment option.

 

The functional currency of Xinjiang United Family, our wholly owned indirect subsidiary in the PRC, and its 25 VIEs, is Renminbi (“RMB”), the currency of China, and the functional currency of Chanson 23rd Street and Chanson Greenwich, our wholly owned indirect subsidiaries in New York City, is U.S. dollars. Our consolidated financial statements are presented in U.S. dollars. In this prospectus, 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

 

 

PROSPECTUS SUMMARY

 

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our Class A Ordinary Shares, discussed under “Risk Factors,” before deciding whether to buy our Class A Ordinary Shares.

 

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to a forward split of our ordinary shares at a ratio of 1,000-for-1 share and additional share issuances to our existing shareholders approved by our shareholders and board of directors on March 27, 2021.

 

Overview

 

Our Company

 

We manufacture and sell a wide selection of bakery products, seasonal products (i.e. products sold during particular holiday seasons), and beverage products; we also offer eat-in services in some of our stores. We currently focus our business in the Xinjiang Uygur Autonomous Region (“Xinjiang”) of the PRC and New York City and plan to expand to other regions of the PRC and the U.S., with a goal of opening three to five new stores in China annually and 10 new stores in the United States during the next five years. We 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 our products.

 

We sell our products primarily through (i) a bakery chain consisting of 29 stores operated by Xinjiang United Family and its VIEs (the “PRC Stores”), under our “George●ChansonTM” brand in Xinjiang, and (ii) through Chanson 23rd Street in New York City. We are also currently renovating spaces for the opening of a new store in New York City. Selling through our own stores allows us to run our entire operation more efficiently and to exercise greater control over the quality of our products and the presentation of our brand, and to better manage customer experience in our stores. We also sell our products on our digital platforms and through third-party online food ordering platforms. Our current customer base consists of both individual and corporate customers. To expand our customer base, we have developed a variety of marketing and sale strategies, such as increasing our presence on social media platforms, devising pricing and discounting programs, and improving customer in-store experience.

 

For our PRC Stores, we manufacture the majority of bakery products in our central factory located in Urumqi, Xinjiang, prepare beverage products within the stores, and contract third-party manufacturers to produce seasonal products. For Chanson 23rd Street, we 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 our kitchen in the store. To ensure the quality and safety of our products, we 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, we have implemented a rigorous quality control system covering our entire operation process and mandated internal training to improve our employees’ awareness and knowledge of food safety.

 

We have a dedicated and highly-experienced product development team that constantly creates new products that reflect market trends and are designed to meet customer demand. As of March 2021, we had more than 190 types of bakery products and seasonal products on sale in our PRC Stores, including over 80 types of new products introduced to the market since 2019, and 92 types of eat-in menu items and bakery products on sale at Chanson 23rd Street, including 25 types of new products introduced to the market since 2019. We also offer a large number of beverage products in our PRC Stores and Chanson 23rd Street and update our drink menus seasonally and in response to ever changing customer demand. By continuously offering new products and refining our product formulas to enhance existing products, we believe that we are able to steadily bring in new customers and drive the frequency of our existing customers’ visits to our stores, digital platforms, and store page on third-party platforms.

 

For the fiscal years ended December 31, 2019 and 2018, we had total revenue of $12,577,135 and $11,963,674, and net income of $945,468 and $758,973, respectively. Our PRC Stores accounted for 81.1% and 80.3% of our total revenue for those fiscal years, respectively, and Chanson 23rd Street accounted for 18.9% and 19.7%, respectively.

 

For the six months ended June 30, 2020 and 2019, we had total revenue of $5,006,575 and $6,321,775, and a net loss of $45,903 and net income of $579,747, respectively. Our PRC Stores accounted for 85.2% and 77.4% of our total revenue for the six months ended June 30, 2020 and 2019, respectively, and Chanson 23rd Street accounted for 14.8% and 22.6%, respectively.

 

Our PRC Stores primarily generate revenue through sale of bakery products, seasonal products, and beverage products. For the fiscal years ended December 31, 2019 and 2018, revenue derived from sale of bakery products accounted for 90.7% and 88.5% of our PRC Stores’ revenue, revenue derived from sale of seasonal products accounted for 6.9% and 8.6% of our PRC Stores’ revenue, and revenue derived from sale of beverage products accounted for 2.4% and 2.9% of our PRC Stores’ revenue, respectively. For the six months ended June 30, 2020 and 2019, revenue derived from sale of bakery products accounted for 91.6% and 91.8% of our PRC Stores’ revenue, revenue derived from sale of seasonal products accounted for 6.3% and 5.5%, and revenue derived from sale of beverage products accounted for 2.1% and 2.7%, respectively.

 

1

 

 

Chanson 23rd Street primarily generates revenue through offering eat-in services and sale of bakery products and beverage products. For the fiscal years ended December 31, 2019 and 2018, revenue derived from offering eat-in services accounted for 45.5% and 34.1% of Chanson 23rd Street’s revenue, revenue derived from sale of bakery products accounted for 40.3% and 43.9% of Chanson 23rd Street’s revenue, and revenue derived from sale of beverage products accounted for 14.2% and 22.0% of Chanson 23rd Street’s revenue, respectively. For the six months ended June 30, 2020 and 2019, revenue derived from offering eat-in services accounted for 35.0% and 39.2% of Chanson 23rd Street’s revenue, revenue derived from sale of bakery products accounted for 45.5% and 46.9%, and revenue derived from sale of beverage products accounted for 19.5% and 13.9%, respectively.

 

Competitive Strengths

 

We believe that the following competitive strengths have contributed to our success and differentiated us from our competitors:

 

  trendy brand reflecting healthy food concepts;
     
  strict quality control;
     
  advanced industry research and constant product innovation;
     
  advantageous information management system;
     
  well-developed distribution network in Xinjiang; and
     
  experienced management and professional teams.

 

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;
     
  enhance in-store customer experience and customer services;
     
  keep implementing healthy and nutritious diet principles in product development; and
     
  increase brand awareness.

  

Our Securities

 

On March 27, 2021, our shareholders and board of directors approved (i) a forward split of our outstanding ordinary shares at a ratio of 1,000-for-1 share, (ii) the creation of Class A Ordinary Shares and Class B Ordinary Shares, and (iii) additional share issuances to our existing shareholders to increase the number of total ordinary shares issued and outstanding prior to the completion of this offering from 100,000 to 9,000,000. On March 29, 2021, we filed our second amended and restated memorandum and articles of association with the Registrar of Companies of the Cayman Islands (the “Cayman Registrar”) to effect such corporate actions, which filing is currently being processed by the Cayman Registrar. Our second amended and restated memorandum and articles of association will become effective upon acceptance by the Cayman Registrar. Unless otherwise indicated, all references to ordinary shares, options to purchase ordinary shares, share data, per share data, and related information have been retroactively adjusted, where applicable, in this prospectus to reflect the forward split of our ordinary shares and the additional share issuances to our existing shareholders as if they had occurred at the beginning of the earlier period presented.

 

Our authorized share capital is divided into Class A Ordinary Shares and Class B Ordinary Shares. Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each holder of Class A Ordinary Shares will be entitled to one vote per one Class A Ordinary Share and each holder of Class B Ordinary Shares will be entitled to 10 votes per one Class B Ordinary Share. Due to the voting power of Class B Ordinary Shares, the holders of Class B Ordinary Shares currently and may continue to have a concentration of voting power, which limits the holders of Class A Ordinary Shares’ ability to influence corporate matters. Each Class B Ordinary Share is convertible into one Class A Ordinary Share at any time by the holder thereof. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances. See “Description of Share Capital.”

 

Unless the context requires otherwise, all references to the number of Class A Ordinary Shares and Class B Ordinary Shares to be outstanding after our initial public offering are based on 3,060,000 Class A Ordinary Shares and 5,940,000 Class B Ordinary Shares issued and outstanding.

 

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Corporate Information

 

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.xson.com.cn, 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 prospectus. Our agent for service of process in the United States is George Chanson (NY) Corp., located at 20 West 23rd St, New York, NY 10010.

 

Corporate Structure

 

We currently conduct our business through:

 

  (i) an association between Xinjiang United Family and 25 individually-owned businesses comprising the VIEs known as the “United Family Group” or “UFG”: 24 of the entities that comprise UFG (each a “UFG Entity” and, collectively, the “UFG Entities”) are owned independently by our chairman of the board of directors (“Chairman”), Mr. Gang Li, and one of the entities is owned independently by Ms. Hui Wang, the Marketing Director of Xinjiang United Family. Our affiliation with UFG is managed through several exclusive agreements between Xinjiang United Family, each UFG Entity, and the sole owner of such UFG Entity. As a result of our arrangements with all the UFG Entities, we effectively control each UFG Entity. For more details on the United Family Group, please see “Corporate History and Structure—The United Family Group”;
     
  (ii) Xinjiang United Family and its three branch offices; and
     
  (iii) Chanson 23rd Street and Chanson Greenwich (currently under renovation for an opening planned in the Summer 2021).

 

The following is a complete list of the stores of Xinjiang United Family as of the date of this prospectus, 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. Li and operated under VIE agreements between this entity and Xinjiang United Family
             
2   Shayibake District Yining Rd. George Chanson Bakery   Dehui Wanda   Same as above
             
3   Changji George Chanson Youhao Supermarket Bakery   Changji Youhao   Same as above
             
4   Changji George Chanson Bakery   Changji Huijia   Same as above
             
5   Tianshan District Xinhua North Rd. George Chanson Bakery  

Hongshan

  Same as above

 

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6   Shayibake District Youhao South Rd. Chanson Bakery Store   Baisheng   Same as above
             
7   Shayibake District Pingding Shandong No.2 Rd. George Chanson Bakery   Zhongyangjun   Same as above
             
8   Tianshan District Xinmin Rd. George Chanson Bakery   Beimen   Same as above
             
9   Tianshan District Minzhu Rd. George Chanson Bakery   Minzhu   Same as above
             
10   Tianshan District Jianquan No.3 Rd. George Chanson Bakery   Riyue Xingguang   Same as above
             
11   Tianshan District Jiefang North Rd. George Chanson Bakery   Wanyancheng   Same as above
             
12   Urumqi Economics and Technology Development District George Chanson Bakery on Kashi West Rd.   Huarun Wanjia   Same as above
             
13   Xinshi District Liyushan South Rd. George Chanson Bakery   Medical College   Same as above
             
14   Xinshi District Changchun South Rd. George Chanson Bakery   Changchun   Same as above
             
15   Xinshi District Beijing Middle Rd. United Family Chanson Bakery   Huijia Third Floor   Same as above
             
16   Xinshi District Suzhou East Rd. Chanson Bakery   Baishang   Same as above
             
17   Xinshi District Suzhou Rd. Xiaoxigou Chanson Bakery   Xiaoxigou   Same as above
             
18   Xinshi District South No.3 Rd. Chanson Bakery   Railway Bureau   Same as above
             
19   Urumqi Economics and Technology Development District George Chanson Bakery on Xuanwuhu Rd.   Economics Development Wanda   Same as above
             
20   Shayibake District Youhao South Rd. Chanson Bakery   Hongshan Lifestyle Store   Same as above

 

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21   Tianshan District Xingchenhui Chanson Bakery   Taigu Town   Same as above
             
22   Shuimogou District South Nanhu Rd. George Chanson Bakery   Nanhu   Same as above
             
23   Xinshi District Hebei East Rd. George Chanson Bakery   Hebei Road Huarun   Same as above
             
24   Urumqi Toutunhe District George Chanson Bakery on Zhongya South Rd.   Degang Wanda   Same as above
             
25   Shihezi Hemeijia Bakery No.1   Shihezi   Part of UFG – owned 100% by Ms. Hui Wang and operated under agreements between this entity and Xinjiang United Family
             
26   Xinjiang United Family Trading Co., Ltd. Tianshan District Chanson Bakery   Tianbai   A branch office of Xinjiang United Family
             
27   Xinjiang United Family Trading Co., Ltd. Chanson Bakery Urumqi Branch   Wenhua   A branch office of Xinjiang United Family
             
28   Xinjiang United Family Trading Co., Ltd. Urumqi Meimei Chanson Bakery   Meimei   A branch office of Xinjiang United Family
             
29   Xinjiang United Family Trading Co., Ltd. Ruitai Chanson Bakery   Ruitai  

A store operated by Xinjiang United Family, not a separate legal entity

             
30   Chanson 23rd Street LLC   Chanson 23rd Street   A wholly owned indirect subsidiary of Xinjiang United Family
             
31   Chanson 355 Greenwich LLC   Chanson Greenwich  

Same as above. We expect Chanson Greenwich to open in the Summer 2021.

 

For ease of reference, unless it is necessary to the understanding of the context to differentiate, throughout this prospectus we will refer to all of the above entities collectively as our “stores” and, to the extent we refer to a specific entity listed in the table above, we refer to such entity by its commercial name.

 

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The following diagram illustrates our corporate structure after the Reorganization (as defined in “Corporate History and Structure—Our Corporate History”) and upon completion of this offering based on a proposed number of 3,000,000 Class A Ordinary Shares being offered, assuming no exercise of the over-allotment option:

 

  

Notes: All percentages reflect the voting ownership interests instead of the equity interests held by each of our shareholders given that each holder of Class B Ordinary Shares will be entitled to 10 votes per one Class B Ordinary Share and each holder of Class A Ordinary Shares will be entitled to one vote per one Class A Ordinary Share.

 

(1)Represents 2,700,000 Class A Ordinary Shares and 5,400,000 Class B Ordinary Shares held by Gang Li, the 100% owner of Danton Global Limited, as of the date of this prospectus.
  
(2)Represents 270,000 Class B Ordinary Shares held by Jihong Cai, the 100% owner of Haily Global Limited, as of the date of this prospectus.
  
(3)Represents 270,000 Class B Ordinary Shares held by Cheng Chen, the 100% owner of C&C Capital Investments LLC, as of the date of this prospectus.
  
(4)Represents an aggregate of 360,000 Class A Ordinary Shares held equally by two corporate shareholders, each one of which holds less than 5% of our voting ownership interests, as of the date of this prospectus.

  

Summary of Risk Factors

 

Investing in our Class A Ordinary Shares involves significant risks. You should carefully consider all of the information in this prospectus before making an investment in our Class A Ordinary Shares. Below please find a summary of the principal risks we face, organized under relevant headings. These risks are discussed more fully in the section titled “Risk Factors.”

 

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Risks Related to Our Business

 

Risks and uncertainties related to our business include, but are not limited to, the following:

 

  our business is affected by changes in consumer preferences and discretionary spending;
     
  our long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand our operations in existing and new markets;
     
  we operate in a highly-competitive market and our failure to compete effectively could adversely affect our results of operations;
     
  our financial condition, results of operations, and cash flows have been adversely affected by the Coronavirus Disease 2019 (“COVID-19”) outbreak;
     
  we rely on our central factory and a limited number of third-party producers and suppliers. Any interruption in operations at our central factory or in such third-party producers or suppliers could prevent or limit our ability to meet demand for or fulfill orders of our products;
     
  our geographic focus makes us particularly vulnerable to economic and other events and trends in Xinjiang and New York City; and
     
  failure to maintain or enhance our brands or image could have a material and adverse effect on our business and results of operations.

 

Risks Related to Our Corporate Structure

 

We are also subject to risks and uncertainties related to our corporate structure, including, but are not limited to, the following:

 

  our VIE Arrangements with the UFG Entities and the UFG Operators may not be effective in providing control over the UFG Entities;
     
  our contractual arrangements 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 these contractual arrangements;
     
  our controlling shareholder has potential conflicts of interest with our Company which may adversely affect our business; and
     
  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.

 

Risks Relating to Doing Business in the PRC

 

We face risks and uncertainties relating to doing business in the PRC in general, including, but not limited to, the following:

 

  changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and operations;
     
  uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protection available to you and us;
     
  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;
     
  under the PRC Enterprise Income Tax 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; and
     
  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.

 

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Risks Relating to this Offering and the Trading Market

 

In addition to the risks described above, we are subject to general risks and uncertainties relating to this offering and the trading market, including, but not limited to, the following:

 

  there has been no public market for our Class A Ordinary Shares prior to this offering, and you may not be able to resell our Class A Ordinary Shares at or above the price you pay for them, or at all;
     
   the dual class structure of our ordinary shares has the effect of concentrating voting control with our Chairman, and his interest may not be aligned with the interests of our other shareholders; and
     
  We do not intend to pay dividends for the foreseeable future.

 

Impact of COVID-19 on Our Operations and Financial Performance

 

Due to the impact of the COVID-19 outbreak, we temporarily closed all but one of our PRC Stores between late January and early March of 2020. The PRC Stores resumed their normal activities on March 8, 2020. However, all the PRC Stores were closed again on July 17, 2020 due to the resurgence of COVID-19 cases in Xinjiang. The PRC Stores resumed their normal activities in September 2020. In the United States, Chanson 23rd Street in New York City provided only delivery and pickup services between the end of February 2020 and the end of June 2020, and resumed outdoor dining services at the end of June 2020 and indoor dining services at the end of September 2020. Chanson 23rd Street suspended its indoor dining services again between December 14, 2020 and February 11, 2021 according to an indoor dining ban issued by the Governor of New York State. Chanson 23rd Street resumed its indoor dining services on February 12, 2021 at 25 percent capacity, which was increased to 35 percent on February 26, 2021 and further increased to 50 percent on March 19, 2021. In addition, the renovation of Chanson Greenwich was delayed and we currently expect the store to open in the Summer 2021.

 

See “Risk Factors—Risks Related to Our Business—Our financial condition, results of operations, and cash flows have been adversely affected by the COVID-19 outbreak” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Affecting Our Results of Operations.”

 

Implications of Our Being an “Emerging Growth Company”

 

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act.” An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to larger public companies. In particular, as an emerging growth company, we:

 

  may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations;
     
  are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;
     
  are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

 

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  are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);
     
  are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
     
  are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
     
  will not be required to conduct an evaluation of our internal control over financial reporting until our second annual report on Form 20-F following the effectiveness of our initial public offering.

 

We intend to take advantage of all of these reduced reporting requirements and exemptions, other than the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act.

 

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions until we no longer meet the definition of an emerging growth company. The JOBS Act provides that we would cease to be an “emerging growth company” at the end of the fiscal year in which the fifth anniversary of our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, as amended (the “Securities Act”), occurred, if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our Class A Ordinary Shares held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period.

 

Foreign Private Issuer Status

 

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are exempt from certain provisions applicable to U.S. domestic public companies. For example:

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
     
  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
     
  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
     
  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
     
  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; and
     
  we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

Controlled Company

 

Upon completion of this offering, our Chairman, Mr. Gang Li, will beneficially own approximately 86.62% of the aggregate voting power of our outstanding Class A Ordinary Shares and Class B Ordinary Shares as a group assuming no exercise of the over-allotment option, or 86.03% assuming full exercise of the over-allotment option. As a result, we will be deemed a “controlled company” for the purpose of the Nasdaq listing rules. As a controlled company, we are permitted to elect to rely on certain exemptions from the obligations to comply with certain corporate governance requirements, including:

 

  the requirement that our director nominees be selected or recommended solely by independent directors; and
     
  the requirement that we have a nominating and corporate governance committee and a compensation committee that are composed entirely of independent directors with a written charter addressing the purposes and responsibilities of the committees.

 

Although we do not intend to rely on the controlled company exemptions under the Nasdaq listing rules even if we are deemed a controlled company, we could elect to rely on these exemptions in the future, and if so, you would not have the same protection afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

 

9

 

 

THE OFFERING

 

Class A Ordinary Shares offered by us   3,000,000 Class A Ordinary Shares, or 3,450,000 Class A Ordinary Shares if the Underwriter exercises its over-allotment option in full
     
Price per Class A Ordinary Share   We currently estimate that the initial public offering price will be in the range of $4.00 to $6.00 per Class A Ordinary Share.
     
Class A Ordinary Shares outstanding prior to completion of this offering   3,060,000 Class A Ordinary Shares
     
Class A Ordinary Shares outstanding immediately after this offering  

6,060,000 Class A Ordinary Shares assuming no exercise of the Underwriter’s over-allotment option and excluding 180,000 Class A Ordinary Shares underlying the Underwriter Warrants

 

6,510,000 Class A Ordinary Shares assuming full exercise of the Underwriter’s over-allotment option and excluding 180,000 Class A Ordinary Shares underlying the Underwriter Warrants

     
Listing   We will apply to have our Class A Ordinary Shares listed on the Nasdaq Capital Market.
     
Ticker symbol   “CHSN”
     
Transfer Agent  

Transhare Corporation

     
Use of proceeds   We intend to use the proceeds from this offering to open new stores in the U.S. and for working capital and general corporate purposes. See “Use of Proceeds” on page 46 for more information.
     
Lock-up   All of our directors and officers and our shareholders owning 5% or more of our Class A Ordinary Shares have agreed with the Underwriter, subject to certain exceptions, not to sell, transfer, or dispose of, directly or indirectly, any of our Class A Ordinary Shares or securities convertible into or exercisable or exchangeable for our Class A Ordinary Shares for a period of six months after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.
     

Risk factors

 

 

 

Voting rights

 

The Class A Ordinary Shares offered hereby involve a high degree of risk. You should read “Risk Factors,” beginning on page 12 for a discussion of factors to consider before deciding to invest in our Class A Ordinary Shares.

 

Holders of Class A Ordinary Shares are entitled to one vote per one Class A Ordinary Share.

 

Holders of Class B Ordinary Shares are entitled to 10 votes per one Class B Ordinary Share.

 

Holders of our Class A Ordinary Shares and Class B Ordinary Shares will generally vote together as a single class, unless otherwise required by law. Mr. Gang Li, who after our initial public offering will control approximately 86.62% of the voting power of our outstanding ordinary shares assuming no exercise of the over-allotment option by the Underwriter or 86.03% of the voting power of our outstanding ordinary shares assuming full exercise of the over-allotment option by the Underwriter, will have the ability to control the outcome of matters submitted to our shareholders for approval, including the election of our directors. See “Description of Share Capital”.

 

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Summary Consolidated Financial Data

 

The following selected historical statements of operations for the years ended December 31, 2019 and 2018, and balance sheet data as of December 31, 2019 and 2018, have been derived from our audited financial statements for those periods. The following summary consolidated financial data for the six months ended June 30, 2020 and 2019, have been derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in the prospectus.

 

Selected Statements of Operations Information:

 

    For the Fiscal Year
Ended
December 31,
2019
    For the Fiscal Year
Ended
December 31,
2018
 
Revenue   $ 12,577,135     $ 11,963,674  
Gross profit   $ 6,673,679     $ 5,931,172  
Operating expenses   $ 5,606,716     $ 5,088,706  
Income from operations   $ 1,066,963     $ 842,466  
Provision for Income taxes   $ 59,686     $ 58,151  
Net income   $ 945,468     $ 758,973  

 

   For the
Six Months
Ended
June 30,
2020
   For the
Six Months
Ended
June 30,
2019
 
Revenue  $5,006,575   $6,321,775 
Gross profit  $2,498,432   $3,440,353 
Operating expenses  $2,479,379   $2,832,242 
Income from operations  $19,053   $608,111 
Provision for Income taxes  $7,451   $11,206 
Net income (loss)  $(45,903)  $579,747 

 

Selected Balance Sheet Information:

 

    As of
December 31,
2019
    As of
December 31,
2018
 
Current assets   $ 5,160,941     $ 3,742,066  
Total assets   $ 17,447,725     $ 14,755,305  
Current liabilities   $ 8,406,127     $ 7,225,513  
Total liabilities   $ 15,176,665     $ 13,402,926  
Total shareholders’ equity   $ 2,271,060     $ 1,352,379  

 

   As of
June 30,
2020
   As of
December 31,
2019
 
Current assets  $5,346,151   $5,160,941 
Total assets  $20,373,758   $17,447,725 
Current liabilities  $8,898,968   $8,406,127 
Total liabilities  $18,163,074   $15,176,665 
Total shareholders’ equity  $2,210,684   $2,271,060 

 

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RISK FACTORS

 

An investment in our Class A Ordinary Shares involves a high degree of risk. Before deciding whether to invest in our Class A Ordinary Shares, you should consider carefully the risks described below, together with all of the other information set forth in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be materially and adversely affected, which could cause the trading price of our Class A Ordinary Shares to decline, resulting in a loss of all or part of your investment. The risks described below and discussed in other parts of this prospectus are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business. You should only consider investing in our Class A Ordinary Shares if you can bear the risk of loss of your entire investment.

 

Risks Related to Our Business

 

Our business is affected by changes in consumer preferences and discretionary spending.

 

Our success depends, in part, upon the popularity of our bakery products and our ability to develop new bakery products that appeal to consumers. Shifts in consumer preferences away from our bakery stores or our product offerings and mix, our inability to develop new products that appeal to consumers could harm our business. Our success depends in large part on our customers’ continued belief that food made with high-quality ingredients, including selected proteins raised without antibiotics, our artisan breads, cakes, pastries, and other bakery treats made without artificial preservatives, flavors, sweeteners, or colors from artificial sources are worth the prices charged at our bakery stores relative to the lower prices offered by some of our competitors. Our inability to successfully educate customers about the quality of our bakery products or our customers’ rejection of our pricing approach could result in decreased demand for our products or require us to change our pricing, marketing, or promotional strategies, which could materially and adversely affect our consolidated financial results or the brand identity that we have created. In addition, our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we 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 our sales, results of operations, business, and financial condition.

 

Our long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand our operations in existing and new markets.

 

One of the key means of achieving our growth strategies will be through opening and operating new stores on a profitable basis for the foreseeable future. We opened four, five, and three new stores in the fiscal years ended December 31, 2020, 2019, and 2018, respectively. We identify target markets, taking into account numerous factors such as the locations of our current stores, demographics, traffic patterns, information gathered from various sources, and, recently, whether known consumer patterns will remain at the same level as prior to the COVID-19 outbreak and if we need to modify the layout of our new stores to minimize contact with customers. We may not be able to open our planned new stores within budget or on a timely basis, if at all, given the uncertainty of these factors, which could adversely affect our business, financial condition, and results of operations. As we operate more stores, our 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 outbreak;
     
  our ability to increase brand awareness and bakery product consumption in areas where we open stores;

 

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  the identification and availability of sites for store locations with the appropriate size, traffic patterns, local retail and business attractions, and infrastructure that will drive high levels of customer traffic and sales per unit;
     
  competition in existing and new markets, including competition for store sites;
     
  the negotiation of acceptable lease terms;
     
  our ability to obtain all required governmental permits on a timely basis;
     
  our 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 our 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 our corporate culture;
     
  the effective management of inventory to meet the needs of our stores on a timely basis; and
     
  the availability of sufficient levels of cash flow and financing to support our 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 our 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 our experience in the markets in which we currently operate may not be applicable in other parts of the PRC and the U.S. As a result, we may not be able to leverage our experience to expand into other parts of the PRC and the U.S. When we enter new markets, we 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, our business model may not be successful in new and untested markets and markets with a different business environment. We may not be able to grow our revenue in the new cities we enter into, but we will incur substantial costs in connection with any such expansion. Consequently, we cannot assure you that we will achieve our planned growth or, even if we are able to grow our store base as planned, that any new stores will be profitable, which could have a material adverse effect on our results of operations.

 

We operate in a highly-competitive market and our failure to compete effectively could adversely affect our results of operations.

 

The market for bakery products is highly competitive. Our current competitors include international and domestic companies that produce and sell bakery products in Xinjiang and New York City, and our potential competitors include companies that produce and sell bakery products in other cities in the U.S. We compete for customers primarily on the basis of the price and quality of our 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. We may not successfully compete with our existing competitors and new competitors may enter the market.

 

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In addition, we cannot predict the pricing or promotion actions of our competitors or their effect on customer perceptions or the success of our own advertising and promotional efforts. Our competitors may develop and launch products targeted to compete directly with our products and some of our competitors may have substantially greater financial, marketing, and other resources than we do. This creates competitive pressure that could cause us to lose market share or require us to lower prices, increase advertising expenditures, or increase the use of discounting or promotional campaigns. These competitive factors may also restrict our ability to increase prices, including in response to commodity and other cost increases. If we are unable to continue to respond effectively to these and other competitive pressure, our customers may reduce purchase of our products or may insist on prices that erode our margins. These or other developments could materially and adversely affect our sales volumes and margins and result in a decrease in our operating results, which could have a material adverse effect on our business, financial condition, and results of operations.

 

Our financial condition, results of operations, and cash flows have been adversely affected by the COVID-19 outbreak.

 

The recent COVID-19 outbreak has spread throughout the world, especially in China, the United States, and Europe. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic—the first pandemic caused by a coronavirus. The outbreak has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Both the Chinese and U.S. governments have ordered quarantines, travel restrictions, and the temporary closure of stores and facilities. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses.

 

Due to the impact of the COVID-19 outbreak, we temporarily closed all but one of our PRC Stores between late January and early March of 2020. The PRC Stores resumed their normal activities on March 8, 2020. However, all the PRC Stores were closed again on July 17, 2020 due to the resurgence of COVID-19 cases in Xinjiang. The PRC Stores resumed their normal activities in September 2020. In the United States, Chanson 23rd Street in New York City provided only delivery and pickup services between the end of February 2020 and the end of June 2020, and resumed outdoor dining services at the end of June 2020 and indoor dining services at the end of September 2020. Chanson 23rd Street suspended its indoor dining services again between December 14, 2020 and February 11, 2021 according to an indoor dining ban issued by the Governor of New York State. Chanson 23rd Street resumed its indoor dining services on February 12, 2021 at 25 percent capacity, which was increased to 35 percent on February 26, 2021 and further increased to 50 percent on March 19, 2021. In addition, the renovation of Chanson Greenwich was delayed and we currently expect the store to open in the Summer 2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Affecting Our Results of Operations.”

 

Consequently, the COVID-19 outbreak has materially adversely affected our business operations and condition and operating results for 2020, including but not limited to material negative impact on our total revenue and net income. The extent to which the COVID-19 outbreak impacts our results of operations in 2021 will depend on the future developments of the outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain and unpredictable.

 

Sales of our products are subject to changing customer preferences. If we do not correctly anticipate such changes, our sales and profitability may decline.

 

There are a number of trends in customer preferences which have an impact on us 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 our business depends on both the continued appeal of our products and, given the varied backgrounds and tastes of our customer base, our 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 we operate could have a material adverse effect on our business. Customer tastes are also susceptible to change. Our competitiveness therefore depends on our ability to predict and quickly adapt to customer trends, exploiting profitable opportunities for product development without alienating our existing customer base or focusing excessive resources or attention on unprofitable or short-lived trends. If we are unable to respond on a timely and appropriate basis to changes in demand or customer preferences, our sales volumes and margins could be adversely affected.

 

14

 

 

Our future results and competitive position are dependent on the successful development of new products and improvement of existing products, which are subject to a number of difficulties and uncertainties.

 

Our future results and ability to maintain or improve our competitive position depend on our capacity to anticipate changes in our key markets and to identify, develop, manufacture, market, and sell new or improved products in these changing markets successfully. We 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 our 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 our continuing ability 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 our 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 our existing products if customers purchase the new product in place of our existing products. If we are unsuccessful in developing new products in response to changing customer demand or preferences in an efficient and economical manner, or if our competitors respond more effectively than we do, demand for our products may decrease, which could materially and adversely affect our business, financial condition, and results of operations.

 

Our inability to source raw materials or other inputs of an acceptable type or quality could adversely affect our results of operations.

 

We 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 our cost of revenue, and accordingly, adverse changes in raw material prices will impact our results of operations.

 

Specifically, the availability and the prices of milk, eggs, and other agricultural commodities can be volatile. We 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 we attempt to negotiate fixed prices for certain materials with our suppliers for periods up to a full year, most of our contracts with suppliers do not have fix prices, therefore we cannot guarantee that we 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.

 

Our ability 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 our products could increase our costs and disrupt our operations. If the availability of any of our inputs is constrained for any reason, we 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.

 

Our inability to pass on price increases for materials or other inputs to our customers could adversely affect our results of operations.

 

Our ability to pass through increases in the prices of raw materials to our customers depends, among others, on prevailing competitive conditions and pricing methods in the markets in which we operate, and we may not be able to pass through such price increases to our customers. Even if we are able to pass through increases in prices, there is typically a time lag between cost increases impacting our business and implementation of product price increases, during which time our gross margin may be negatively impacted. During our adjustments to increase our prices to recover cost increases, customers may take actions which exacerbate the impact of such cost increases, for example, by ceasing to purchase our products or deferring orders until adjustments have ended. Our inability to pass through price increases in raw materials and preserve our profit margins in the future could materially and adversely affect our business, financial condition, and results of operations.

 

15

 

 

We rely on our central factory and a limited number of third-party producers and suppliers. Any interruption in operations at our central factory or in such third-party producers or suppliers could prevent or limit our ability to meet demand for or fulfill orders of our products.

 

We 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 our PRC Stores. Any significant disruption at our 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 our PRC Stores and significantly harm our results of operations and financial performance.

 

In addition, the Premises Use Agreement for our central factory expires in 2028, and we may be unable to renew this agreement or find a new facility on commercially reasonable terms. If we were unable or unwilling to renew at the proposed rates, relocating our 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 our manufacturing activities or operating results. If our manufacturing capabilities were impaired by our move, we may not be able to manufacture and ship our products in a timely manner, which would adversely impact our business.

 

We also depend upon a limited number of third-party producers to produce all of the seasonal products for our PRC Stores. During the fiscal years ended December 31, 2019 and 2018, our four largest third-party suppliers represented approximately 47% and 53% of raw material purchases of our PRC Stores, respectively, and our three largest third-party suppliers represented approximately 76% and 75% of raw material purchases of Chanson 23rd Street, respectively. During the six months ended June 30, 2020, our four largest third-party suppliers represented approximately 47% of raw material purchases of our PRC Stores, and our three largest third-party suppliers represented approximately 75% of raw material purchases of Chanson 23rd Street. 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 our control. Certain of our contracts with key suppliers, such as for the raw materials we used in our products, can be terminated by the supplier upon giving notice within a certain period. If any of these producers or suppliers breach or terminate their contracts with us or experience significant disruptions of their operations, we 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 us on reasonable terms or at all. Any disruption of producing or packaging could delay delivery of our products, which could harm our business and financial results and result in lost or deferred revenue.

 

Our geographic focus makes us particularly vulnerable to economic and other events and trends in Xinjiang and New York City.

 

Our current operations in the PRC are geographically limited to three cities in Xinjiang, and 26 of our 29 PRC Stores are located in Urumqi, the capital city of Xinjiang. We derived 75% and 71% of our revenue from our stores in Urumqi in the fiscal years ended December 31, 2019 and 2018, respectively, and derived 89% of our revenue from our stores in Urumqi in the six months ended June 30, 2020. In addition, our current operations in the U.S. are limited to New York City. Our 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 outbreak, or the implementation of provincial or local policies unfavorable to bakery industry may cause a decrease in the demand for our products and could have a negative impact on our 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 our business, financial condition, and results of operation.

 

Failure to maintain or enhance our brands or image could have a material and adverse effect on our business and results of operations.

 

We believe our “George●Chanson,” “Patisserie ChansonTM,” and “Chanson” brands are well-recognized among our customers and other food industry players such as other bakery product manufacturers and bakery chain stores in the local markets we operate in. Our brands are integral to our sales and marketing efforts. Our continued success in maintaining and enhancing our brands and image depends to a large extent on our ability to satisfy customer needs by further developing and maintaining the quality of our products, as well as our ability to respond to competitive pressures. If we are unable to satisfy customer needs or if our public image or reputation were otherwise diminished, our business transactions with our customers may decline, which could in turn adversely affect our results of operations.

 

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Health concerns or adverse developments with respect to the safety or quality of products of the food industry in general or our own products specifically may damage our reputation, increase our costs of operations, and decrease demand for our products.

 

Food safety and the public’s perception that our products are safe and healthy are essential to our image and business. We sell food products for human consumption, which subjects us 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. We may also be impacted by publicity concerning any assertion that our products caused illness or injury. In addition, we 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 our products. Any significant lawsuit or widespread product recall or other events leading to the loss of customer confidence in the safety and quality of our products could damage our brand, reputation, and image and negatively impact our sales, profitability, and prospects for growth. In addition, product recalls are difficult to foresee and prepare for and, in the event that we are required to recall one or more of our products, such recall may result in loss of sales due to unavailability of our products and may take up a significant amount of our management’s time and attention. We maintain systems designed to monitor food safety risks and carefully select our third-party producers and suppliers. However, we cannot guarantee that our efforts will be successful or that such risks will not materialize. In addition, although we attempt, through contractual relationships and regular inspections, to control the risk of contamination caused by third parties in relation to the manufacturing processes we outsource, we cannot guarantee that our efforts will be successful or that contamination of our products by third parties will not materialize.

 

We 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, we or our suppliers would be required to find alternative supplies or ingredients that may or may not be available at commercially reasonable prices and within the required time. In addition, governmental regulations may require us to identify replacement products to offer to our customers or, alternatively, to discontinue certain offerings or limit the range of products we offer. We may be unable to find substitutes that are as appealing to our 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 our products.

 

We 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 our 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 our business. We do not currently have insurance to cover claims for damages, and if we choose to purchase such insurance, the availability and price of insurance to cover claims for damages are subject to market forces that we do not control, and such insurance may not cover all the costs of such claims and would not cover damage to our reputation. Even if product liability claims against us 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 our products and damage our reputation and brand image.

 

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We could incur material costs to address violations of, or liabilities under, health, safety, and environmental regulations.

 

Our 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 our 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 we operate or from which we source raw materials and ingredients become more stringent in the future, the extent and timing of investments required to maintain compliance may exceed our budgets or estimates and may limit the availability of funding for other investments.

 

Furthermore, under some environmental laws, we could be liable for costs incurred in investigating or remediating contamination at properties we own or occupy, even if the contamination was caused by a party unrelated to us or was not caused by us, 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 our properties or at third-party sites, could result in substantial unanticipated costs which could have a material adverse effect on our business, financial condition, and results of operations.

 

Chanson 23rd Street 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 our 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 our business, financial condition, or results of operations.

 

Increased distribution costs or disruption of product transportation could adversely affect our 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, our 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 our ability to supply products affordably and in a timely manner or at all. Failure to deliver our perishable food products promptly could also result in inventory spoilage and the inability to satisfy the demand of our customers at our stores. Any increases in the cost of transportation, and any disruption in transportation, could have a material adverse effect on our 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 our Chanson 23rd Street’s liquor and food service licenses and, thereby, harm its 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 Chanson 23rd Street. Typically, licenses must be renewed annually and may be revoked, suspended, or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses and approvals could adversely affect Chanson 23rd Street and delay or result in our decision to cancel the opening of new stores, which would adversely affect our business, financial condition, or results of operations.

 

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Alcoholic beverage control regulations generally require Chanson 23rd Street 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 Chanson 23rd Street, 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 Chanson 23rd Street.

 

Any disruption of our information technology system would harm our business and reduce our profitability.

 

We rely on our information technology systems, in particular our 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. Our 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. We may be adversely affected if our controls designed to manage information technology operational risks fail to contain such risks. If we 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, we could be subject to adverse effects including billing and collection errors, business disruptions, in particular concerning our manufacturing and logistics functions, and security breaches. Any disruption caused by failings in our information technology infrastructure equipment or of communication networks, could delay or otherwise impact our day-to-day business and decision-making processes and negatively impact our performance. In addition, we are reliant on third parties to service parts of our IT infrastructure. Failure on their part to provide good and timely service may have an adverse impact on our information technology network. Furthermore, we do not control the facilities or operations of our 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 our business, financial condition, and results of operations.

 

Data security breaches and attempts thereof could negatively affect our reputation, credibility, and business.

 

We collect and store personal information relating to our customers and employees, including their personally identifiable information, and rely on third parties for the various social media tools and websites we use as part of our 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 our employees, customers, or website visitors could harm our reputation and credibility, reduce our e-commerce sales, impair our ability to attract website visitors, reduce our ability to attract and retain customers, and could result in litigation against us or the imposition of significant fines or penalties. We cannot assure you that any of our 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 our 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, we may become subject to more extensive requirements to protect the customer information that we process in connection with the purchase of our products, resulting in increased compliance costs.

 

A breach of security of confidential customer information related to our electronic processing of credit and debit card transactions, or a breach of security of our employee information, could substantially affect our reputation, business, financial condition, and results of operations.

 

A significant portion of the sales in Chanson 23rd Street are by credit or debit cards. Other retailers have experienced security breaches in which credit and debit card information has been stolen. Chanson 23rd Street 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 Chanson 23rd Street may also be subject to lawsuits or other proceedings relating to these types of incidents. Chanson 23rd Street 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 Chanson 23rd Street 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 Chanson 23rd Street and could substantially affect its reputation and business, financial condition, or results of operations.

 

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Governmental regulation may adversely affect our ability to open new stores in the U.S. or otherwise adversely affect our business, financial condition, or results of operations.

 

Chanson 23rd Street and any store or stores we 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. We 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.

 

We 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 Chanson 23rd Street. We may in the future have to modify our 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 Chanson 23rd Street and any store or stores we 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 our business, financial condition, or results of operations.

 

Disclosure of our recipes and other proprietary information, or a failure to adequately protect these, could result in increased competition and have a material adverse effect on our business and financial results.

 

Our ability to compete effectively depends in part on our ability to obtain, maintain, and protect our proprietary information. We rely on trade secret laws and practices, including physical security, limited dissemination and access, and confidentiality agreements with our employees, consultants, business partners, and others, to protect our recipes, proprietary processes, and other proprietary information. However, trade secrets are difficult to protect, and courts outside the jurisdictions in which we operate may be less willing to protect our trade secrets. There can be no assurance that our protective measures will effectively prevent disclosure or unauthorized use of proprietary information or provide an adequate remedy in the event of misappropriation, infringement, or other violations of our proprietary information.

 

Existing laws afford only limited protection for our proprietary rights. Despite our efforts, we may not be able to protect some of our proprietary information, or the protection that we receive may not be sufficient. We face additional risks that our protective measures could prove to be inadequate, including:

 

  the steps we 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 our proprietary rights or may change in the future in a manner adverse to us; and
     
  effective protection of intellectual property rights may be unavailable or limited in some countries in which we operate or plan to do business.

 

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From time to time, we may seek to enforce our proprietary rights against third parties. Policing unauthorized use of proprietary information can be difficult and expensive. We may not be successful in our attempts to enforce our proprietary rights against third parties. Any such litigation may result in substantial diversion of financial and management resources and, if decided unfavorably to us, could have a material adverse effect on our business and financial results.

 

We are subject to the risks associated with leasing a substantial amount of space and are required to make substantial lease payments under our operating leases. Any failure to make these lease payments when due would likely harm our business, financial condition, and results of operations.

 

We do not own any real estate. Instead, we lease all of our store locations and our corporate office and central factory in Urumqi and New York City. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions. As our stores mature and as we expand our store base, our lease expenses and our cash outlays for rent under our lease agreements will increase. Our substantial operating lease obligations could have significant negative consequences, including:

 

  requiring that an increased portion of our cash from operations and available cash be applied to pay our lease obligations, thus reducing liquidity available for other purposes;
     
  increasing our vulnerability to adverse general economic and industry conditions;
     
  limiting our flexibility to plan for or react to changes in our business or in the industry in which we compete; and
     
  limiting our ability to obtain additional financing.

 

If an existing or future store is not profitable, and we decide to close it, we may nonetheless remain committed to perform our 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, we may not satisfy the contractual requirements for early cancellation under that lease.

 

We depend on cash flow from operations to pay our lease expenses, finance our growth capital requirements, and fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities to fund these requirements, we may not be able to achieve our growth plans, fund our other liquidity and capital needs, or ultimately service our lease expenses, which would harm our business.

 

Unexpected termination of leases, failure to renew the leases of our existing premises, or failure to renew such leases at acceptable terms could materially and adversely affect our business.

 

We lease the premises for all of our stores and our corporate office and central factory. As a result, we may be subject to compulsory acquisition, closure, or demolition of any of the properties on which our stores are situated. Although we may receive liquidated damages or compensation if our leases are terminated unexpectedly, we may be forced to suspend operations of the relevant store and divert management attention, time, and costs to find a new site and relocate our store, which will negatively affect our business and results of operations.

 

We enter into leases of approximately one to 15 years with an option to renew for our stores. Rent for our leases is typically fixed amounts and subject to annual or biennially incremental increases as stipulated in the lease agreements. We cannot assure you that we would be able to renew the relevant lease agreements without substantial additional cost or increase in the rental cost payable by us. 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, our business and results of operations may be materially and adversely affected. If we are unable to renew the leases for our store sites, we will have to close or relocate the store, which could subject us to decoration and other costs and risks, and loss of existing customers, and could have a material and adverse effect on our business and results of operations. In addition, the relocated store may not perform as well as the existing store.

 

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If we cannot manage our growth effectively and efficiently, our results of operations or profitability could be adversely affected.

 

Our revenue for the fiscal year ended December 31, 2019, was $12,577,135, an increase of 5.1% from $11,963,674 for the fiscal year ended December 31, 2018. Although our revenue for the six months ended June 30, 2020 decreased by 20.8% to $5,006,575 from $6,321,775 for the six months ended June 30, 2019 due to the impact of the COVID-19 outbreak, we still intend to continue to expand our business by opening new stores. This expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological, and other types of resources. Our planned expansion will also place significant demands on us to maintain the quality of our product and customer services to ensure that our brand does not suffer as a result of any deviations, whether actual or perceived, in the quality of our product and customer services. In order to manage and support our growth, we must continue to improve our existing operational, administrative, and technological systems and our 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 we expand into new markets and launch new business initiatives. We may not be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel, and integrate new expansion into our operations. As a result, our quality of service may deteriorate and our results of operations or profitability could be adversely affected.

 

Any decrease in customer traffic in the shopping malls or other locations in which our stores are located could cause our sales to be less than expected.

 

Our stores are located in shopping malls, other shopping centers, and busy street locations. Sales at these stores are derived, to a significant degree, from the volume of customer traffic in those locations and in the surrounding area. Our 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 our stores. Our 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 our stores are located;
     
  epidemics, such as the COVID-19 outbreak, 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 us.

 

In addition, severe weather conditions and other catastrophic occurrences in areas in which we have stores may have a material adverse effect on our results of operations. Such conditions may result in physical damage to our stores, loss of inventory, decreases in customer traffic, and closure of one or more of our stores. Any of these factors may disrupt our business and have a material adverse effect on our financial condition and results of operations.

 

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If we are unable to attract, train, assimilate, and retain employees that embody our culture, including store personnel, store and district managers, senior managers, and technicians, we may not be able to grow or successfully operate our business.

 

Our success depends in part upon our ability to attract, train, assimilate, and retain a sufficient number of employees, including store personnel, store managers, and district managers, who understand and appreciate our culture, are able to represent our brand effectively and establish credibility with our customers. If we are unable to hire and retain store personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers, and knowledge of the bakery and other products we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially adversely affected, and our 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. Our planned growth will require us to attract, train, and assimilate even more personnel. Any failure to meet our staffing needs or any material increases in team member turnover rates could have a material adverse effect on our business or results of operations.

 

We place substantial reliance on the bakery industry experience and knowledge of our senior management team as well as their relationships with other industry participants. Mr. Gang Li, our Chairman, and Ms. Jihong Cai, our chief financial officer, are particularly important to our future success due to their substantial experience and reputation in the bakery markets. We do not carry, and do not intend to procure, key person insurance on any of our senior management team. The loss of the services of one or more members of our senior management team due to their departure, or otherwise, could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for our current senior management could be difficult, and competition for such personnel of similar experience is intense. If we fail to retain our senior management, our business and results of operations could be materially and adversely affected.

 

The market for technicians and other individuals with the required technical expertise to succeed in our business is highly competitive. There may be a limited supply of qualified individuals in some of the cities in the PRC where we have operations and other cities into which we intend to expand. We must hire and train qualified technicians and other employees on a timely basis to keep pace with our rapid growth while maintaining consistent quality of products across our operations in various geographic locations. We must also provide continuous training to our technicians and other employees so that they are equipped with up-to-date knowledge of various aspects of our operations and can meet our demand for high-quality products. If we fail to do so, the quality of our products may decrease in one or more of the markets where we operate, which in turn, may cause a negative perception of our brand and adversely affect our business.

 

Failure to maintain the quality of customer services could harm our reputation and our ability to retain existing customers and attract new customers, which may materially and adversely affect our business, financial condition, and results of operations.

 

Our business is significantly affected by the overall size of our customer base, which in turn is determined by, among other factors, their experience with our customer services. As such, the quality of customer services is critical to retaining our existing customers and attracting new customers. If we fail to provide quality customers services, our customers may be less inclined to visit our stores and purchase our products or recommend us to new customers, and may switch to our competitors. Failure to maintain the quality of customer services could harm our reputation and may materially and adversely affect our business, financial condition, and results of operations.

 

The ongoing need for renovations and other capital improvements at our stores could have a material adverse effect on us, including our financial condition, liquidity, and results of operations.

 

To improve the in-store experience of our customers, our 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;
     

 

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  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 us 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 us, including our financial condition, liquidity, and results of operations.

 

Future acquisitions may have an adverse effect on our ability to manage our business.

 

We may acquire businesses, technologies, services, or products which are complementary to our core bakery product manufacturing and retail business. Future acquisitions may expose us to potential risks, including risks associated with the integration of new operations, services, and personnel, unforeseen or hidden liabilities, the diversion of resources from our existing business and technology, our 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 our integration of new businesses.

 

Any of the potential risks listed above could have a material and adverse effect on our ability to manage our business, our revenue, and net income. We may need to raise additional debt funding or sell additional equity securities to make such acquisitions. The raising of additional debt funding by us, if required, would result in increased debt service obligations and could result in additional operating and financing covenants, or liens on our assets, that would restrict our operations. The sale of additional equity securities could result in additional dilution to our shareholders. 

 

Risks Relating to Our Corporate Structure

 

Our corporate structure, in particular our VIE arrangements (the “VIE Arrangements”), are subject to significant risks, as set forth in the following risk factors. Mr. Gang Li and Ms. Hui Wang are referred herein individually as a “UFG Operator” and collectively as the “UFG Operators.”

 

Our VIE Arrangements with the UFG Entities and the UFG Operators may not be effective in providing control over the UFG Entities.

 

A substantial part of our current revenue and net income is derived from the UFG Entities. We do not have an ownership interest in any of the UFG Entities but rely on contractual arrangements with them to control and operate their business. However, the VIE Arrangements may not be as effective in providing us with the necessary control over each UFG Entity and its operations. Any deficiency in these contractual arrangements 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 our VIE Arrangements to effect control over and 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, prior to the closing of this offering, own 100% of the equity interests in 24 and one UFG Entities, respectively, it may be difficult for us to change our corporate structure if such UFG Operators refuse to cooperate with us.

 

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Our contractual arrangements 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 these contractual arrangements.

 

As all of our contractual arrangements with the UFG Entities are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. Disputes arising from these contractual arrangements between us and the UFG Entities 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 these contractual arrangements, through arbitration, litigation, and other legal proceedings remain in the PRC, which could limit our ability to enforce these contractual arrangements and exert effective control over the UFG Entities. 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 these contractual arrangements, we may not be able to exert effective control over the UFG Entities, and our ability to conduct our business may be materially and adversely affected.

 

We may not be able to consolidate the financial results of some of our affiliated companies or such consolidation could materially adversely affect our operating results and financial condition.

 

A substantial part of our business is conducted through the UFG Entities, which currently are considered for accounting purposes as VIEs, and we are considered the primary beneficiary, enabling us to consolidate our financial results in our consolidated financial statements. In the event that in the future a company we hold as a VIE would no longer meet the definition of a VIE, or we are deemed not to be the primary beneficiary, we would not be able to consolidate line by line that entity’s financial results in our consolidated financial statements for PRC purposes. Also, if in the future an affiliate company becomes a VIE and we become the primary beneficiary, we would be required to consolidate that entity’s financial results in our consolidated financial statements for PRC purposes. If such entity’s financial results were negative, this could have a corresponding negative impact on our operating results for PRC purposes. However, any material variations in the accounting principles, practices, and methods used in preparing financial statements for PRC purposes from the principles, practices, and methods generally accepted in the U.S. and in the SEC accounting regulations must be discussed, quantified, and reconciled in financial statements for the U.S. and SEC purposes.

 

The contractual arrangements 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. 24 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 contractual arrangements with us, irrespective of the effect such action may have on us. 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 will be 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.

 

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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 whom reside within in the PRC. Even if you are successful in bringing an action, the PRC laws may render you unable to enforce a judgment against our assets and management, most of which are located in the PRC.

 

We rely on the approval certificates and business license held by UFG and any deterioration of the relationship between Xinjiang United Family and UFG could materially and adversely affect our overall business operations.

 

Pursuant to the VIE Arrangements, 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 Arrangements, which are intended to provide us, through our indirect ownership of Xinjiang United Family, with effective control over the business operations of each UFG Entity. However, the VIE Arrangements 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 Arrangements, go bankrupt, suffer from difficulties in its business, or otherwise become unable to perform its obligations under the VIE Arrangements 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.

 

Because we rely on the exclusive service agreement with each UFG Entity for our revenue, the termination of this agreement will severely and detrimentally affect our continuing business viability under our current corporate structure.

 

We are a holding company and a substantial part of our business operations are conducted through the contractual arrangements between each UFG Entity and Xinjiang United Family. 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, we cannot assure you that such an event or reason will not occur in the future. In the event that the exclusive service agreement is 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.

 

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Risks Relating to Doing Business in the PRC

 

Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and operations.

 

Most of our assets and operations are currently located in China. Accordingly, our business, financial condition, results of operations, and prospects may be influenced to a significant degree by political, economic, and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, including the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

 

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government, or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, reduce demand for our products, 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 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 Affiliated Entities 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 and internal rules that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including 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.

 

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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 named in the prospectus based on foreign laws. It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China.

 

We are a company incorporated under the laws of the Cayman Islands, and we conduct most of our operations in China and most of our assets are located in China. In addition, substantially all our senior executive officers reside within China for a significant portion of the time and are PRC nationals. 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 the securities laws of the U.S. or any 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. See “Enforceability of Civil Liabilities.”

 

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 United States may not be efficient in the absence of a practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or “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.

 

Recent joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable 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 offering.

 

On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.

 

On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating in a “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or the board of directors for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditor.

 

On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable 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 Holding Foreign Companies Accountable Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law.

 

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The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our Class A Ordinary Shares to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, 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. Our auditor is headquartered in Manhattan, New York, and has been inspected by the PCAOB on a regular basis with the last inspection in May 2018. However, the recent developments would add uncertainties to our offering and we cannot assure you whether the national securities exchange we apply to for listing or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our 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.

 

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.

 

Our operations are subject to extensive legal and regulatory requirements. We are required to hold a number of licenses and permits in connection with our 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 we are found to be in violation of applicable laws and regulations, we 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 our business, financial condition, results of operations, and prospects. As of the date of this prospectus, all 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. We 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. We will make our best effort to renew the permits described above but we cannot assure you that we will be able to renew such permits or we will not be subject to any penalties in the future. See “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 our central factory, as well as our production equipment and production process, at least a sewage registration is required. As of the date of this prospectus, we are still in the process of applying for a sewage registration. As a result, we may be subject to administrative penalties by the environmental protection department or other relevant departments for discharging pollutants without obtaining a pollution discharge permit or failing to fill in a pollution discharge registration form, which could adversely affect our business and results of operations. See “Regulations—PRC Regulations—Regulations on Food Production and Food Business Operation—Pollutant Discharge Permit.”

 

Increases in labor costs in the PRC may adversely affect our business and our profitability.

 

China’s economy has experienced increases in labor costs in recent years. China’s overall economy and the average wage in China are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing prices for our products, our profitability and results of operations may be materially and adversely affected.

  

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In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our 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 our employees. Pursuant to the PRC Labor Contract Law, or 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 we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our 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 our employment practice does not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.

 

Our PRC Affiliated Entities 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 “Regulations—PRC Regulations—Regulations on Employment and Social Welfare—Social Insurance and Housing Fund.” 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. Our PRC Affiliated Entities have not made adequate social insurance and housing fund contributions for all employees. We 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. If we fail to make up for the shortfalls within the prescribed time limit, the relevant administrative authorities will impose a fine of one to three times the outstanding amount upon us. However, considering that (i) some of the employees of Xinjiang United Family are over the age limit to be paid social insurance fees; (ii) some employees chose to not receive social insurance fees deposited by Xinjiang United Family and decided to participate in their own voluntary social insurance plans instead, and promised not to ask Xinjiang United Family to make up the payment; and (3) 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, it is unlikely that the overdue social insurance premiums would be ordered to be repaid by Xinjiang United Family. With respect to housing fund plans, we may be required to pay and deposit housing funds in full and on time within the prescribed time limit. If we fail to do so, relevant authorities could file applications to competent courts for compulsory enforcement of payment and deposit.

 

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, State Administration of Foreign Exchange (“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, or “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, or “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, or “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.

 

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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 may not be informed of the identities of all the PRC residents holding direct or indirect interest in our Company, however, and we have no control over any of our future beneficial owners. Thus, 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. Such failure or inability of our PRC residents beneficial owners to comply with these SAFE regulations may subject us or 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 this offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Under PRC laws and regulations, we are permitted to utilize the proceeds from this offering to fund our PRC subsidiary by making loans to or additional capital contributions to our PRC subsidiary, subject to applicable government registration, statutory limitations on amount, and approval requirements. The amount of capital contributions that we may make to Xinjiang United Family is RMB6,000,000 (approximately $857,143), without obtaining approvals from SAFE or other government authorities. Additionally, Xinjiang United Family may increase its registered capital to receive additional capital contributions from us and currently there is no statutory limit to increasing its registered capital, subject to satisfaction of applicable government and filing requirements. Pursuant to relevant PRC regulations, we may provide loans to Xinjiang United Family up to the larger amount of (i) the balance between the registered total investment amount and registered capital of Xinjiang United Family, or (ii) twice the amount of the net assets of Xinjiang United Family calculated in accordance with the People’s Bank of China Circular 9, subject to satisfaction of applicable government registration or approval requirements. For any amount of loans that we may extend to Xinjiang United Family, such loans must be registered with the local counterpart of SAFE. For more details, see “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 this offering to fund the establishment of new entities in China by our PRC subsidiary or to invest in or acquire any other PRC companies through our PRC subsidiary. Moreover, we cannot assure you that we will be able to complete the necessary registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiary or future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received or expect to receive from our offshore offerings and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our business, including our liquidity and our ability to fund and expand our business.

 

Fluctuations in exchange rates could have a material and 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. 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.

 

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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, our Class A Ordinary Shares offered by this prospectus are offered in U.S. dollars, we will need to convert part of the net proceeds we receive into RMB in order to use the funds for our business in the PRC. Changes in the conversion rate between the U.S. dollar and RMB will affect the amount of proceeds we will have available for our business.

 

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

 

Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations and the value of your investment.

 

Under the PRC Enterprise Income Tax Law, or the “EIT Law,” that became effective 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, or the “SAT,” and partially amended by People’s Bank of China Circular 9 promulgated in January 2014, specifies that certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Further to SAT Circular 82, SAT issued a bulletin, known as “SAT Bulletin 45,” which took effect in September 2011 and amended on June 1, 2015 and October 1, 2016 to provide more guidance on the implementation of SAT Circular 82 and clarify the reporting and filing obligations of Chinese controlled offshore incorporated resident enterprises, to provide more guidance on the implementation of SAT Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated resident enterprises.” SAT Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-determination matters. Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth in SAT Circular 82 and SAT Bulletin 45 may reflect SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups, or by PRC or foreign individuals.

 

If the PRC tax authorities determine that the actual management organ of Chanson International is within the territory of China, Chanson International may be deemed to be a PRC resident enterprise for PRC enterprise income tax purposes and a number of unfavorable PRC tax consequences could follow. First, we will be subject to the uniform 25% enterprise income tax on our world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Finally, dividends payable by us to our investors and gains on the sale of our shares may become subject to PRC withholding tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our Company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our shares. Although up to the date of this prospectus, 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.

 

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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, or “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, or “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. 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 Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or 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, or 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 disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.

 

We are regulated by the SEC, and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by China Securities Regulatory Commission, a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings, and our other public pronouncements with the understanding that no local regulator has done any review of us, our SEC reports, other filings, or any of our other public pronouncements.

 

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, or 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.

 

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Risks Relating to this Offering and the Trading Market

 

There has been no public market for our Class A Ordinary Shares prior to this offering, and you may not be able to resell our Class A Ordinary Shares at or above the price you pay for them, or at all.

 

Prior to this offering, there has not been a public market for our Class A Ordinary Shares. We plan to apply for the listing of our Class A Ordinary Shares on the Nasdaq Capital Market. An active public market for our Class A Ordinary Shares, however, may not develop or be sustained after the offering, in which case the market price and liquidity of our Class A Ordinary Shares will be materially and adversely affected.

 

The initial public offering price for our Class A Ordinary Shares may not be indicative of prices that will prevail in the trading market and such market prices may be volatile.

 

The initial public offering price for our Class A Ordinary Shares will be determined by negotiations between us and the Underwriter, and may not bear a direct relationship to our earnings, book value, or any other indicia of value. We cannot assure you that the market price of our Class A Ordinary Shares will not decline significantly below the initial public offering price. The financial markets in the U.S. and other countries have experienced significant price and volume fluctuations in the last few years. Volatility in the price of our Class A Ordinary Shares may be caused by factors outside of our control and may be unrelated or disproportionate to changes in our results of operations.

 

You will experience immediate and substantial dilution in the net tangible book value of Class A Ordinary Shares purchased.

 

The initial public offering price of our Class A Ordinary Shares is substantially higher than the (pro forma) net tangible book value per Class A Ordinary Share. Consequently, when you purchase our Class A Ordinary Shares in the offering, upon completion of the offering you will incur immediate dilution of $3.76 per share, assuming an initial public offering price of $5.00, which is the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus. See “Dilution.” In addition, you may experience further dilution to the extent that additional Class A Ordinary Shares are issued upon conversion of Class B Ordinary Shares or exercise of options we may grant from time to time.

 

If we fail to implement and maintain an effective system of internal controls or fail to remediate the material weaknesses in our internal control over financial reporting that have been identified, we may fail to meet our reporting obligations or be unable to accurately report our results of operations or prevent fraud, and investor confidence and the market price of our Class A Ordinary Shares may be materially and adversely affected.

 

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. 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, 2019 and 2018, we have identified material weaknesses in our internal control over financial reporting, as defined in the standards established by the PCAOB and other control deficiencies. The material weaknesses identified included a lack of accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the U.S. (“U.S. GAAP”) and SEC reporting and compliance requirements. Following the identification of the material weaknesses and control deficiencies, we plan to continue to take remedial measures including (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework; (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; (iii) engaging an external consulting firm to assist us with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal control; and (iv) appointing independent directors, establishing an audit committee, and strengthening corporate governance. However, the implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting. Our failure to correct the material weaknesses or our failure to discover and address any other material weaknesses or control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and 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. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.

 

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Upon completion of this offering, we will become a public company in the U.S. subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2021. In addition, once we cease to be an “emerging growth company,” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated, or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational, and financial resources and systems for the foreseeable future. We may be unable to complete our evaluation testing and any required remediation in a timely manner.

 

We will incur substantial increased costs as a result of being a public company.

 

Upon consummation of this offering, we will incur significant legal, accounting, and other expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and Nasdaq, impose various requirements on the corporate governance practices of public companies.

 

Compliance with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costlier. We have incurred additional costs in obtaining director and officer liability insurance. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers.

 

We are an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Class A Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

After we are no longer an “emerging growth company,” or until five years following the completion of our initial public offering, whichever is earlier, we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company, we have been required to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures.

 

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We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

The dual class structure of our ordinary shares has the effect of concentrating voting control with our Chairman, and his interest may not be aligned with the interests of our other shareholders.

 

We have a dual-class voting structure consisting of Class A Ordinary Shares and Class B Ordinary Shares. Under this structure, holders of Class A Ordinary Shares are entitled to one vote per one Class A Ordinary Share, and holders of Class B Ordinary Shares are entitled to 10 votes per one Class B Ordinary Share, which may cause the holders of Class B Ordinary Shares to have an unbalanced, higher concentration of voting power. Immediately prior to completion of this offering, Mr. Gang Li, our Chairman, beneficially owns 2,700,000, or 88.24% of our issued Class A Ordinary Shares, and 5,400,000, or 90.91%, of our issued Class B Ordinary Shares, representing approximately 90.78% of the voting rights in our Company. After this offering, Mr. Gang Li will hold 2,700,000 Class A Ordinary Shares and 5,400,000 Class B Ordinary Shares, representing approximately 86.62% of the voting rights in our Company, assuming no exercise of the over-allotment option by the Underwriter, or approximately 86.03% assuming full exercise of the over-allotment option by the Underwriter. 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.

 

Following this offering, our largest shareholder will continue to own 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 deemed a “controlled company,” we could elect to rely on these exemptions in the future. If we were to elect to rely on the “controlled company” exemptions, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, if we rely on the exemptions, during the period we remain a controlled company and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

 

Substantial future sales of our Class A Ordinary Shares or the anticipation of future sales of our Class A Ordinary Shares in the public market could cause the price of our Class A Ordinary Shares to decline.

 

Sales of substantial amounts of our Class A Ordinary Shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our Class A Ordinary Shares to decline. An aggregate of 3,060,000 Class A Ordinary Shares are outstanding before the consummation of this offering and 6,060,000 Class A Ordinary Shares will be outstanding immediately after the consummation of this offering if the Underwriter’s over-allotment option is not exercised, and 6,510,000 Class A Ordinary Shares will be outstanding immediately after the consummation of this offering if the Underwriter’s over-allotment option is fully exercised. Sales of these shares into the market could cause the market price of our Class A Ordinary Shares to decline.

 

We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Class A Ordinary Shares if the market price of our Class A Ordinary Shares increases.

 

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If securities or industry analysts do not publish research or reports about our business, or if the publish a negative report regarding our Class A Ordinary Shares, the price of our Class A Ordinary Shares and trading volume could decline.

 

Any trading market for our Class A Ordinary Shares may depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of our Class A Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our Class A Ordinary Shares and the trading volume to decline.

 

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

 

The initial public offering price for our Class A Ordinary Shares will be determined through negotiations between the Underwriter and us and may vary from the market price of our Class A Ordinary Shares following our initial public offering. If you purchase our Class A Ordinary Shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our Class A Ordinary Shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. The market price of our 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, stockholders 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.

 

Our management has broad discretion to determine how to use the funds raised in the offering and may use them in ways that may not enhance our results of operations or the price of our Class A Ordinary Shares.

 

We anticipate that we will use the net proceeds from this offering for opening new stores in the U.S. and for working capital and other corporate purposes. Our management will have significant discretion as to the use of the net proceeds to us from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the market price of our Class A Ordinary Shares.

 

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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.

 

We expect to qualify as a foreign private issuer upon the completion of this offering. As a foreign private issuer, we will be exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. domestic issuers, and we will not be required to disclose in our periodic reports all of the information that U.S. domestic issuers are required to disclose. While we currently expect to qualify as a foreign private issuer immediately following the completion of this offering, 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.

 

Nasdaq listing rules require 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 requirements, or we may choose to comply with the above requirement within one year of listing. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors. Thus, although a director must act in the best interests of the Company, it is possible that fewer board members will be exercising independent judgment and the level of board oversight on the management of our Company may decrease as a result. In addition, Nasdaq listing rules also require U.S. domestic issuers to have a compensation committee, a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to these requirements. Nasdaq listing rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of Nasdaq listing rules in determining whether shareholder approval is required on such matters and to appoint a nominating and corporate governance committee. 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.

 

Although as a Foreign Private Issuer we are exempt from certain corporate governance standards applicable to U.S. issuers, if we cannot satisfy, or continue to satisfy, the initial listing requirements and other rules of the Nasdaq Capital Market, our securities may not be listed or may be delisted, which could negatively impact the price of our securities and your ability to sell them.

 

We will seek to have our securities approved for listing on the Nasdaq Capital Market upon consummation of this offering. We cannot assure you that we will be able to meet those initial listing requirements at that time. Even if our securities are listed on the Nasdaq Capital Market, we cannot assure you that our securities will continue to be listed on the Nasdaq Capital Market.

 

In addition, following this offering, in order to maintain our listing on the Nasdaq Capital Market, we will be required to comply with certain rules of the Nasdaq Capital Market, including those regarding minimum stockholders’ equity, minimum share price, minimum market value of publicly held shares, and various additional requirements. Even if we initially meet the listing requirements and other applicable rules of the Nasdaq Capital Market, we may not be able to continue to satisfy these requirements and applicable rules. If we are unable to satisfy the Nasdaq Capital Market criteria for maintaining our listing, our securities could be subject to delisting.

 

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If the Nasdaq Capital Market does not list our securities, or 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.

 

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.

 

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 JOBS Act, 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, 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. See “Implications of Our Being an Emerging Growth Company.”

 

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The laws of the Cayman Islands may not provide our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the U.S.

 

We are an exempted company incorporated under the laws of the Cayman Islands with limited liability. Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Act (2021 Revision) of the Cayman Islands and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme Court and the Court of Appeal are generally of persuasive authority but are not binding in the courts of the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are similarly of persuasive but not binding authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the U.S. In particular, the Cayman Islands has a less developed body of securities laws relative to the U.S. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the U.S.

 

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of the register of members of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of the board of directors, or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Act of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

 

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

 

Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. These rights, however, may be provided in a company’s articles of association. Our articles of association allow our shareholders holding shares representing in aggregate not less than 10% of our voting share capital in issue, to requisition a general meeting of our shareholders, in which case our directors are obliged to call such meeting. Advance notice of at least 21 clear days is required for the convening of our annual general shareholders’ meeting and at least 14 clear days’ notice any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third of the total issued shares carrying the right to vote at a general meeting of the Company. For these purposes, “clear days” means that period excluding (a) the day

when the notice is given or deemed to be given and (b) the day for which it is given or on which it is to take effect.

 

If we are classified as a passive foreign investment company, U.S. taxpayers who own our Class A Ordinary Shares may have adverse U.S. federal income tax consequences.

 

A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company, which is known 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%.

 

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Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.

 

If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our Class A Ordinary Shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.

 

Depending on the amount of cash we raise in this offering, together with any other assets held for the production of passive income, it is possible that, for our 2021 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income, in which case we would be deemed a PFIC, which could have adverse US federal income tax consequences for US 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 our PRC Affiliated Entities as being owned by us for U.S. 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 “Material Income Tax Consideration—U.S. Federal Income Taxation—Passive Foreign Investment Company.”

 

Our pre-IPO shareholders will be able to sell their shares upon completion of this offering subject to restrictions under Rule 144 under the Securities Act.

 

3,060,000 of our Class A Ordinary Shares are issued and outstanding before this offering. Our pre-IPO shareholders may be able to sell their Class A Ordinary Shares under Rule 144 after the completion of this offering. See “Shares Eligible for Future Sale” below. Because these shareholders have paid a lower price per Class A Ordinary Share than participants in this offering, when they are able to sell their pre-IPO shares under Rule 144, they may be more willing to accept a lower sales price than the initial public offering price. This fact could impact the trading price of the Class A Ordinary Shares following the completion of the offering, to the detriment of participants in this offering. Under Rule 144, before our pre-IPO shareholders can sell their shares, in addition to meeting other requirements, they must meet the required holding period. We do not expect any of the Class A Ordinary Shares to be sold pursuant to Rule 144 during the pendency of this offering.

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus 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 prospectus. 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 our 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 outbreak; and
     
  other assumptions described in this prospectus 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 prospectus, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

Industry Data and Forecasts

 

This prospectus contains data related to the bakery industry in the PRC and the U.S. These industry data include projections that are based on a number of assumptions which have been derived from industry and government sources which we believe to be reasonable. The bakery industry may not grow at the rate projected by industry data, or at all. The failure of the industry to grow as anticipated is likely to have a material adverse effect on our business and the market price of our Class A Ordinary Shares. In addition, the rapidly changing nature of the bakery industry subjects any projections or estimates relating to the growth prospects or future condition of our industry to significant uncertainties. Furthermore, if any one or more of the assumptions underlying the industry data turns out to be incorrect, actual results may, and are likely to, differ from the projections based on these assumptions.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

 

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We incorporated under the laws of the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions, and the availability of professional and support services. The Cayman Islands, however, has a less developed body of securities laws as compared to the U.S. and provides significantly less protection for investors than the U.S. Additionally, Cayman Islands companies may not have standing to sue in the Federal courts of the U.S.

 

Most of our operations are conducted in the PRC and most of our assets are located in the PRC. 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 investors to effect service of process within the U.S. upon us or these persons, or to enforce against us or them judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the securities laws of the U.S. or any state in the U.S.

 

We have appointed George Chanson (NY) Corp. as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the U.S. or of any state in the U.S. or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

 

Ogier, our counsel with respect to the laws of the Cayman Islands, and Dentons Law Offices, LLP (Guangzhou) (“Dentons”), our counsel with respect to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the U.S. or any state in the U.S. or (ii) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers predicated upon the securities laws of the U.S. or any state in the U.S.

 

Ogier has further advised us that there is currently no statutory enforcement or treaty between the U.S. and the Cayman Islands providing for enforcement of judgments. A judgment obtained in the U.S., however, may be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination on the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment: (i) is given by a foreign court of competent jurisdiction; (ii) is final; (iii) is not in respect of taxes, a fine or a penalty; and (iv) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or public policy of the Cayman Islands. Furthermore, it is uncertain that Cayman Islands courts would enforce: (i) judgments of U.S. courts obtained in actions against us or other persons that are predicated upon the civil liability provisions of the U.S. federal securities laws; or (ii) original actions brought against us or other persons predicated upon the Securities Act. Ogier has informed us that there is uncertainty with regard to Cayman Islands law relating to whether a judgment obtained from the U.S. courts under civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature.

 

Dentons has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. There are no treaties or other forms of reciprocity between the PRC and the U.S. for the mutual recognition and enforcement of court judgments. Dentons has further advised us that under PRC law, PRC courts will not enforce a foreign judgment against us or our officers and directors if the court decides that such judgment violates the basic principles of PRC law or national sovereignty, security or public interest, thus making the recognition and enforcement of a U.S. court judgment in the PRC difficult.

 

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USE OF PROCEEDS

 

Based upon an assumed initial public offering price of $5.00 per Class A Ordinary Share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, we estimate that we will receive net proceeds from this offering, after deducting the estimated underwriting discounts and the estimated offering expenses payable by us, of approximately $12,870,533 if the Underwriter does not exercise its over-allotment option, and $14,940,533 if the Underwriter exercises its over-allotment option in full.

 

We plan to use the net proceeds we receive from this offering for opening new stores in the U.S. and the balance to fund working capital and for other general corporate purposes.

 

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. To the extent that the net proceeds we receive from this offering are not immediately used for the above purposes, we intend to invest our net proceeds in short-term, interest-bearing bank deposits or debt instruments.

 

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DIVIDEND POLICY

 

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.

 

Under the 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 be dependent on receipt of funds from our PRC Affiliated Entities. Pursuant to 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 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 “Risk Factors—Risks Relating to Doing Business in the PRC—There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.”

 

Current PRC regulations permit our indirect PRC subsidiary to pay dividends to Jenyd only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in the PRC is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. Furthermore, if our subsidiaries and affiliates in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenue from our operations, we may be unable to pay dividends on our Class A Ordinary Shares or Class B Ordinary Shares.

 

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and trade and service-related foreign exchange transactions, can be made in foreign currencies, without prior approval of 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.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2020:

 

  on an actual basis; and
     
  on an as adjusted basis to reflect the issuance and sale of the Class A Ordinary Shares by us in this offering at the assumed initial public offering price of $5.00 per Class A Ordinary Share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts, and the estimated offering expenses payable by us.

 

In addition, we currently have 5,940,000 Class B Ordinary Shares issued and outstanding. Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each holder of Class A Ordinary Shares will be entitled to one vote per one Class A Ordinary Share and each holder of Class B Ordinary Shares will be entitled to 10 votes per one Class B Ordinary Share. The Class A Ordinary Shares are not convertible into shares of any other class. The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time after issuance at the option of the holder on a one-to-one basis. The Class B Ordinary Shares are not being converted as part of this offering.

 

You should read this capitalization table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

    June 30, 2020  
    Actual     As
adjusted
(Over-
allotment
option not
exercised)(1)
    As
adjusted
(Over-
allotment
option
exercised
in full) (1)
 
    $     $     $   
Cash and cash equivalents   $ 3,297,036     $ 16,167,569     $ 18,237,569  
Shareholders’ Equity:                        
Class A Ordinary Shares, $0.001 par value, 44,000,000 Class A Ordinary Shares authorized, 3,060,000 Class A Ordinary Shares issued and outstanding; 6,060,000 Class A Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is not exercised, and 6,510,000 Class A Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is exercised in full     3,060       6,060       6,510  
Class B Ordinary Shares, $0.001 par value, 6,000,000 Class B Ordinary Shares authorized, 5,940,000 Class B Ordinary Shares issued and outstanding; 5,940,000 Class B Ordinary Shares issued and outstanding, as adjusted     5,940       5,940       5,940  
Additional paid-in capital     869,400       13,736,933       15,806,483  
Statutory reserve     447,231       447,231       447,231  
Retained earnings     715,720       715,720       715,720  
Accumulated other comprehensive income     169,333       169,333       169,333  
Total Shareholders’ Equity     2,210,684       15,081,217       17,151,217  
Total Capitalization   $ 2,210,684     $ 15,081,217     $ 19,464,166  

 

  (1) Reflects the sale of Class A Ordinary Shares in this offering at an assumed initial public offering price of $5.00 per share, and after deducting the estimated underwriting discounts, and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. Additional paid-in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts, and estimated offering expenses payable by us. We estimate that such net proceeds will be approximately $12,870,533 if the Underwriter’s over-allotment option is not exercised, or $14,940,533 if the Underwriter’s over-allotment option is exercised in full.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $5.00 per Class A Ordinary Share, which is the midpoint of the estimated range of the initial public offering price set forth on the front cover of this prospectus, would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by $2,760,000 if the Underwriter’s over-allotment option is not exercised or $3,174,000 if the Underwriter’s over-allotment option is exercised in full, assuming the number of Class A Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts, and estimated expenses payable by us.

 

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DILUTION

 

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to a forward split of our ordinary shares at a ratio of 1,000-for-1 share and additional share issuances to our existing shareholders approved by our shareholders and board of directors on March 27, 2021.

 

If you invest in our Class A Ordinary Shares, your interest will be diluted for each Class A Ordinary Share you purchase to the extent of the difference between the initial public offering price per Class A Ordinary Share and our net tangible book value per Class A Ordinary Share after this offering. Dilution results from the fact that the initial public offering price per Class A Ordinary Share is substantially in excess of the net tangible book value per Class A Ordinary Share attributable to the existing shareholders for our presently outstanding Class A Ordinary Shares.

 

Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each holder of Class A Ordinary Shares will be entitled to one vote per one Class A Ordinary Share and each holder of Class B Ordinary Shares will be entitled to 10 votes per one Class B Ordinary Share. The Class A Ordinary Shares are not convertible into shares of any other class. The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time after issuance at the option of the holder on a one-to-one basis. The Class B Ordinary Shares are not being converted as part of this offering.

 

Our net tangible book value as of June 30, 2020, was $1,990,806, or $0.22 per ordinary share (both Class A and Class B Ordinary Share). Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting the net tangible book value per ordinary share (as adjusted for the offering) from the initial public offering price per Class A Ordinary Share and after deducting the estimated underwriting discounts, and the estimated offering expenses payable by us.

 

After giving effect to our sale of 3,000,000 Class A Ordinary Shares offered in this offering based on the assumed initial public offering price of $5.00 per Class A Ordinary Share, which is the midpoint of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deduction of the estimated underwriting discounts, and the estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2020, would have been $14,861,339, or $1.24 per outstanding ordinary share (both Class A and Class B Ordinary Share). This represents an immediate increase in net tangible book value of $1.02 per ordinary share (both Class A and Class B Ordinary Share) to the existing shareholders, and an immediate dilution in net tangible book value of $3.76 per Class A Ordinary Share to investors purchasing Class A Ordinary Shares in this offering. The as adjusted information discussed above is illustrative only.

 

A $1.00 change in the assumed public offering price of $5.00 per Class A Ordinary Share would, in the case of an increase, increase and, in the case of a decrease, decrease our pro forma net tangible book value after giving effect to the offering by $2,760,000, the pro forma net tangible book value per ordinary share (both Class A and Class B Ordinary Share) after giving effect to this offering by $0.23 and the dilution in pro forma net tangible book value per Class A Ordinary Share to new investors in this offering by $0.77 assuming no change to the number of Class A Ordinary Shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our Class A Ordinary Shares and other terms of this offering determined at pricing.

 

The following table illustrates such dilution:

 

   No
Exercise of
Over-
Allotment
Option
   Full
Exercise of
Over-
Allotment
Option
 
Assumed Initial public offering price per Class A Ordinary Share  $5.00   $5.00 
Net tangible book value per ordinary share (both Class A and Class B Ordinary Share) as of June 30, 2020   0.22    0.22 
Increase in net tangible book value per ordinary share (both Class A and Class B Ordinary Share) attributable to payments by new investors   1.02    1.14 
Pro forma net tangible book value per ordinary share (both Class A and Class B Ordinary Share) immediately after this offering   1.24    1.36 
Amount of dilution in net tangible book value per Class A Ordinary Share to new investors in the offering  $3.76   $3.64 

 

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The following tables summarize, on a pro forma as adjusted basis as of June 30, 2020, the differences between existing shareholders and the new investors with respect to the number of Ordinary Shares purchased from us, the total consideration paid and the average price per Ordinary Share before deducting the estimated underwriting discounts, and the estimated offering expenses payable by us.

 

   Class A and Class B
Ordinary Shares
purchased
   Total consideration   Average
price per
Ordinary
 
Over-allotment option not exercised  Number   Percent   Amount   Percent   Share 
   ($ in thousands) 
Existing shareholders   9,000,000    75.00%  $878    5.53%  $0.10 
New investors   3,000,000    25.00%   15,000    94.47%   5.00 
Total   12,000,000    100.00%  $15,878    100.00%  $1.32 

 

   Class A and Class B
Ordinary Shares
purchased
   Total consideration   Average
price per
Ordinary
 
Over-allotment option exercised in full  Number   Percent   Amount   Percent   Share 
   ($ in thousands) 
Existing shareholders   9,000,000    72.29%  $878    4.84%  $0.10 
New investors   3,450,000    27.71%   17,250    95.16%   5.00 
Total   12,450,000    100.00%  $18,128    100.00%  $1.46 

 

The pro forma as adjusted information as discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our Class A Ordinary Shares and other terms of this offering determined at the pricing.

 

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CORPORATE HISTORY AND STRUCTURE

 

Our Corporate History

 

Xinjiang United Family was established on August 7, 2009, as a limited company pursuant to PRC laws. On April 17, 2015, Xinjiang United Family incorporated a wholly owned subsidiary, Chanson NY, a New York corporation, which in turn incorporated a wholly owned subsidiary, Chanson 23rd Street, a New York limited liability company, on December 17, 2015. On February 20, 2020, our Chairman, Mr. Gang Li, formed Chanson Greenwich, a New York limited liability company, and subsequently assigned his 100% membership interests in Chanson Greenwich to Chanson NY for a consideration of $10 on September 28, 2020. After the transfer, Chanson Greenwich became a wholly owned subsidiary of Chanson NY.

 

In connection with this offering, we have undertaken a reorganization of our corporate structure (the “Reorganization”) in the following steps:

 

  on July 26, 2019, we incorporated RON Holding Limited, an exempted company with limited liability, under the laws of the Cayman Islands. Effective on December 18, 2020, RON Holding Limited changed its name to Chanson International Holding;
     
  on August 13, 2019, we incorporated Deen Global in the British Virgin Islands as a wholly owned subsidiary of Chanson International;
     
 

on September 13, 2019, we incorporated Jenyd in Hong Kong as a wholly owned subsidiary of Deen Global;

      
 

on September 27, 2020, the original shareholders of Xinjiang United Family entered into a Share Transfer Agreement with Jenyd to transfer 100% of the equity interests of Xinjiang United Family to Jenyd; and

     
 

in March 2021, we undertook a series of corporate actions, including a forward split of our ordinary shares, the creation of Class A Ordinary Shares and Class B Ordinary Shares, re-designation of our ordinary shares into Class A and Class B Ordinary Shares, and additional share issuances to our existing shareholders. See “Description of Share Capital—History of Share Issuances.”

 

Our Corporate Structure

 

We currently conduct our business through:

 

  (i) an association with 25 individually-owned businesses comprising the VIEs known as the “United Family Group” or “UFG”: 24 of the UFG Entities are owned independently by our Chairman, Mr. Gang Li, and one of the UFG Entities is owned independently by Ms. Hui Wang, the Marketing Director of Xinjiang United Family. Our affiliation with UFG is managed through several exclusive agreements between Xinjiang United Family, each UFG Entity, and the sole owner of such UFG Entity. As a result of our arrangements with all the UFG Entities, we effectively control each UFG Entity;
     
  (ii) Xinjiang United Family and its three branch offices; and
     
  (iii) Chanson 23rd Street and Chanson Greenwich.

 

For a complete description of our existing stores, please see “Prospectus Summary—Corporate Structure.”

 

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The following diagram illustrates our corporate structure after the Reorganization and upon completion of this offering based on 3,00,000 Class A Ordinary Shares being offered, assuming no exercise of the over-allotment option:

 

 

 

Notes: All percentages reflect the voting ownership interests instead of the equity interests held by each of our shareholders given that each holder of Class B Ordinary Shares will be entitled to 10 votes per one Class B Ordinary Share and each holder of Class A Ordinary Shares will be entitled to one vote per one Class A Ordinary Share.

 

  (1)

Represents 2,700,000 Class A Ordinary Shares and 5,400,000 Class B Ordinary Shares held by Gang Li, the 100% owner of Danton Global Limited, as of the date of this prospectus..

     
  (2) Represents 270,000 Class B Ordinary Shares held by Jihong Cai, the 100% owner of Haily Global Limited, as of the date of this prospectus.
     
  (3) Represents 270,000 Class B Ordinary Shares held by Cheng Chen, the 100% owner of C&C Capital Investments LLC, as of the date of this prospectus.
     
  (4) Represents an aggregate of 360,000 Class A Ordinary Shares held equally by two corporate shareholders, each one of which holds less than 5% of our voting ownership interests, as of the date of this prospectus.

 

The United Family Group

 

Each UFG Entity was established as an individually-owned business and became part of Xinjiang United Family through the VIE arrangements. UFG’s revenue accounted for 53% and 54% of our total revenue for the fiscal years ended December 31, 2019 and 2018, respectively, and 74% for the six months ended June 30, 2020. UFG consists of 25 VIEs through which we operate successful bakeries. Our Chairman, Mr. Gang Li, is the sole owner of 24 UFG Entities, and Ms. Hui Wang, the Marketing Director of Xinjiang United Family, is the sole owner of one UFG Entity.

 

Our affiliation with UFG is managed through several exclusive agreements between Xinjiang United Family, each UFG Entity, and the sole owner of such UFG Entity, also known as the “VIE Agreements.” The VIE Agreements are designed to provide Xinjiang United Family with the power, rights, and obligations equivalent in all material respects to those it would possess as the sole equity holder of each UFG Entity, including absolute control rights and the rights to the assets, property, and revenue of each UFG Entity.

 

Below is the set of VIE Agreements Xinjiang United Family has entered into with each UFG Entity.

 

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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 shall be in charge of all aspects of the UFG Entity’s operation, control and manage all matters and funds of UFG Entity, and enjoy 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. Upon the establishment of the audit committee at the consummation of this offering, the audit committee of Chanson International will be 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. In the event the UFG Entity or UFG Operator breaches its contractual obligations under the Transaction Agreements, Xinjiang United Family will be entitled to foreclose on the UFG Operator’s assets in the UFG Entity and may (1) exercise its option to purchase or designate third parties to purchase part or all of the UFG Operator’s assets in the UFG Entity and in this situation, Xinjiang United Family may terminate the Pledge Agreement and the other VIE agreements after acquisition of all assets in the UFG Entity or form a new VIE structure with any third party designated by Xinjiang United Family, or (2) dispose of the pledged assets and be paid in priority out of proceeds from the disposal in which case the existing VIE structure will be terminated.

 

Call Option Agreement

 

Under the Call Option Agreement, the UFG Operator irrevocably granted Xinjiang United Family an exclusive option to require the UFG Operator to transfer, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of his or her assets in the UFG Entity to Xinjiang United Family (or its designee). The option price is the minimum amount to the extent permitted under PRC law.

 

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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, together with the Pledge Agreement, the Exclusive Service Agreement, and the Operating Rights Proxy Agreement and Powers of Attorney, enable Xinjiang United Family to exercise effective control over the UFG Entity.

 

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, we effectively control all the UFG Entities. 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.

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to a forward split of our ordinary shares at a ratio of 1,000-for-1 share and additional share issuances to our existing shareholders approved by our shareholders and board of directors on March 27, 2021.

 

Overview

 

We manufacture and sell a wide selection of bakery products, seasonal products, and beverage products; we also offer eat-in services in some of our stores. We currently focus our business in Xinjiang of the PRC and New York City and plan to expand to other regions of the PRC and the U.S., with a goal of opening three to five new stores in China annually and 10 new stores in the United States during the next five years. We 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 our products.

 

We sell our products primarily through (i) a bakery chain consisting of 29 stores operated by Xinjiang United Family and its VIEs, under our “George●Chanson” brand in Xinjiang, and (ii) through Chanson 23rd Street in New York City. We are also currently renovating spaces for the opening of a new store in New York City. Selling through our own stores allows us to run our entire operation more efficiently and to exercise greater control over the quality of our products and the presentation of our brand, and to better manage customer experience in our stores. We also sell our products on our digital platforms and through third-party online food ordering platforms. Our current customer base consists of both individual and corporate customers. To expand our customer base, we have developed a variety of marketing and sale strategies, such as increasing our presence on social media platforms, devising pricing and discounting programs, and improving customer in-store experience.

 

For our PRC Stores, we manufacture the majority of bakery products in our central factory located in Urumqi, Xinjiang, prepare beverage products within the stores, and contract third-party manufacturers to produce seasonal products. For Chanson 23rd Street, we 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 our kitchen in the store. To ensure the quality and safety of our products, we 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, we have implemented a rigorous quality control system covering our entire operation process and mandated internal training to improve our employees’ awareness and knowledge of food safety.

 

We have a dedicated and highly-experienced product development team that constantly creates new products that reflect market trends and are designed to meet customer demand. As of March 2021, we had more than 190 types of bakery products and seasonal products on sale in our PRC Stores, including over 80 types of new products introduced to the market since 2019, and 92 types of eat-in menu items and bakery products on sale at Chanson 23rd Street, including 25 types of new products introduced to the market since 2019. We also offer a large number of beverage products in our PRC Stores and Chanson 23rd Street and update our drink menus seasonally and in response to ever changing customer demand. By continuously offering new products and refining our product formulas to enhance existing products, we believe that we are able to steadily bring in new customers and drive the frequency of our existing customers’ visits to our stores, digital platforms, and store page on third-party platforms.

 

For the fiscal years ended December 31, 2019 and 2018, we had total revenue of $12,577,135 and $11,963,674, and net income of $945,468 and $758,973, respectively. Our PRC Stores accounted for 81.1% and 80.3% of our total revenue for those fiscal years, respectively, and Chanson 23rd Street accounted for 18.9% and 19.7%, respectively.

 

For the six months ended June 30, 2020 and 2019, we had total revenue of $5,006,575 and $6,321,775, and a net loss of $45,903 and net income of $579,747, respectively. Our PRC Stores accounted for 85.2% and 77.4% of our total revenue for the six months ended June 30, 2020 and 2019, respectively, and Chanson 23rd Street accounted for 14.8% and 22.6%, respectively.

 

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Our PRC Stores primarily generate revenue through sale of bakery products, seasonal products, and beverage products. For the fiscal years ended December 31, 2019 and 2018, revenue derived from sale of bakery products accounted for 90.7% and 88.5% of our PRC Stores’ revenue, revenue derived from sale of seasonal products accounted for 6.9% and 8.6%, and revenue derived from sale of beverage products accounted for 2.4% and 2.9%, respectively.

 

For the six months ended June 30, 2020 and 2019, revenue derived from sale of bakery products accounted for 91.6% and 91.8% of our PRC Stores’ revenue, revenue derived from sale of seasonal products accounted for 6.3% and 5.5%, and revenue derived from sale of beverage products accounted for 2.1% and 2.7%, respectively.

 

Chanson 23rd Street primarily generates revenue through offering eat-in services and sale of bakery products and beverage products. For the fiscal years ended December 31, 2019 and 2018, revenue derived from offering eat-in services accounted for 45.5% and 34.1% of Chanson 23rd Street’s revenue, revenue derived from sale of bakery products accounted for 40.3% and 43.9%, and revenue derived from sale of beverage products accounted for 14.2% and 22.0%, respectively.

 

For the six months ended June 30, 2020 and 2019, revenue derived from offering eat-in services accounted for 35.0% and 39.2% of Chanson 23rd Street’s revenue, revenue derived from sale of bakery products accounted for 45.5% and 46.9%, and revenue derived from sale of beverage products accounted for 19.5% and 13.9%, respectively.

 

Key Factors that Affect Our Results of Operations

 

We believe the following key factors may affect our financial condition and results of operations:

 

Our business is affected by changes in consumer preferences and discretionary spending.

 

Our success depends, in part, upon the popularity of our bakery products and our ability to develop new bakery products that appeal to consumers. Shifts in consumer preferences away from our bakery stores or our product offerings and mix, our inability to develop new products that appeal to consumers could harm our business. Our success depends in large part on our customers’ continued belief that food made with high-quality ingredients, including selected proteins raised without antibiotics, our artisan breads, cakes, pastry and other bakery treats made without artificial preservatives, flavors, sweeteners, or colors from artificial sources are worth the prices charged at our bakery stores relative to the lower prices offered by some of our competitors. Our inability to successfully educate customers about the quality of our bakery products or our customers’ rejection of our pricing approach could result in decreased demand for our products or require us to change our pricing, marketing, or promotional strategies, which could materially and adversely affect our consolidated financial results or the brand identity that we have created. In addition, our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we 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 our sales, results of operations, business, and financial condition.

 

Our revenue and growth could be adversely affected if our comparable store sales are less than expected.

 

Our success depends on increasing comparable store sales. To increase sales and profits, and therefore comparable store sales growth, we must focus on delivering value and generating customer excitement by strengthening opportunistic purchasing, optimizing inventory management, maintaining strong store conditions, and effectively marketing current products and new product offerings. We may not be able to maintain or improve the levels of comparable store sales that we have experienced in the past, and our comparable store sales growth is a significant driver of our profitability and overall business results. In addition, competition and pricing pressures from competitors may also materially adversely impact our operating margins. Our comparable store sales growth could be lower than our historical average or our future target for many reasons, including general economic conditions, operational performance, price inflation or deflation, new competitive entrants near our stores, price changes in response to competitive factors, the impact of new stores entering the comparable store base, possible supply shortages or other operational disruptions, the number and dollar amount of customer transactions in our stores, and our ability to provide product or service offerings that generate new and repeat visits to our stores. Opening new stores in our established markets may result in inadvertent oversaturation, temporarily or permanently diverting customers and sales from our existing stores to new stores and reduce comparable store sales, thus adversely affecting our overall financial performance. These factors may cause our comparable store sales results to be materially lower than in recent periods, which could harm our profitability and business. Changes in our average store sales or our inability to increase our average store sales could cause our operating results to vary adversely from expectations, which could adversely affect our results of operations.

 

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Fluctuations in various food and supply costs, including dairy, could adversely affect our operating results.

 

Supplies and prices of the various ingredient materials that are used to prepare our bakery products (including flour, milk, sugar, eggs) can be affected by a variety of factors, such as weather, seasonal fluctuations, demand, politics, and economics factors, and such prices may fluctuate. An increase in pricing of any ingredient that is used in our bakery products could result in an increase in costs from our suppliers, and we may not be able to increase prices to cover increased costs which would have an adverse effect on our operating results and profitability.

 

The geographic concentration of our stores primarily in in Xinjiang and New York City subjects us to an increased risk of loss of revenue from events beyond our control or conditions affecting that region.

 

Currently, we operate 29 bakery stores exclusively located in Xinjiang. In addition, our current operations in the U.S. are limited to New York City. As a result, we are particularly susceptible to adverse trends, severe weather, competition, and economic conditions in these areas. Any unforeseen events or circumstances that negatively affect these areas could materially adversely affect our sales and profitability. These factors include, among other things, epidemics, changes in demographics, population and employee bases, wage increases, changes in economic conditions, severe weather conditions, and climate change. Such conditions may result in reduced customer traffic and spending in our stores, physical damage to our stores, loss of inventory, closure of one or more of our stores, inadequate workforce in our markets, temporary disruption in the supply of products, delays in the delivery of goods to our stores, increased expenses, and a reduction in the availability of products in our stores. Any of these factors may disrupt our business and materially adversely affect our financial condition and results of operations

 

If we are unable to compete successfully, our financial condition and results of operations may be harmed.

 

The industry in which we conduct our business is intensely competitive. Our bakery stores compete with well-established national, regional, and locally-owned traditional bakeries, cafés, and other companies providing bakery products. Additionally, we also compete with certain quick-service restaurants, specialty food stores, supermarkets, and convenience stores. The principal factors on which we compete are taste, quality, prices of products offered, customer service, atmosphere, location, convenience, and overall customer experience. We also compete for retail space in desirable locations. Many competitors or potential competitors have substantially greater financial and other resources, which may allow them to react more quickly to changes in pricing, marketing, and other changing tastes of consumers. In the event that we cannot effectively compete on a continuing basis or competitive pressures arise, such inability to compete or competitive pressures could have a material adverse effect on our business, results of operations and financial condition.

 

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 net revenue is derived primarily from sales of bakery and other products under our “George●Chanson,” “Patisserie Chanson,” and “Chanson” brand names. We have experienced stable growth, resulting from our focus on supporting our best-selling items and introduction of new products. Our net 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 our store base in existing and new markets as well as comparable store sales growth, described below under “Comparable Store Sales.” Revenue is impacted by competition, current economic conditions, pricing, inflation, product mix and availability, promotional and competitive activities, and spending habits of our customers. Our product offerings across diverse product categories support growth in revenue by attracting new customers and encouraging repeat visits from our existing customers.

 

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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 us, as comparable store sales can be helpful to us in making future decisions regarding existing stores and new locations. Comparable store sales are impacted by the same factors that impact revenue. We often drill down into comparable store sales figures to determine the exact cause of changes in revenue. We also use comparable store sales to evaluate current and likely future performance and as a measure of revenue growth to evaluate how established stores have performed over time compared to new stores.

 

For simplicity, our comparable store sales consist of revenue from our 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 we continue to execute on our growth strategy, we expect a significant portion of our revenue growth will be attributable to revenue from new stores. Accordingly, comparable store sales are one of the measures we use to assess the success of our growth strategy.

 

Gross Profit and Gross Margin

 

Gross profit is the difference between revenue and cost of revenue. Our cost of revenue consists of labor costs, costs of ingredients used to prepare our 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 our 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 our bakery products could result in an increase in costs from our suppliers, and we may not be able to increase prices to cover increased costs, which would have an adverse effect on our operating results and profitability. In order to negotiate more favorable prices on ingredients, we 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 we expect the price to increase. Over the past years, we have invested significant time and energy to achieve cost reduction and productivity improvement in our supply chain. We 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 our business. Increased labor costs due to competition, increased minimum wage or employee benefits costs, or otherwise, would adversely impact our operating expenses. In addition, our success depends on our ability to attract, motivate, and retain qualified employees, including store managers and staff, to keep pace with our growth strategy.

 

Gross margin is gross profit divided by revenue. Gross margin is a measure used by management to indicate whether we are selling our products at an appropriate gross profit. Our gross margin is impacted by our product mix and availability, as some products generally provide higher gross margins, and by our merchandise costs, which may vary. Gross margin is also impacted by prices of our products. We typically evaluate the profitability of our products annually or semi-annually. We consider many factors such as cost of revenue fluctuations and competitive pricing strategies. We have historically been able to discontinue less profitable products and launch similar new products, and refine our product formulas to enhance existing products with higher prices to cover higher ingredient costs. In addition, we have a dedicated and highly-experienced product development team that constantly creates brand new products that reflect market trends and are attractive to customers.

 

SG&A Expenses

 

Our SG&A expenses are comprised of both store-related expenses and corporate expenses. Store-related expenses include payroll and employee benefit expenses and sales commissions paid to sales personnel, store rent, occupancy and maintenance costs, the cost of opening new stores, and marketing and advertising expenses. Corporate expenses include payroll and benefits for corporate and field support, legal, professional, and other consulting fees, travel expenses, and other facility related costs, such as rent and depreciation.

 

SG&A expenses generally increase as we grow our store base and invest in corporate infrastructure. We have made significant investments in talent retention and infrastructure 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 we invest to open new stores, launch new products, increase brand awareness, attract new customers, and increase our market penetration. To support our growth, we will continue to increase headcount, particularly in the sales and marketing departments. This increase in headcount will drive higher payroll and employee-related expenses. We also continue to invest in product innovation and fuel sales growth. We expect our SG&A expenses to continue to increase in absolute dollars as we incur increased costs related to the growth of our business and our operation as a public company.

 

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Operating Income

 

Operating income is the difference between gross profit and SG&A expenses, depreciation, and amortization. Operating income excludes interest expenses, other income (expenses), and income tax expenses. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.

 

Comparable Store Sales

 

A variety of factors affect our comparable store sales, including, among others, consumer trends, competition, current economic conditions, pricing, inflation, changes in our product mix, and the success of our marketing programs. Our comparable store sales for the year ended December 31, 2019 were as follows:

 

China

 

Our comparable store sales in China decreased by 5.2% during the year ended December 31, 2019, excluding the impact of foreign currency translation. Our comparable stores sales during 2019 were affected by the shopfront beautification projects done by the local government and our store renovation. Four of our PRC Stores were under shopfront beautification projects with duration between two to five months, while another two of our PRC Stores were under renovation with duration of about 40 days. Therefore, our sales were affected by the decreased frequency of customer visits resulted from the shopfront beautification projects and renovation. In addition, we opened five new stores in Urumqi. As the density of our stores increased, the frequency of customer visits to our existing stores were affected because some customers who live near our new stores would choose to visit our new stores instead of the existing ones.

 

United States

 

Our comparable store sales growth in the United States was 0.8% during the year ended December 31, 2019. As we only had one bakery store in operation in the United States, the comparable stores sales result was identical to the actual results. Please refer to the analysis below for more details.

  

Our comparable store sales for the six months ended June 30, 2020 were as follows:

 

China

 

Our comparable store sales in China decreased by 25.6% during the six months ended June 30, 2020, excluding the impact of foreign currency translation. Our comparable stores sales during the six months ended June 30, 2020 were affected by the COVID-19 outbreak, which resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. In compliance with the government health emergency rules in place, we temporarily closed all but one of our PRC Stores between late January and early March of 2020. Even though our PRC Stores resumed their normal activities on March 8, 2020, the business of our stores located at shopping centers, school areas, and other commercial districts were still affected by the reduced customer traffic due to tightened safety control.

 

United States

 

Our comparable store sales in the United States decreased by was 48.3% during the six months ended June 30, 2020. As we only had one bakery store in operation in the United States, the comparable stores sales result was identical to the actual results. Please refer to the analysis below for more details.

 

COVID-19 Affecting Our Results of Operations

 

In 2020, the COVID-19 outbreak has spread throughout the world, especially in China and the United States. The outbreak resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. After the store closure between late January and early March of 2020, all of our PRC Stores were closed again on July 17, 2020 due to the resurgence of COVID-19 cases in Xinjiang. The PRC Stores resumed their normal activities in September 2020. As a result of the store closure, the PRC Stores generated no revenue and the estimated loss of revenue was approximately RMB12 million (approximately $1.7 million) during the period of closure. In the United States, Chanson 23rd Street in New York City provided only delivery and pickup services between the end of February 2020 and the end of June 2020, and resumed outdoor dining services at the end of June 2020 and indoor dining services at the end of September 2020. Chanson 23rd Street suspended its indoor dining services again between December 14, 2020 and February 11, 2021 according to an indoor dining ban issued by the Governor of New York State. Chanson 23rd Street resumed its indoor dining services on February 12, 2021 at 25 percent capacity, which was increased to 35 percent on February 26, 2021 and further increased to 50 percent on March 19, 2021. In addition, the renovation of Chanson Greenwich was delayed and we currently expect the store to open in the Summer 2021. Consequently, the COVID-19 outbreak adversely affected our business operations and operating results for 2020. Our revenue generated in China decreased by approximately $1.3 million, or 13%, during the year ended December 31, 2020 as compared to the same period of last year, and our revenue generated in United States decreased by approximately $1.0 million, or 41%, during the year ended December 31, 2020 as compared to the same period of last year. Overall, our total revenue decreased by approximately $2.3 million, or 18%, during the year ended December 31, 2020 as compared to the same period of last year. For the two-month period from January 2021 to February 2021, our revenue generated in China increased by approximately $0.2 million, or 25%, as compared to the same period in 2020, as the COVID-19 first started to impact our operations in China since January 2020, while our revenue generated in the United States decreased by approximately $0.3 million, or 69%, as compared to the same period in 2020, as the COVID-19 outbreak did not have an impact in our U.S. operation during that period in 2020. Overall, our total revenue decreased by approximately $0.1 million, or 10%, during the two-month period from January 2021 to February 2021, as compared to the same period in 2020.

 

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As of the date of this prospectus, the COVID-19 outbreak in China appears to have been under relative control. However, the COVID-19 outbreak in the U.S. will depend on the future developments of the outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain and unpredictable. Therefore, while we expect the COVID-19 outbreak to continue negatively impacting our business, results of operations, and financial position, the related financial impact cannot be reasonably estimated at this time.

 

During the time the stores were closed, we paid all our employees base salaries in order to satisfy their basic living expenditure needs. After the reopening, we have taken various preventative and quarantine measures across our stores, including conducting regular nucleic acid tests in accordance with the government requirement, monitoring our employees’ health conditions daily, and distributing free masks to all our employees. We also limit the customer flows in our stores and customers who visit our stores are required to measure temperature and wear masks. In the United States, we kept our store in New York City open and provided takeout and delivery services. To fulfill our social responsibility, we have offered special discounts on our products to all hospital workers and free pastries to all frontline workers, drivers, and delivery people as a gesture to show our appreciation for what they contributed to the society during the pandemic.

 

We have taken actions to preserve our liquidity during the COVID-19 pandemic. On May 11, 2020, we entered into a loan agreement with Huaxia Bank, which provided us funding of RMB15 million (approximately $2.1 million) through May 2021 with a favorable fixed interest rate of 4.98%. We expect that we will be able to renew this bank loan upon its maturity based on past experience and our good credit history. On April 29, 2020, our subsidiary Chanson 23rd Street received funding for a loan totaling $209,291 under the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), which is part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020. Under the terms of the SBA PPP loan, up to 100% of the principal and accrued interest may be forgiven if certain criteria are met and the loan proceeds are used for qualifying expenses such as payroll costs, benefits, rent, and utilities as described in the CARES Act. The loan accrues interest at a rate of 1% and any portion of the principal and accrued interest that is not forgiven is required to be repaid by April 29, 2021. In addition, we have increased efforts to collect our accounts receivable. As of the date of this prospectus, approximately 96.8%, or $1.1 million, of our accounts receivable balance as of June 30, 2020 had been collected. The remaining balance of approximately $0.04 million is expected to be collected before June 30, 2021.  As of December 31, 2020, we had a negative working capital of approximately $3.4 million, including deferred revenue of approximately $4.8 million which was reported as current liability, but will not require cash payment in the future. We believe our cash and cash equivalents on hand, our operating cash flows, and the available bank facilities will be sufficient to meet our working capital needs over the next 12 months.

 

Results of Operations

 

Comparison of Results of Operations for the Six Months Ended June 30, 2020 and 2019

 

The following table summarizes the results of our operations during the six months ended June 30, 2020 and 2019, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

   For the six months ended June 30,   Variance 
   2020   2019   Amount   % 
Revenue  $5,006,575   $6,321,775   $(1,315,200)   (20.8)%
Cost of revenue   2,508,143    2,881,422    (373,279)   (13.0)%
Gross profit   2,498,432    3,440,353    (941,921)   (27.4)%
                     
OPERATING EXPENSES                    
Selling expenses   1,407,777    1,459,451    (51,674)   (3.5)%
General and administrative expenses   1,071,602    1,372,791    (301,189)   (21.9)%
Total operating expenses   2,479,379    2,832,242    (352,863)   (12.5)%
                     
INCOME FROM OPERATIONS   19,053    608,111    (589,058)   (96.9)%
                     
OTHER INCOME (EXPENSES)                    
Interest expense, net   (55,818)   (67,207)   11,389    (16.9)%
Other income (expense), net   (1,687)   50,049    (51,736)   (103.4)%
Total other expenses, net   (57,505)   (17,158)   (40,347)   235.1%
                     
INCOME (LOSS) BEFORE INCOME TAX PROVISION   (38,452)   590,953    (629,405)   (106.5)%
                     
INCOME TAX PROVISION   7,451    11,206    (3,755)   (33.5)%
                     
NET INCOME (LOSS)  $(45,903)  $579,747   $(625,650)   (107.9)%

 

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Revenue

 

We generate revenue primarily from bakery products and other products sold in China and the United States. Bakery products sold in China consist of packaged bakery products (cakes, bread, and snacks), birthday cakes, and made-in-store pastries. Other products sold in China consist of seasonal products (mooncakes and zongzi) and beverage products. Bakery products sold in the United States consist of cakes, bread, sweets, birthday cakes, and pastries. Other products sold in the United States consist of eat-in menu items (sandwiches, salads, toasts, croissants, soups, and desserts) and beverage products.

 

Our total revenue decreased by $1,315,200, or 20.8%, from $6,321,775 for the six months ended June 30, 2019 to $5,006,575 for the six months ended June 30, 2020. The decrease in our revenue was due to decreased revenue from both China and the United States, as discussed in greater details below.

 

The following table sets forth the breakdown of our revenue for the six months ended June 30, 2020 and 2019, respectively:

 

   For the six months ended June 30,   Variance 
   2020   %   2019   %   Amount   % 
China                        
Bakery products  $3,908,641    78.1%  $4,488,875    71.0%  $(580,234)   (12.9)%
Other products   359,417    7.1%   405,711    6.4%   (46,294)   (11.4)%
Subtotal: revenue from China   4,268,058    85.2%   4,894,586    77.4%   (626,528)   (12.8)%
                               
United States                              
Bakery products   335,665    6.8%   669,205    10.6%   (333,540)   (49.8)%
Other products   402,852    8.0%   757,984    12.0%   (355,132)   (46.9)%
Subtotal: revenue from the United States   738,517    14.8%   1,427,189    22.6%   (688,672)   (48.3)%
                               
Total Revenue  $5,006,575    100.0%  $6,321,775    100.0%  $(1,315,200)   (20.8)%

 

China

 

Our PRC Stores accounted for 85.2% and 77.4% of our total revenue for the six months ended June 30, 2020 and 2019, respectively. Revenue from China decreased by $626,528, or 12.8%, from $4,894,586 for the six months ended June 30, 2019 to $4,268,058 for the six months ended June 30, 2020. The decrease in our revenue was primarily due to decreased revenue from bakery products, as discussed in greater details below.

 

Revenue from bakery products decreased by $580,234, or 12.9%, from $4,488,875 for the six months ended June 30, 2019 to $3,908,641 for the six months ended June 30, 2020. The decrease was mainly due to a decrease in comparable store sales of 25.9% in bakery products, as a result of the store closures and reduced services due to the COVID-19 outbreak in 2020, and depreciation of RMB against US$. The average translation rate for the six months ended June 30, 2020 and 2019 was at US$1 to RMB7.0332 and US$1 to RMB6.7856, respectively, which represented a decrease of 3.6%. The decrease was partially offset by the increased revenue of $591,162 from newly-opened PRC stores during the six months ended June 30, 2020 as these stores have increased customer visits.

 

Revenue from other products decreased by $46,294, or 11.4%, from $405,711 for the six months ended June 30, 2019 to $359,417 for the six months ended June 30, 2020. Revenue from seasonal products remained relatively stable as our sales of seasonal products were during the Dragon Boat Festival in June 2020 when our stores were open, so our sales of these products were not materiality impacted by the COVID-19 outbreak. The decreased revenue in other products was mainly due to the decreased revenue from beverage products by $44,376, or 33.1%, which was mainly impacted by the COVID-19 outbreak during the six months ended June 30, 2020.

 

United States

 

Chanson 23rd Street, accounted for 14.8% and 22.6% of our total revenue for the six months ended June 30, 2020 and 2019, respectively. Revenue from the United States decreased by $688,672, or 48.3%, from $1,427,189 for the six months ended June 30, 2019 to $738,517 for the six months ended June 30, 2020. The decrease was primarily due to decreased revenue from both bakery products and other products as discussed in greater details below.

 

Revenue from bakery products decreased by $333,540, or 49.8%, from $669,205 for the six months ended June 30, 2019 to $335,665 for the six months ended June 30, 2020. Due to the COVID-19 outbreak, Chanson 23rd Street in New York City had been providing only delivery and pickup services between the end of February 2020 and the end of June 2020, and resumed dining services, outdoor only, at the end of June 2020. Therefore, revenue from bakery products decrease significantly.

 

Revenue from other products decreased by $355,132, or 46.9%, from $757,984 for the six months ended June 30, 2019 to $402,852 for the six months ended June 30, 2020. Decreased revenue in other products was due to a decrease in revenue from both eat-in services and beverage products. Revenue from eat-in services decreased by $300,301, or 53.7%, from $559,255 for the six months ended June 30, 2019 to $258,954 for the six months ended June 30, 2020. Revenue from beverage products decreased by $54,831, or 27.6%, from $198,729 for the six months ended June 30, 2019 to $143,898 for the six months ended June 30, 2020. Revenue from other products decreased significantly as our business was negatively disrupted by COVID-19 as mentioned above.

 

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Cost of Revenue

 

Our cost of revenue consists of food ingredient costs, packing costs, workforce related costs, overhead costs such as manufacturing space rental and utility, depreciation, and amortization. Our overall cost of revenue decreased by $373,279, or 13.0%, from $2,881,422 for the six months ended June 30, 2019 to $2,508,143 for the six months ended June 30, 2020. The decrease was mainly attributable to the decrease in the cost of revenue from both the United States and China, as discussed in greater details below.

 

The following table sets forth the breakdown of our cost of revenue for the six months ended June 30, 2020 and 2019, respectively:

 

   For the six months ended June 30,   Variance 
   2020   %   2019   %   Amount   % 
China                        
Bakery products  $2,004,387    79.9%  $2,040,790    70.8%  $(36,403)   (1.8)%
Other products   116,705    4.7%   140,943    4.9%   (24,238)   (17.2)%
Subtotal: cost of revenue from China   2,121,092    84.6%   2,181,733    75.7%   (60,641)   (2.8)%
                               
United States                              
Bakery products   167,794    6.7%   303,775    10.6%   (135,981)   (44.8)%
Other products   219,257    8.7%   395,914    13.7%   (176,657)   (44.6)%
Subtotal: cost of revenue from the United States   387,051    15.4%   699,689    24.3%   (312,638)   (44.7)%
                               
Total Cost of Revenue  $2,508,143    100.0%  $2,881,422    100.0%  $(373,279)   (13.0)%

 

China

 

Cost of revenue from China decreased by $60,641, or 2.8%, from $2,181,733 for the six months ended June 30, 2019 to $2,121,092 for the six months ended June 30, 2020. The decrease was primarily due to a decreased cost of revenue of bakery products, as discussed in greater details below.

 

Cost of revenue from sales of bakery products decreased by $36,403, or 1.8%, from $2,040,790 for the six months ended June 30, 2019 to $2,004,387 for the six months ended June 30, 2020. The percentage of decrease in cost of revenue was less than that in revenue during the same period, mainly due to higher inventory spoilage caused by the store closure between late January and early March of 2020, as some of our fresh ingredients or ingredients with shorter storage life were spoiled or expired during the store closure period.

 

Cost of revenue from other products decreased by $24,238, or 17.2%, from $140,943 for the six months ended June 30, 2019 to $116,705 for the six months ended June 30, 2020. While the cost of revenue of seasonal product remained relatively stable, the cost of revenue from beverage products decreased by $23,101, or 35.6%, from $64,853 for the six months ended June 30, 2019 to $41,752 for the six months ended June 30, 2020. The overall decrease in cost of revenue from other products was in line with the decrease in revenue from other products in our PRC Stores.

 

United States

 

Cost of revenue from the United States decreased by $312,638, or 44.7%, from $699,689 for the six months ended June 30, 2019 to $387,051 for the six months ended June 30, 2020. The decrease was primarily due to the decreased cost of revenue from bakery products and other products as discussed in greater details below.

 

Cost of revenue from sales of bakery products decreased by $135,981, or 44.8%, from $303,775 for the six months ended June 30, 2019 to $167,794 for the six months ended June 30, 2020. The decrease was largely in line with the decrease in revenue from bakery products in our U.S. store.

 

Cost of revenue from sales of other products decreased by $176,657, or 44.6%, from $395,914 for the six months ended June 30, 2019 to $219,257 for the six months ended June 30, 2020. The decrease was mainly due to a decrease in cost of revenue from eat-in services by $137,075, or 49.4%, from $277,526 for the six months ended June 30, 2019 to $140,451 for the six months ended June 30, 2020. The decrease was also due to a decrease in cost of revenue from sales of beverage products by $39,582, or 33.4%, from $118,388 for the six months ended June 30, 2019 to $78,806 for the six months ended June 30, 2020. The overall decrease in cost of revenue from other products was in line with the decrease in revenue from other products in our U.S. store.

 

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Gross Profit and Gross Margin

 

Our gross profit decreased by $941,921, or 27.4%, from $3,440,353 for the six months ended June 30, 2019 to $2,498,432 for the six months ended June 30, 2020. The decrease was mainly attributable to the overall decrease in revenue. Our gross margin decreased by 4.5 percentage points from 54.4% for the six months ended June 30, 2019 to 49.9% for the six months ended June 30, 2020.

 

The following table sets forth the breakdown of our gross profit for the six months ended June 30, 2020 and 2019, respectively:

 

   For the six months ended June 30,   Variance 
   2020   Margin %   2019   Margin %   Amount   % 
China                        
Bakery products  $1,904,254    48.7%  $2,448,085    54.5%  $(543,831)   (22.2)%
Other products   242,712    67.5%   264,768    65.3%   (22,056)   (8.3)%
Subtotal: gross margin and margin % from China   2,146,966    50.3%   2,712,853    55.4%   (565,887)   (20.9)%
                               
United States                              
Bakery products   167,871    50.0%   365,430    54.6%   (197,559)   (54.1)%
Other products   183,595    45.6%   362,070    47.8%   (178,475)   (49.3)%
Subtotal: gross margin and margin % from the United States   351,466    47.6%   727,500    51.0%   (376,034)   (51.7)%
                               
Total Gross Margin and Margin %  $2,498,432    49.9%  $3,440,353    54.4%  $(941,921)   (27.4)%

 

China

 

Gross profit from China decreased by $565,887, or 20.9%, from $2,712,853 for the six months ended June 30, 2019 to $2,146,966 for the six months ended June 30, 2020. The decrease was mainly attributable to the overall decrease in revenue. The gross margin decreased by 5.1 percentage points from 55.4% for the six months ended June 30, 2019 to 50.3% for the six months ended June 30, 2020.

 

The gross profit of bakery products decreased by $543,831, or 22.2%, from $2,448,085 for the six months ended June 30, 2019 to $1,904,254 for the six months ended June 30, 2020, and the gross margin of bakery products decreased by 5.8 percentage points from 54.5% for the six months ended June 30, 2019 to 48.7% for the six months ended June 30, 2020. The decrease was mainly due to the increased inventory spoilage caused by the store closure between late January and early March of 2020 as mentioned above.

 

The gross profit of other products decreased by $22,056, or 8.3%, from $264,768 for the six months ended June 30, 2019 to $242,712 for the six months ended June 30, 2020, which was in line with the decrease in revenue of other products. The gross margin of other products remained relatively stable with a slight increase by 2.2 percentage points from 65.3% for the six months ended June 30, 2019 to 67.5% for the six months ended June 30, 2020. While the gross margin of seasonal product remained relatively stable with a slight increase of 0.2 percentage points, the gross margin of beverage products increased by 1.9 percentage points from 51.6% for the six months ended June 30, 2019 to 53.5% for the six months ended June 30, 2020. During the six months ended June 30, 2019, we sold more fresh fruit beverage products and due to the overestimated customer demand, we stockpiled excess fresh fruit, which were spoiled due to their short storage life. During the six months ended June 30, 2020, we were able to better manage our inventory and estimate the demand, therefore reducing the stock spoilage, which in return, resulted in a higher gross margin as compared to the same period in 2019.

 

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United States

 

Gross profit from the United States decreased by $376,034, or 51.7%, from $727,500 for the six months ended June 30, 2019 to $351,466 for the six months ended June 30, 2020. The decrease was mainly attributable to the overall decrease in revenue. The gross margin decreased by 3.4 percentage points from 51.0% for the six months ended June 30, 2019 to 47.6% for the six months ended June 30, 2020.

 

The gross profit of bakery products decreased by $197,559, or 54.1%, from $365,430 for the six months ended June 30, 2019 to $167,871 for the six months ended June 30, 2020, and the gross margin of bakery products decreased by 4.6 percentage points from 54.6% for the six months ended June 30, 2019 to 50.0% for the six months ended June 30, 2020. We did not close our store in New York City during the COVID-19 outbreak. In order to attract more customers, we offered discounts on customer orders over certain amount. We have also offered special discounts on our products to all hospital workers and free pastries to all frontline workers, drivers, and delivery people as a gesture to show our appreciation for what they contributed to the society during the pandemic. As a result of the discounts offered, our gross margin decreased during the six months ended June 30, 2020 as compared to the same period in 2019.

 

The gross profit of other products decreased by $178,475, or 49.3%, from $362,070 for the six months ended June 30, 2019 to $183,595 for the six months ended June 30, 2020, and the gross margin of other products decreased by 2.2 percentage points from 47.8% for the six months ended June 30, 2019 to 45.6% for the six months ended June 30, 2020. More specifically, the gross profit of eat-in services decreased by $163,226, or 57.9%, from $281,729 for the six months ended June 30, 2019 to $118,503 for the six months ended June 30, 2020, and the gross margin of eat-in services decreased by 4.6 percentage points from 50.4% for the six months ended June 30, 2019 to 45.8% for the six months ended June 30, 2020. The decrease was mainly attributable to the discounts we offered during the six months ended June 30, 2020 as mentioned above. The gross profit of beverage products decreased by $15,249 or 19.0%, from $80,341 for the six months ended June 30, 2019 to $65,092 for the six months ended June 30, 2020, and the gross margin of beverage products increased by 4.8 percentage points from 40.4% for the six months ended June 30, 2019 to 45.2% for the six months ended June 30, 2020. After the opening of our cocktail bar in February 2020, we launched serval new types of cocktails and spirit-free beverage products with relatively higher gross margin, especially our bottled cocktails, which were popular among our customers during the pandemic. As a result, gross margin increased during the six months ended June 30, 2020 as compared to the same period in 2019.

 

Operating Expenses

 

The following table sets forth the breakdown of our operating expenses for the six months ended June 30, 2020 and 2019.

 

   For the six months ended June 30, 
   2020   2019   Variance 
   Amount   % of
revenue
   Amount   % of
revenue
   Amount   % 
                         
Total revenue  $5,006,575    100.0%  $6,321,775    100.0%  $(1,315,200)   (20.8)%
Total operating expenses:                              
Selling expenses   1,407,777    28.1%   1,459,451    23.1%   (51,674)   (3.5)%
General and administrative expenses   1,071,602    21.4%   1,372,791    21.7%   (301,189)   (21.9)%
Total operating expenses  $2,479,379    49.5%  $2,832,242    44.8%  $(352,863)   (12.5)%

 

Selling Expenses

 

Our selling expenses primarily include payroll and sales commission expenses paid to our sales and marketing personnel, store operating expenses, store rental, store decoration and maintenance expenses, utility expenses, and other expenses related to sales activities. Selling expenses decreased by $51,674, or 3.5%, from $1,459,451 for the six months ended June 30, 2019 to $1,407,777 for the six months ended June 30, 2020. The decrease in selling expenses was primarily due to the decrease in salary expenses of $66,575 and social security expenses of $30,062. During our store closure period in China from January to March 2020, we paid our employees base salaries in order to satisfy their basic living expenditure needs during the store closures. In addition, we were exempted from paying work-related injury insurance, endowment insurance, and unemployment insurance for our employees since February 2020, a measurement taken by the Chinese government to support the economy during the pandemic. The decrease was partially offset by the increased service commission of $19,870 paid to the third-party delivery companies as our store in the United States could only provide delivery services and pick up services during the period between the end of February 2020 and the end of June 2020, and increased renovation expenses of $19,709 incurred for preparation of our new stores. Our selling expenses accounted for 28.1% and 23.1% of our revenue for the six months ended June 30, 2020 and 2019, respectively.

 

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General and Administrative Expenses

 

Our general and administrative expenses primarily consist of administrative employee salaries, welfare and insurance expenses, depreciation, and professional service expenses. General and administrative expenses decreased by $301,189, or 21.9%, from $1,372,791 for the six months ended June 30, 2019 to $1,071,602 for the six months ended June 30, 2020, primarily due to a decrease in administrative employee salaries by $330,481. The decrease in administrative employee salaries was mainly due to us paying our employees base salaries during the store closure, the exemption of social security expenses mentioned above, and a reduced headcount for our store in the United States, as a measure to reduce expenses. Our general and administrative expenses accounted for 21.4% and 21.7% of our revenue for the six months ended June 30, 2020 and 2019, respectively.

 

Other Expenses, Net

 

Our other expenses, net primarily consist of interest expenses on our short-term bank loans, and gain or loss from disposal of fixed assets. Other expenses, net decreased by $40,347, or 235.1%, from $17,158 for the six months ended June 30, 2019 to $57,505 for the six months ended June 30, 2020. The decrease was mainly due to the decrease in other income by $51,736, or 103.4%, from a net other income of $50,049 for the six months ended June 30, 2019 to a net other expense of $1,687 for the six months ended June 30, 2020. The decrease was mainly because we had other income in the six months ended June 30, 2019 of $57,920, from a payment waived by one of our suppliers due to quality issues of its products. The other expenses were partially offset by a decrease in interest expenses by $11,389, or 16.9%, from $67,207 for the six months ended June 30, 2019 to $55,818 for the six months ended June 30, 2020. In 2020, banks offered favorable interest rates during the COVID-19 pandemic, and therefore our weighted average interest rate for the six months ended June 30, 2020 decreased as compared to the same period in 2019.

 

Provision for Income Taxes

 

Our provision for income taxes was $7,451 and $11,206 for the six months ended June 30, 2020 and 2019, respectively. The decrease was a result of the decreased income before income taxes, due to the impact of COVID-19 outbreak in 2020. Under the EIT Law, domestic enterprises and foreign investment enterprises are usually subject to a unified 25% EIT rate while preferential tax rates, tax holidays, or exemptions may be granted on a case-by-case basis.

 

Xinjiang United Family and its three branch offices were incorporated in the PRC. During the six months ended June 30, 2020 and 2019, Xinjiang United Family and all its three branch offices qualified as small-scaled minimal profit enterprises. Based on the EIT Law, 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%. From January 1, 2019 to December 31, 2021, the portion of its taxable income not more than RMB1 million is subject to a reduced rate of 5% and the portion between RMB1 million and RMB3 million is subject to a reduced rate of 10%. Xinjiang United Family and all its three branch offices will continue to enjoy the favorable tax rate as long as they are qualified as small-scaled minimal profit enterprises.

 

The UFG Entities are individually-owned businesses, which are not subject to the EIT Law. The Measures for Individual Income Tax Calculation of Individual Industrial and Commercial Households, or the “Measures,” were adopted by the SAT on December 19, 2014 and promulgated on December 27, 2014, and amended on June 15, 2018. According to Article 7 of the Measures, for the income from production and operation of individually-owned businesses, the amount of taxable income shall be the balance of the total income of each tax year after deducting costs, expenses, taxes, losses and other expenditures, and allowable compensation for losses in previous years. Income tax for an individually-owned business can generally be assessed on an actual basis or a deemed basis, which the UFG Entities apply. Therefore, income tax for the UFG Entities is levied as a fixed-rate income tax at a certain percentage of a deemed Taxable Net Income (“TNI”) as assessed by the local tax authority. For the six months ended June 30, 2020 and 2019, eight of these UFG Entities were subject to income tax assessed at either 1% or 1.5% of TNI that ranged from RMB15,000 to RMB123,000 per month. The rest of these UFG Entities were exempted from paying income tax. Along with the continuing growth of business, we expect that the tax rates of these UFG Entities are likely to increase in the future in the annual assessment based on the past performance by the local tax authority. If these UFG Entities change their forms of organization from individually-owned businesses to other corporate forms (such as limited liability company) as a result of their business development requirement, they will no longer enjoy the favorable tax rates and will be subject to the EIT Law, though we currently do not expect their forms of organization to change in the foreseeable future.

 

For the six months ended June 30, 2020 and 2019, the tax saving as the result of the favorable tax rates and tax exemption amounted to $154,659 and $270,068, respectively, and the per share effect of the favorable tax rate and tax exemption was $1,547 and $2,701, respectively.

 

Net Income

 

As a result of the foregoing, we reported a net loss of $45,903 for the six months ended June 30, 2020 as compared to a net income of $579,747 for the six months ended June 30, 2019. 

 

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Comparison of Results of Operations for the Years Ended December 31, 2019 and 2018

 

The following table summarizes the results of our operations during the years ended December 31, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such years.

 

   For the years ended
December 31,
   Variance 
   2019   2018   Amount   % 
Revenue  $12,577,135   $11,963,674   $613,461    5.1%
Cost of revenue   5,903,456    6,032,502    (129,046)   (2.1)%
Gross profit   6,673,679    5,931,172    742,507    12.5%
                     
OPERATING EXPENSES                    
Selling expenses   3,152,341    2,917,083    235,258    8.1%
General and administrative expenses   2,454,375    2,171,623    282,752    13.0%
Total operating expenses   5,606,716    5,088,706    518,010    10.2%
                     
INCOME FROM OPERATIONS   1,066,963    842,466    224,497    26.6%
                     
OTHER INCOME (EXPENSES)                    
Interest expense, net   (148,902)   (110,007)   (38,895)   35.4%
Other income, net   87,093    84,665    2,428    2.9%
Total other expenses, net   (61,809)   (25,342)   (36,467)   143.9%
                     
INCOME BEFORE INCOME TAX PROVISION   1,005,154    817,124    188,030    23.0%
                     
INCOME TAX PROVISION   59,686    58,151    1,535    2.6%
                     
NET INCOME  $945,468   $758,973   $186,495    24.6%

 

Revenue

 

We generate revenue primarily from bakery products and other products sold in China and the United States. Bakery products sold in China consist of packaged bakery products (cakes, bread, and snacks), birthday cakes, and made-in-store pastries. Other products sold in China consist of seasonal products (mooncakes and zongzi) and beverage products. Bakery products sold in the United States consist of cakes, bread, sweets, birthday cakes, and pastries. Other products sold in the United States consist of eat-in menu items (sandwiches, salads, toasts, croissants, soups, and desserts) and beverage products.

 

Our total revenue increased by $613,461, or 5.1%, from $11,963,674 for the year ended December 31, 2018 to $12,577,135 for the year ended December 31, 2019. The increase in our revenue was primarily due to increased revenue from China, as discussed in greater details below.

 

The following table sets forth the breakdown of our revenue for the years ended December 31, 2019 and 2018, respectively:

 

   For the Years ended December 31,   Variance 
   2019   %   2018   %   Amount   % 
China                        
Bakery products  $9,260,071    73.6%  $8,506,774    71.1%  $753,297    8.9%
Other products   943,004    7.5%   1,100,765    9.2%   (157,761)   (14.3)%
Subtotal: revenue from China   10,203,075    81.1%   9,607,539    80.3%   595,536    6.2%
                               
United States                              
Bakery products   957,797    7.6%   1,034,220    8.6%   (76,423)   (7.4)%
Other products   1,416,263    11.3%   1,321,915    11.0%   94,348    7.1%
Subtotal: revenue from the United States   2,374,060    18.9%   2,356,135    19.7%   17,925    0.8%
                               
Total Revenue  $12,577,135    100.0%  $11,963,674    100.0%  $613,461    5.1%

 

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China

 

Our PRC Stores accounted for 81.1% and 80.3% of our total revenue for the years ended December 31, 2019 and 2018, respectively. Revenue from China increased by $595,536, or 6.2%, from $9,607,539 for the year ended December 31, 2018 to $10,203,075 for the year ended December 31, 2019. The increase in our revenue was primarily due to increased revenue from bakery products, which was partially offset by the decreased revenue from other products, as discussed in greater details below.

 

Revenue from bakery products increased by $753,297, or 8.9%, from $8,506,774 for the year ended December 31, 2018 to $9,260,071 for the year ended December 31, 2019. The increase was mainly due to revenue from the five newly-opened PRC stores amounted to $1,320,118 during the year ended December 31, 2019. The increase was partially offset by the decrease in comparable store sales of 2.2% in bakery products, which was discussed above, closure of two less profitable bakery stores, and depreciation of RMB against US$. The average translation rate for the years ended December 31, 2019 and 2018 were at US$1 to RMB6.9088 and at US$1 to RMB6.6163, respectively, which represented a decrease of 4.4%.

 

Revenue from other products decreased by $157,761, or 14.3%, from $1,100,765 for the year ended December 31, 2018 to $943,004 for the year ended December 31, 2019. The decrease was mainly due to the decreased revenue of seasonal products by $123,742, or 15.0%, from $825,385 for the year ended December 31, 2018 to $701,643 for the year ended December 31, 2019. During the year ended December 31, 2019, in order to improve the profitability of our seasonal products, we changed our business strategy by selling more high-end seasonal products with higher selling prices and gross profit, which resulted in overall decrease in sales volume and revenue from seasonal products. However, our gross margin of seasonal products improved during the year ended December 31, 2019, as discussed in “—Gross Profit and Gross Margin” below.

 

United States

 

Chanson 23rd Street, accounted for 18.9% and 19.7% of our total revenue for the years ended December 31, 2019 and 2018, respectively. Revenue from the United States increased by $17,925, or 0.8%, from $2,356,135 for the year ended December 31, 2018 to $2,374,060 for the year ended December 31, 2019. The increase was primarily due to increased revenue from other products, which was partially offset by decreased revenue from bakery products as discussed in greater details below.

 

Revenue from bakery products decreased slightly by $76,423, or 7.4%, from $1,034,220 for the year ended December 31, 2018 to $957,797 for the year ended December 31, 2019. The decrease was due to a shift in the business model of Chanson 23rd Street, as we focused more on offering eat-in services as discussed below.

 

Increased revenue in other products was due to an increase in revenue from eat-in services, partially offset by a decrease in revenue from beverage products.

 

Revenue from eat-in services increased by $274,684, or 34.2%, from $804,291 for the year ended December 31, 2018 to $1,078,975 for the year ended December 31, 2019. Starting from fiscal year 2019, we have focused more on offering eat-in services as we aim to make Chanson 23rd Street an affordable luxury European-style café and eatery that specializes in the art of dessert making. Therefore, we developed and refined our recipes in order to serve customers with better light meals, which brought in more new customers and increased the frequency of our existing customers’ visits to our store.

 

Revenue from beverage products decreased by $180,336, or 34.8%, from $517,624 for the year ended December 31, 2018 to $337,288 for the year ended December 31, 2019. The decrease was mainly due to the temporary closure of our cocktail bar due to renovation between August 2019 and February 2020. Therefore, revenue from beverage products deceased significantly for the year ended December 31, 2019 as compared to last year.

 

Cost of Revenue

 

Our cost of revenue consists of food ingredient costs, packing costs, workforce related costs, overhead costs such as store rental and utility, depreciation, and amortization. Our overall cost of revenue decreased by $129,046, or 2.1%, from $6,032,502 for the year ended December 31, 2018 to $5,903,456 for the year ended December 31, 2019. The decrease was mainly attributable to the decrease in the cost of revenue from the United States, which was partially offset by the increase in the cost of revenue from China, as discussed in greater details below.

 

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The following table sets forth the breakdown of our cost of revenue for the years ended December 31, 2019 and 2018, respectively:

 

   For the Years ended December 31,   Variance 
   2019   %   2018   %   Amount   % 
China                        
Bakery products  $4,330,824    73.4%  $3,902,285    64.7%  $428,539    11.0%
Other products   368,509    6.2%   588,476    9.8%   (219,967)   (37.4)%
Subtotal: cost of revenue from China   4,699,333    79.6%   4,490,761    74.4%   208,572    4.6%
                               
United States                              
Bakery products   444,813    7.5%   640,869    10.6%   (196,056)   (30.6)%
Other products   759,310    12.9%   900,872    14.9%   (141,562)   (15.7)%
Subtotal: cost of revenue from the United States   1,204,123    20.4%   1,541,741    25.6%   (337,618)   (21.9)%
                               
Total Cost of Revenue  $5,903,456    100.0%  $6,032,502    100.0%  $(129,046)   (2.1)%

 

China

 

Cost of revenue from China increased by $208,572, or 4.6%, from $4,490,761 for the year ended December 31, 2018 to $4,699,333 for the year ended December 31, 2019. The increase was primarily due to the increased cost of revenue of bakery products, which was partially offset by the decreased cost of revenue of other products as discussed in greater details below.

 

Cost of revenue from sales of bakery products increased by $428,539, or 11.0%, from $3,902,285 for the year ended December 31, 2018 to $4,330,824 for the year ended December 31, 2019. The overall increase in cost of revenue was in line with the increase in revenue from bakery products in our PRC Stores.

 

Cost of revenue from other products decreased by $219,967, or 37.4%, from $588,476 for the year ended December 31, 2018 to $368,509 for the year ended December 31, 2019. The decrease was mainly due to the cost of revenue from seasonal products decreasing by $161,280, or 38.0%, from $423,957 for the year ended December 31, 2018 to $262,677 for the year ended December 31, 2019. The decrease of the cost of revenue from seasonal products was mainly due to the decreased sales volume as mentioned above, which was in line with the decrease in the revenue of seasonal products during the year ended December 31, 2019.

 

United States

 

Cost of revenue from the United States decreased by $337,618, or 21.9%, from $1,541,741 for the year ended December 31, 2018 to $1,204,123 for the year ended December 31, 2019. The decrease was primarily due to the decreased cost of revenue from bakery products and other products as discussed in greater details below.

 

Cost of revenue from sales of bakery products decreased by $196,056, or 30.6%, from $640,869 for the year ended December 31, 2018 to $444,813 for the year ended December 31, 2019. The decrease was mainly due to reduced ingredient costs and workforce related costs. As we gained more experiences since we started our U.S. operations in 2015, we managed to improve our operation efficiency with better management of inventory and manpower, which resulted in reduced product waste and downsized operation headcount.

 

Cost of revenue from sales of other products decreased by $141,562, or 15.7%, from $900,872 for the year ended December 31, 2018 to $759,310 for the year ended December 31, 2019. The decrease was mainly due to the decrease in cost of revenue from the sales of beverage products by $132,239, or 38.1%, from $346,716 for the year ended December 31, 2018 to $214,477 for the year ended December 31, 2019, which was in line with the decrease in sales of beverage products resulting from the temporary closure of our cocktail bar.

 

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Gross Profit and Gross Margin

 

Our gross profit increased by $742,507, or 12.5%, from $5,931,172 for the year ended December 31, 2018 to $6,673,679 for the year ended December 31, 2019. The increase was mainly attributable to the overall increase in sales as well as the decrease in cost of revenue. Our gross margin increased by 3.5 percentage points from 49.6% for the year ended December 31, 2018 to 53.1% for the year ended December 31, 2019.

 

The following table sets forth the breakdown of our gross profit for the years ended December 31, 2019 and 2018, respectively:

 

   For the Years ended December 31,   Variance 
   2019   Margin %   2018   Margin %   Amount   % 
China                        
Bakery products  $4,929,247    53.2%  $4,604,489    54.1%  $324,758    7.1%
Other products   574,495    60.9%   512,289    46.5%   62,206    12.1%
Subtotal: gross margin and margin % from China   5,503,742    53.9%   5,116,778    53.3%   386,964    7.6%
                               
United States                              
Bakery products   512,984    53.6%   393,351    38.0%   119,633    30.4%
Other products   656,953    46.4%   421,043    31.9%   235,910    56.0%
Subtotal: gross margin and margin % from the United States   1,169,937    49.3%   814,394    34.6%   355,543    43.7%
                               
Total Gross Margin and Margin %  $6,673,679    53.1%  $5,931,172    49.6%  $742,507    12.5%

 

China

 

Gross profit from China increased by $386,964, or 7.6%, from $5,116,778 for the year ended December 31, 2018 to $5,503,742 for the year ended December 31, 2019. The increase was mainly attributable to the overall increase in sales. The gross margin increased by 0.6 percentage points from 53.3% for the year ended December 31, 2018 to 53.9% for the year ended December 31, 2019.

 

The gross profit of bakery products increased by $324,758, or 7.1%, from $4,604,489 for the year ended December 31, 2018 to $4,929,247 for the year ended December 31, 2019, which was in line with the increase in the sales of bakery products. The gross margin of bakery products from the PRC Stores remained relatively stable with a slight decrease of 0.9 percentage points from 54.1% for the year ended December 31, 2018 to 53.2% for the year ended December 31, 2019.

 

The gross profit of other products increased by $62,206, or 12.1%, from $512,289 for the year ended December 31, 2018 to $574,495 for the year ended December 31, 2019, while the gross margin increased 14.4 percentage points from 46.5% for the year ended December 31, 2018 to 60.9% for the year ended December 31, 2019. The increase was mainly attributable to the increase of gross profit of seasonal products by $37,538, or 9.4%, from $401,428 for the year ended December 31, 2018 to $438,966 for the year ended December 31, 2019, and the gross margin of seasonal products from the PRC Stores increased by 14.0 percentage points from 48.6% for the year ended December 31, 2018 to 62.6% for the year ended December 31, 2019. As mentioned above, in order to improve the profitability of our seasonal products, we changed our business strategy by selling more high-end seasonal products with higher selling prices and gross profit during the year ended December 31, 2019, resulting in a higher gross margin of seasonal products.

 

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United States

 

Gross profit from the United States increased by $355,543, or 43.7%, from $814,394 for the year ended December 31, 2018 to $1,169,937 for the year ended December 31, 2019. The increase was mainly attributable to the overall decrease in cost of revenue. The gross margin increased by 14.7 percentage points from 34.6% for the year ended December 31, 2018 to 49.3% for the year ended December 31, 2019.

 

The gross profit of bakery products increased by $119,633, or 30.4%, from $393,351 for the year ended December 31, 2018 to $512,984 for the year ended December 31, 2019, and the gross margin of bakery products increased by 15.6 percentage points from 38.0% for the year ended December 31, 2018 to 53.6% for the year ended December 31, 2019. The increases were due to the improvement in operation efficiency as we mentioned above.

 

The gross profit of other products increased by $235,910, or 56.0%, from $421,043 for the year ended December 31, 2018 to $656,953 for the year ended December 31, 2019, and the gross margin of other products increased by 14.5 percentage points from 31.9% for the year ended December 31, 2018 to 46.4% for the year ended December 31, 2019. The gross profit of eat-in services increased by $284,007, or 113.5%, from $250,135 for the year ended December 31, 2018 to $534,142 for the year ended December 31, 2019, and the gross margin of eat-in services increased by 18.4 percentage points from 31.1% for the year ended December 31, 2018 to 49.5% for the year ended December 31, 2019. The increases were due to the increased sales and improvement in operation efficiency as we mentioned above.

 

Operating Expenses

 

The following table sets forth the breakdown of our operating expenses for the years ended December 31, 2019 and 2018.

 

   For the Years Ended December 31, 
   2019   2018   Variance 
   Amount   % of
revenue
   Amount   % of
revenue
   Amount   % 
                         
Total revenue  $12,577,135    100.0%  $11,963,674    100.0%  $613,461    5.1%
Total operating expenses:                              
Selling expenses   3,152,341    25.1%   2,917,083    24.4%   235,258    8.1%
General and administrative expenses   2,454,375    19.5%   2,171,623    18.2%   282,752    13.0%
Total operating expenses  $5,606,716    44.6%  $5,088,706    42.6%  $518,010    10.2%

 

Selling Expenses

 

Our selling expenses primarily include payroll and sales commission expenses paid to our sales and marketing personnel, store operating expenses, store rental, store decoration and maintenance expenses, utility expenses, and other expenses related to sales activities. Selling expenses increased by $235,258, or 8.1%, from $2,917,083 for the year ended December 31, 2018 to $3,152,341 for the year ended December 31, 2019. The increase in selling expenses was primarily caused by an increase in store rental expenses by $180,282 and salary expenses by $42,866, because we opened five new stores in the PRC and hired sales personnel for these new stores to promote bakery product sales during the fiscal year 2019. Our selling expenses accounted for 25.1% and 24.4% of our revenue for the years ended December 31, 2019 and 2018, respectively.

 

General and Administrative Expenses

 

Our general and administrative expenses primarily consist of administrative employee salaries, welfare and insurance expenses, depreciation, and professional service expenses. General and administrative expenses increased by $282,752, or 13.0%, from $2,171,623 for the year ended December 31, 2018 to $2,454,375 for the year ended December 31, 2019, primarily due to an increase in professional fees in relation to accounting services by $206,320, an increase in services fees incurred for the year ended December 31, 2019 for the preparation of our initial public offering, and an increase in administrative employee salaries by $34,487 when we hired more administrative employees and expanded our management team to meet the business growth demand. Our general and administrative expenses accounted for 19.5% and 18.2% of our revenue for the years ended December 31, 2019 and 2018, respectively.

 

Other Expenses, Net

 

Our other expenses, net primarily consist of interest expenses on our short-term bank loans, and gain or loss from disposal of fixed assets. Other expenses, net increased by $36,467, or 143.9%, from $25,342 for the year ended December 31, 2018 to $61,809 for the year ended December 31, 2019. The increase in other expenses, net was primarily due to our interest expenses increasing by $38,895 from $110,007 for the year ended December 31, 2018 to $148,902 for the year ended December 31, 2019, because we carried an increased weighted average loan balance for the year ended December 31, 2019 as compared to 2018.

 

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Provision for Income Taxes

 

Our provision for income taxes was $59,686 and $58,151 for the years ended December 31, 2019 and 2018, respectively. Under the EIT Law, domestic enterprises and foreign investment enterprises are usually subject to a unified 25% EIT rate while preferential tax rates, tax holidays, or exemptions may be granted on a case-by-case basis.

 

Xinjiang United Family and its three branch offices were incorporated in the PRC. During the year ended December 31, 2018, Xinjiang United Family and its two branch offices qualified as small-scaled minimal profit enterprises, and during the year ended December 31, 2019, Xinjiang United Family and all its three branch offices qualified as small-scaled minimal profit enterprises. Based on the EIT Law of PRC, 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%. From January 1, 2019 to December 31, 2021, the portion of its taxable income not more than RMB1 million is subject to a reduced rate of 5% and the portion between RMB1 million and RMB3 million is subject to a reduced rate of 10%. Xinjiang United Family and all its three branch offices will continue enjoying the favorable tax rate as long as they are qualified as small-scaled minimal profit enterprises.

 

The UFG Entities are individually-owned businesses, which are not subject to the EIT Law. The Measures for Individual Income Tax Calculation of Individual Industrial and Commercial Households, or the “Measures,” were adopted by the SAT on December 19, 2014 and promulgated on December 27, 2014, and amended on June 15, 2018. According to Article 7 of the Measures, for the income from production and operation of individually-owned businesses, the amount of taxable income shall be the balance of the total income of each tax year after deducting costs, expenses, taxes, losses and other expenditures, and allowable compensation for losses in previous years. Income tax for an individually-owned business can generally be assessed on an actual basis or a deemed basis, which the UFG Entities apply. Therefore, income tax for the UFG Entities is levied as a fixed-rate income tax at a certain percentage of a deemed TNI as assessed by the local tax authority. For the year ended December 31, 2019 and 2018, eight of these UFG Entities were subject to income tax assessed at either 1% or 1.5% of TNI that ranged from RMB15,000 to RMB123,600 per month. The rest of these UFG Entities were exempted from paying income tax. Along with the continuing growth of business, we expect that the tax rates of these UFG Entities are likely to increase in the future in the annual assessment based on the past performance by the local tax authority. If these UFG Entities change their forms of organization from individually-owned businesses to other corporate forms (such as limited liability company) as a result of their business development requirement, they will no longer enjoy the favorable tax rates and will be subject to the EIT Law, though we currently do not expect their forms of organization to change in the foreseeable future.

 

For the years ended December 31, 2019 and 2018, tax savings as the result of the favorable tax rates and tax exemptions amounted to $465,888 and $506,612, respectively, and the per share effect of the favorable tax rate and tax exemptions was $4,659 and $5,066, respectively.

 

Net Income

 

As a result of the foregoing, we reported a net income of $945,468 for the year ended December 31, 2019 as compared to a net income of $758,973 for the year ended December 31, 2018.

   

Liquidity and Capital Resources

 

To date, we have financed our operations primarily through cash flow from operations, bank loans, and shareholder working capital funding, when necessary. We plan to support our future operations primarily from cash flows provided by operating activities.

 

As of June 30, 2020, we had $3,297,036 in cash and cash equivalents as compared to $3,874,288 as of December 31, 2019. As of June 30, 2020, we also had $1,168,708 accounts receivable balance, approximately 91.3%, or $1.1 million, of the June 30, 2020 balance have been subsequently collected. The remaining balance is expected to be collected before June 30, 2021. The collection of such receivables made cash available for use in our operations as working capital, if necessary.

 

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As of June 30, 2020, we had approximately $2.3 million in bank loans outstanding. We expect that we will be able to renew our existing bank loan upon its maturity based on past experience and our good credit history.

 

As of June 30, 2020, we had a negative working capital of approximately $3.6 million, including deferred revenue of approximately $4.3 million which was reported as current liability, but will not require cash payment in the future. We believe our cash and cash equivalents on hand, our operating cash flows, and the available bank facilities will be sufficient to meet our working capital needs over the next 12 months. However, if we were to experience an adverse operating environment, including adverse developments in the ongoing COVID-19 outbreak, or incur unanticipated capital expenditures, or if we decide to accelerate our growth, then additional financing may be required. Our capital expenditures, including development costs related to the opening or acquisition of additional bakery stores and facilities, maintenance and renovation expenditures, and other capital needs such as other infrastructure to support ongoing operational initiatives have been and will continue to be significant. We cannot guarantee, however, that additional financing, if required, would be available at all or on favorable terms. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.

 

As of December 31, 2019, we had $3,874,288 in cash and cash equivalents as compared to $546,584 as of December 31, 2018. As of December 31, 2019, we also had $455,668 accounts receivable balance. We collected all our accounts receivable during the subsequent period from January to July 2020. The collection of such receivables made cash available for use in our operations as working capital, if necessary.

 

As of December 31, 2019, we had approximately $2.1 million in bank loans outstanding, which was subsequently fully repaid upon its maturity. On May 11, 2020, we secured another bank loan with Huaxia Bank, which provided us additional funding of RMB15 million (approximately $2.1 million) through May 2021. We expect that we will be able to renew our existing bank loan upon its maturity based on past experience and our good credit history.

 

As of December 31, 2019, we had a negative working capital of approximately $3.2 million, including deferred revenue of approximately $3.4 million which was reported as current liability, but will not require cash payment in the future. We believe our cash and cash equivalents on hand, our operating cash flows, and the available bank facilities will be sufficient to meet our working capital needs over the next 12 months. However, if we were to experience an adverse operating environment, including adverse developments in the ongoing COVID-19 outbreak, or incur unanticipated capital expenditures, or if we decide to accelerate our growth, then additional financing may be required. Our capital expenditures, including development costs related to the opening or acquisition of additional bakery stores and facilities, maintenance and remodel expenditures, and other capital needs such as other infrastructure to support ongoing operational initiatives have been and will continue to be significant. We cannot guarantee, however, that additional financing, if required, would be available at all or on favorable terms. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.

 

In the coming years, we will be looking to other sources, such as equity financing, to meet our cash needs. While facing uncertainties in regards to the size and timing of capital to be raised, we are confident that we can continue to meet operational needs mainly by utilizing cash flows generated from our operating activities and shareholder working capital funding, as necessary.

 

Currently, our main operations are conducted in China and most of our revenue, expenses, cash, and cash equivalents are denominated in RMB. Our holding company, however, may need dividends and other distributions on equity from our PRC subsidiary and VIEs to satisfy its liquidity requirements. Although dividends may be freely remitted in or out of China in RMB or foreign currency according to the PRC regulations, our PRC subsidiary and VIEs are restricted in their ability to transfer a portion of their net assets, equivalent to their reserves and their share capital, to the holding company in the form of loans, advances, or cash dividends. See “Risk Factors—Risks Relating to Doing Business in the PRC—Our PRC subsidiary is subject to restrictions on paying dividends or making other payments to us, which may have a material adverse effect on our ability to conduct our business.” As of December 31, 2019 and 2018, the total restricted net assets equivalent amounted to $1,325,631 and $1,248,175, respectively. As of June 30, 2020, the total restricted net assets amounted to $1,325,631.

 

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The following table sets forth summary of our cash flows for the periods indicated:

 

   For the six months ended
June 30,
 
   2020   2019 
Net cash provided by (used in) operating activities  $85,350   $(199,798)
Net cash provided by (used in) investing activities   (45,278)   1,634,086 
Net cash provided by (used in) financing activities   (562,607)   87,921 
Effect of exchange rate change on cash   (65,720)   (14,814)
Net increase (decrease) in cash and cash equivalents, and restricted cash   (588,255)   1,507,395 
Cash and cash equivalents, and restricted cash at beginning of period   3,885,291    557,587 
Cash and cash equivalents, and restricted cash at end of period  $3,297,036   $2,064,982 

 

The following table sets forth summary of our cash flows for the periods indicated:

 

   For the Years Ended
December 31,
 
   2019   2018 
Net cash provided by operating activities  $1,433,517   $604,160 
Net cash provided by (used in) investing activities   1,317,784    (2,321,437)
Net cash provided by financing activities   619,890    2,043,885 
Effect of exchange rate change on cash   (43,487)   (19,360)
Net increase in cash and cash equivalents, and restricted cash   3,327,704    307,248 
Cash and cash equivalents, and restricted cash at beginning of year   557,587    250,339 
Cash and cash equivalents, and restricted cash at end of year  $3,885,291   $557,587 

 

Operating Activities

 

Net cash provided by operating activities was $85,350 for the six months ended June 30, 2020, mainly derived from a net loss of $45,903 for the period, and net changes in our operating assets and liabilities, which mainly included an increase in accounts receivable of $723,571. Due to the recent COVID-19 outbreak, many of our corporate customers in China and the U.S. were adversely affected during this period, which resulted in slow collection of our accounts receivable. Approximately 91.3%, or $1.1 million, of the June 30, 2020 balance have been subsequently collected. The remaining balance of approximately $0.1 million is expected to be collected before June 30, 2021. Deferred revenue increased by $921,132, primarily due to increased membership cards sales. Amounts loaded onto our membership cards are initially recorded at deferred revenue, and recognized as revenue upon redemption, at which point, we also reduce the deferred revenue liability.

 

Net cash used in operating activities was $199,798 for the six months ended June 30, 2019, mainly derived from a net income of $579,747 for the period, and net changes in our operating assets and liabilities, which mainly included an increase in accounts receivable of $426,671 because of the increased sales of our products. Trade payable and other current liabilities decreased by $353,703 due to the payments to our suppliers and other debtors.

 

Net cash provided by operating activities was $1,433,517 for the year ended December 31, 2019, mainly derived from a net income of $945,468 for the year, and net changes in our operating assets and liabilities, which mainly included a decrease in accounts receivable of $210,407. We strengthened our effort in collection of accounts receivable during the year ended December 31, 2019, resulting in decreased accounts receivable despite of the increase in sales. Deferred revenue increased by $473,946, primarily due to increased membership cards sales. Amounts loaded onto our membership cards are initially recorded at deferred revenue, and recognized as revenue upon redemption for payment, at which point, we also reduce the deferred revenue liability.

 

Net cash provided by operating activities was $604,160 for the year ended December 31, 2018, mainly derived from a net income of $758,973 for the year, and net changes in our operating assets and liabilities, which mainly included an increase in deferred revenue of $353,389 primarily due to increased membership cards sales as we mentioned above. The increase in net cash provided by operating activities was partially offset by the increase in accounts receivable of $213,722 because of the increased sales of our products. The inventory increased by $196,243 as we increased the stockpile of ingredient materials in order to prepare for increased sales orders.

 

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Investing Activities 

 

Net cash used in investing activities amounted to $45,278 for the six months ended June 30, 2020 due to purchases of property and equipment and leasehold improvement for the new stores.

 

Net cash provided by investing activities amounted to $1,634,086 for the six months ended June 30, 2019, primarily including proceeds from the collection of the amount due from a related party of $1,943,385 and purchases of property and equipment of $309,299.

 

Net cash provided by investing activities amounted to $1,317,784 for the year ended December 31, 2019, including proceeds from collection of amount due from a related party of $1,896,008 and purchase of property and equipment of $636,499.

 

Net cash used in investing activities amounted to $2,321,437 for the year ended December 31, 2018, primarily including purchase of property and equipment of $424,043 and advances made to a related party of $1,897,394. The amount due from a related party represented cash advanced to the chief executive officer of Xinjiang United Family and our controlling shareholder and Chairman, Mr. Gang Li, mainly as the initial working capital in relation to the opening of five new UFG Entities, such as prepaid rental, renovation, and other start-up expenses in 2019. The amount due from Mr. Gang Li had been fully utilized or collected by us as of December 31, 2019. As of December 31, 2020, we had an amount of approximately $0.2 million due from a related party, representing cash advanced to Mr. Gang Li, mainly as the initial working capital, such as prepaid rental, renovation, and other start-up expenses, for the opening of a newly established bakery store, Chanson Greenwich, in New York. The amount due from Mr. Gang Li had been fully utilized or collected by us in January 2021. Chanson Greenwich was initially formed by Mr. Gang Li, and subsequently Mr. Gang Li assigned his membership interests in Chanson Greenwich to Chanson NY on September 28, 2020. After the transfer, Chanson Greenwich became a wholly owned subsidiary of Chanson NY. Such business advances to our related party were mainly for the expansion of our business and historically such advances were all fully utilized or collected by us; hence, we do not expect any potential risks or negative consequences of such advances on our liquidity. We are in process of refining our organization structure, and we expect that we will make no such advances to our related party in the future.

 

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Financing Activities

 

Net cash used in financing activities was $562,607 for the six months ended June 30, 2020, which primarily consisted of repayments of short-term bank loans of $2,137,025 and repayment of a shareholder loan of $739,433 and was partially offset by proceeds from short-term bank loans of $2,342,291.

 

Net cash provided by financing activities was $87,921 for the six months ended June 30, 2019, which primarily consisted of proceeds from short-term bank loans of $2,211,000, and proceeds from a shareholder loan of $271,015, and was partially offset by repayments of short-term bank loans of $2,207,937 and payments made for deferred offering costs of $271,015.

 

Net cash provided by financing activities was $619,890 for the year ended December 31, 2019, which primarily consisted of proceeds from a shareholder loan of $813,352 which was partially offset by payments made for deferred offering costs of $194,282. There were also proceeds from short-term bank loans of $2,172,000 because we borrowed RMB15 million from Huaxia Bank as working capital for one year. On the other hand, we repaid $2,171,180 (RMB15 million) short-term bank loans to Huaxia Bank upon loan maturity.

 

Net cash provided by financing activities was $2,043,885 for the year ended December 31, 2018, which primarily consisted of proceeds from short-term bank loans of $2,271,000 because we borrowed RMB15 million from Huaxia Bank as working capital for one year. On the other hand, we repaid $227,115 (RMB1.4 million) short-term bank loans to China Construction Bank upon loan maturity.

 

Contractual obligations

  

As of June 30, 2020, our contractual obligations were as follows:

 

       Less than                     
Contractual obligations  Total   1 year   1-2 years   2-3 years   3-4 years   4-5 years   Thereafter 
Short-term bank loans (1)  $2,312,949   $2,312,949   $-   $-   $-   $-   $- 
Future lease payments (2)   12,397,606    535,640    1,501,421    1,418,719    1,284,895    1,279,301    6,377,630 
Total  $14,710,555   $2,848,589   $1,501,421   $1,418,719   $1,284,895   $1,279,301   $6,377,630 

 

(1)Repayment of a bank loan: as of June 30, 2020, our contractual obligation to repay outstanding bank loans totaled $2,312,949 and related to the following bank loans:

 

A.On May 11, 2020, Xinjiang United Family signed a new loan agreement with Huaxia Bank to borrow RMB15 million ($2,103,658 as of June 30, 2020) as working capital for a year, with a maturity date of May 11, 2021. The loan bears a favorable fixed interest rate of 4.98% and is guaranteed by Ms. Baolin Wang, the legal representative of Xinjiang United Family, and XJ Financing Guaranty. In order for XJ Financing Guaranty to endorse the guarantee with the bank, our controlling shareholder, Mr. Gang Li, and his wife, Ms. Ying Xiong, jointly signed a personal guarantee agreement with XJ Financing Guaranty and pledged their residential property as collateral to XJ Financing Guaranty. In addition, Xinjiang United Family pledged all its equipment in the PRC and the operating rights of two bakery stores as collateral to XJ Financing Guaranty. Three affiliated entities controlled by Mr. Gang Li also signed guarantee agreements with XJ Financing Guaranty.

 

B.On April 29, 2020, our U.S. subsidiary Chanson 23rd Street received funding for a loan totaling $209,291 under the U.S. SBA PPP, which is part of the CARES Act enacted on March 27, 2020. Under the terms of the SBA PPP loan, up to 100% of the principal and accrued interest may be forgiven if certain criteria are met and the loan proceeds are used for qualifying expenses such as payroll costs, benefits, rent, and utilities as described in the CARES Act. The loan accrues interest at a rate of 1% and any portion of the principal and accrued interest that is not forgiven is required to be repaid by April 29, 2021.

 

(2)We lease office spaces, bakery stores facilities, and employee dormitories, which are classified as operating leases in accordance with ASC Topic 842. As of June 30, 2020, our future lease payments totaled $12,397,606.

   

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As of December 31, 2019, our contractual obligations were as follows:

 

       Less than                     
Contractual obligations  Total   1 year   1-2 years   2-3 years   3-4 years   4-5 years   Thereafter 
Short-term bank loans (1)  $2,138,962   $2,138,962   $-   $-   $-   $-   $- 
Future lease payments (2)   9,519,920    1,274,794    1,109,458    947,492    764,814    756,981    4,666,381 
Total  $11,658,882   $3,413,756   $1,109,458   $947,492   $764,814   $756,981   $4,666,381 

 

(1)Repayment of a bank loan: as of December 31, 2019, our contractual obligation to repay an outstanding bank loans totaled $2,138,962 and related to the following bank loan:

 

A. On April 11, 2019, Xinjiang United Family entered into a loan agreement with Huaxia Bank to borrow RMB15 million (approximately $2,138,962 as of December 31, 2019) as working capital for a year, with a maturity date of April 11, 2020. The loan bore a fixed interest rate of 6.98%. The loan was subsequently repaid in full upon maturity. This loan was guaranteed by Ms. Baolin Wang, the legal representative of Xinjiang United Family, and a third-party guaranty company, Xinjiang Financing Guaranty Co., Ltd. (“XJ Financing Guaranty”). In order for XJ Financing Guaranty to endorse the guarantee with the bank, our controlling shareholder, Mr. Gang Li, and his wife, Ms. Ying Xiong, jointly signed a personal guarantee agreement with XJ Financing Guaranty and pledged their residential property as collateral to XJ Financing Guaranty. In addition, Xinjiang United Family pledged all its equipment in the PRC and the operating rights of two bakery stores as collateral to XJ Financing Guaranty. Three affiliated entities controlled by Mr. Gang Li also signed guarantee agreements with XJ Financing Guaranty.

 

(2)We lease office spaces, bakery stores facilities, and employee dormitories, which are classified as operating leases in accordance with Topic 842. As of December 31, 2019, our future lease payments totaled $9,519,920.

 

Trend Information

 

Other than as disclosed elsewhere in this registration statement, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenue, income from continuing operations, profitability, liquidity, or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements as of December 31, 2019 or June 30, 2020.

 

Inflation

 

Inflation does not materially affect our business or the results of our operations.

 

Seasonality

 

For bakery products sold by our PRC Stores and Chanson 23rd Street and eat-in services offered by Chanson 23rd Street, we have not experienced obvious seasonal fluctuations in our sales as these products have been commonly consumed on a daily basis by our customers. With respect to beverage products sold by our PRC Stores and Chanson 23rd Street, we 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. With respect to seasonal products sold by our PRC Stores, we have experienced in the past, and expect to continuously experience in the future, seasonal fluctuations in our retail sales as a result of customers’ increased demand for these seasonal products as gifts and for person consumption during holiday seasons. Historically, we generate almost all the retail sales of our seasonal products during the one or two months before Dragon Boat Festival and Mid-Autumn Festival in China, which respectively take place at the end of the second quarter and the beginning of the third quarter of a year.

 

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Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and unaudited condensed consolidated financial statements. These financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenue and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable, advances to suppliers, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, and revenue recognition. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this prospectus reflect the more significant judgments and estimates used in preparation of our consolidated financial statements and unaudited condensed consolidated financial statements.

 

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements and unaudited condensed consolidated financial statements:

 

Uses of estimates

 

In preparing the consolidated financial statements and unaudited condensed consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are based on information as of the date of the consolidated financial statements and unaudited condensed consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, and revenue recognition. Actual results could differ from those estimates.

 

Accounts Receivable

 

Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts.

 

We determine the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trend. We establish a provision for doubtful receivables when there is objective evidence that we may not be able to collect amounts due. The allowance is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivable balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of June 30, 2020 and December 31, 2019 and 2018, there was no allowance recorded as we consider all of the accounts receivable fully collectible.

 

Inventories, net

 

Inventories consist of ingredient materials, finished goods, packing materials and other materials. Inventories are stated at the lower of cost or net realizable value, on a weighted average basis. Costs include the cost of ingredient materials, direct labor and related production overhead. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products. We periodically evaluate inventories for their net realizable value adjustments, and reduces the carrying value of those inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable value based on various factors including aging and expiration dates, as applicable, taking into consideration historical and expected future product sales. For the years ended December 31, 2019 and 2018 and the six months ended June 30, 2020 and 2019, no inventory reserve was recorded because no slow-moving, obsolete or damaged inventory was identified.

 

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Revenue recognition

 

We adopted Accounting Standards Codification (“ASC”) 606 on January 1, 2018 using the modified retrospective approach.

 

ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

We currently generate our revenue through our bakery/café stores as well as through online sales. We recognize revenue from bakery-café sales upon delivery of the related food and other products to the customer and fulfillment of all performance obligations. Revenue is recognized net of any discounts, sales incentives, and sales taxes and value added taxes that are collected from customers and remitted to taxing authorities.

 

In the PRC Stores, we sell membership cards that do not have an expiration date and from which we do not deduct non-usage fees from outstanding card balances. Membership cards are reloadable and redeemable at any of our store locations. Amounts loaded into these cards are initially recorded as deferred revenue. When membership cards are redeemed at stores, we recognize revenue and reduce the deferred revenue. While we continue to honor all membership cards presented for payments, management determines the likelihood of redemption to be remote for certain cards with long periods of inactivity (“breakage”), which is five years after the last usage based upon our historical redemption patterns. Membership card breakage is recorded as revenue in the consolidated statement of income and the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss). Membership card breakage was immaterial for the years ended December 31, 2019 and 2018, and the six months ended June 30, 2020 and 2019.

 

In the PRC Stores, we maintain a customer loyalty program in which customers earn free cash vouchers when purchasing or reloading membership cards at certain amount. These cash vouchers typically do not expire, except for certain vouchers given out at special occasions, which usually state an expiration date and can only be exchanged for certain seasonal products or specialty cakes. We establish corresponding liabilities in deferred revenue for the membership cards and the free cash vouchers upon issuance. We allocate the consideration received for membership card purchasing or reloading with free cash vouchers proportionately between the membership cards and cash vouchers based on their face values. Revenue is recognized at the allocated amount upon redemption of membership cards and cash vouchers for payment, at which point we deliver products to customers and reduce the deferred revenue. Unredeemed cash vouchers will be recognized as revenue upon their expiration dates, if any, or five years after their issuance if there are no stated expiration dates, when management determines the likelihood of redemption to be remote.

 

Contract balances and remaining performance obligations

 

Contract balances typically arise when a difference in timing between the transfer of control to the customer and receipt of consideration occurs. We did not have contract assets as of December 31, 2019 and 2018. Our contract liabilities, which are reflected in our consolidated balance sheets as deferred revenue of $3,410,303 and $2,979,547 as of December 31, 2019 and 2018, respectively, and in our unaudited condensed consolidated balance sheets as deferred revenue of $4,276,345 as of June 30, 2020, consist primarily of customer payments for the membership cards and the fair value of the cash vouchers under our customer loyalty programs. These amounts represent our unsatisfied performance obligations as of the balance sheet dates. The amount of revenue recognized in the years ended December 31, 2019 and 2018 that was included in the opening deferred revenue was $1,864,535 and $1,740,797, respectively. As of December 31, 2019, the aggregate amount of unredeemed membership cards and cash vouchers was $3,410,303. The amount of revenue recognized in the six months ended June 30 2020 and 2019 that was included in the opening deferred revenue was $1,845,873 and $918,272, respectively. As of June 30, 2020, the aggregate amount of unredeemed membership cards and cash vouchers was $4,276,345. We will recognize revenue when customers make purchases with membership cards or cash vouchers, and a significant portion of the balance is expected to occur during the first two years after June 30, 2020 and the remaining balance between the third and fifth year.

 

Disaggregation of revenue

 

We disaggregate our revenue by geographic areas, as we believe our best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. Our disaggregation of revenue for the years ended December 31, 2019 and 2018 is disclosed in Note 12 of our accompanying consolidation financial statements. Our disaggregation of revenue for the six months ended June 30, 2020 and 2019 is disclosed in Note 12 of our accompanying unaudited condensed consolidation financial statements.

 

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Income taxes

 

We account for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No penalties or interest relating to income taxes were incurred during the years ended December 31, 2019 and 2018 or the six months ended June 30, 2020 and 2019. We do not believe there was any uncertain tax provision at December 31, 2019 and 2018 or at June 30, 2020 and 2019.

 

Our operating subsidiary in China is subject to the income tax laws of the PRC. Our operating subsidiaries in the United States are subject to the tax law of the United States. As of December 31, 2019, the tax years ended December 31, 2015 through December 31, 2019 for our PRC subsidiary remain open for statutory examination by PRC tax authorities, and the tax years ended December 31, 2017 through December 31, 2019 for our United States subsidiaries remain open for statutory examination by U.S. tax authorities. As of June 30, 2020, the tax years ended December 31, 2015 through December 31, 2019 for our PRC subsidiary remain open for statutory examination by PRC tax authorities, and the tax years ended December 31, 2017 through December 31, 2019 for our United States subsidiaries remain open for statutory examination by U.S. tax authorities.

 

Recent Accounting Pronouncements 

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification in this ASU were submitted by stakeholders as part of the Simplification Initiative. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We adopted this ASU on January 1, 2021 and the adoption of this ASU did not have a material impact on our financial statements.

 

Except for the above-mentioned pronouncements, there are no new recently issued accounting standards that will have material impact on our consolidated and unaudited condensed consolidated financial position, statements of operations, and cash flows.

 

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INDUSTRY

 

All the information and data presented in this section have been derived from the industry report of Frost & Sullivan (Beijing) Inc., Shanghai Branch Co. (“Frost & Sullivan”) commissioned by us in September 2020 entitled “The Xinjiang Province and the United States Bakery Industry Independent Market Research” (the “Frost & Sullivan Report”) unless otherwise noted. Frost & Sullivan has advised us that the statistical and graphical information contained herein is drawn from its database and other sources. The following discussion contains projections for future growth, which may not occur at the rates that are projected or at all.

 

OVERVIEW OF BAKERY PRODUCTS MANUFACTURING MARKETS IN THE PRC

 

Introduction

 

Bakery products are foods made from flour, yeast, salt, and water, together with sugar, oil, milk, eggs, or additives for extra flavor and texture, and cooked in an oven. Bakery products in the PRC include both Western bakery products such as bread, cakes, and biscuits, and traditional Chinese bakery products such as mooncakes, Chinese pancakes, and stuffed pies. As the pace of life becomes faster in the PRC, the demand for bakery products is expected to grow steadily since ready-made bakery products are time saving and convenient to carry.

 

Market Size

 

Bakery products have become more popular among Chinese consumers. According to the Frost & Sullivan Report, the retail sales value of bakery products in the PRC had increased from approximately $24.30 billion in 2015 to approximately $30.46 billion in 2019, representing a compound annual growth rate (“CAGR”) of 5.8%. The rise in retail sales value during the period was mainly due to the rising disposable income, an influx of western pastry, and increasing per capita consumption of bakery products in the PRC. With an optimistic economic outlook highlighted under the Outline of 13th Five-Year Plan for the National Economic and Social Development of the PRC by the PRC government and increasing consumption of bakery products among Chinese consumers, the retail sales value of bakery products in the PRC is expected to further increase at a CAGR of 3.7%, reaching approximately $36.09 billion by the end of 2024.

 

 

Source: The Frost & Sullivan Report

Note: Total Retail Sales Value is converted to USD at RMB/USD of 6.605.

 

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According to the Frost & Sullivan Report, from 2015 to 2019, the retail sales value of bakery products in Xinjiang had increased at a CAGR of 8.1% from approximately $0.88 billion to approximately $1.20 billion. The rise in retail sales value during the period was mainly due to the rising disposable income, an influx of western pastry, and increasing per capita consumption of bakery products in the area. It is estimated by Frost & Sullivan that bakery products will become more popular among consumers in Xinjiang and the total consumption of bakery products will further increase, driving the retail sales value of bakery products in Xinjiang to reach approximately $1.48 billion by the end of 2024, representing a CAGR of 4.7%. Such growth in the retail sales value of bakery products will create sufficient room for the industry to develop moderately and market participants may seek opportunities to expand their market presence in Xinjiang in the next few years.

 

 

Source: The Frost & Sullivan Report

Note: Total retail sales value is converted to USD at RMB/USD of 6.605.

 

Production Analysis

 

There are three different production modes for bakery products in the PRC. Most of the bakery product manufacturers produce their products in a central factory and deliver the finished product to chain stores and retail stores for sale. These manufacturers may enjoy lower manufacturing cost but the shelf life of their bakery products is usually shorter (approximately three to five days). Some bakery product manufacturers produce semi-finished products in a central factory and rely on their stores for further processing, such as baking, garnishing, and packaging. The bakery products produced this way are fresher than those delivered from a central factory, since the bakery products are prepared right before being put on the shelf. Lastly, some bakery product manufacturers establish a designated area in their chain stores or retail stores for production in order to offer bakery products with the best quality and freshness. However, as more manpower is needed to produce the same amount of bakery products, the cost of this production model is the highest among three production modes.

 

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Cost analysis

 

Labor cost. According to the National Bureau of Statistics of China, the average annual wage of employed persons in the manufacturing industry in urban areas of the PRC increased from approximately $8,519.9 in 2015 to approximately $11,831.5 in 2019, representing a CAGR of 8.6%, such an increase being mostly attributable to the high demand for labor workers and a rise in the minimum wage level. Besides, driven by the strong economic performance in the PRC, the average annual wage of employed persons in manufacturing industry in urban areas of the PRC is estimated to grow at a CAGR of 2.0% from 2020 to 2024 and reach approximately $13,134.6 in 2024. On the other hand, the average annual wage of employed persons in the catering service industry in urban areas of the PRC increased at a CAGR of 5.0% from approximately $6,284.1 in 2015 to approximately $7,622.4 in 2019. With an expansion of the catering service industry and increasing frequency of dining out among Chinese consumers in the recent years, the average annual wage of employed persons in the catering service industry is expected to reach approximately $8,786.3 in 2024, representing a CAGR of 3.1% from 2020 to 2024. The anticipated rising labor cost in the PRC is expected to exert operational pressure on bakery product manufacturers. Small-sized manufacturers without sufficient capital flow may experience difficulties in hiring enough employees and sustain their business.

 

 

Source: The National Bureau of Statistics of China, and the Frost & Sullivan Report

Note: Total average annual wage is converted to USD at RMB/USD of 6.605.

 

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Raw material cost. According to the National Bureau of Statistics of China and the China Sugar Association and the estimation of Frost & Sullivan, the average selling prices of eggs, sugar, and flour increased at a CAGR of 4.4%, 0.6%, and 4.8% from 2015 to 2019, respectively. The increase in selling prices of eggs, sugar, and flour were mainly due to a steadily increasing demand for these raw ingredients from the food manufacturing industry and the relatively stable supply of eggs, sugar, and flour due to the removal of excess capacity of production in the PRC. The selling prices of eggs, sugar, and flour are expected to increase and reach approximately $0.92 per pound, $0.45 per pound, and $0.48 per pound respectively in 2024, representing a moderate CAGR of 2.3%, 3.0%, and 3.4%, respectively from 2020 to 2024. As the prices of fundamental ingredients of bakery products increased over the recent years, the cost increase will ultimately be shifted to consumers, which will lead to a rise in the unit price of bakery products.

 

 

Source: The National Bureau of Statistics of China, China Sugar Association, and the Frost & Sullivan Report

Note: Total average selling prices are converted to USD at RMB/USD of 6.605.

 

Rental cost. According to the Frost & Sullivan Report, the average monthly rent of retail outlets in Xinjiang increased from approximately $0.95 per square feet in 2015 to approximately $1.01 per square feet in 2019, representing a CAGR of 1.5%. The increase in Xinjiang was mainly due to steady economic growth and stimulating economic policies adopted by the government. Because of urban development and more frequent economic activities in Xinjiang, the average monthly rent of retail outlets in Xinjiang is expected to further increase, reaching approximately $1.04 per square feet in 2024, representing a CAGR of 0.7%. Retail outlet rents often constitute a large part of the business costs of a bakery product retailer, the rising rent will impose higher financial pressure to bakery products retailers.

 

 

Source: The Frost & Sullivan Report

Note: Average monthly rent is converted to USD at RMB/USD of 6.605.

 

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Market Drivers and Development Trends

 

Improved quality of life. Over the past five years, the spending power of Chinese residents has increased and Chinese consumers have exhibited a stronger preference for bakery products made from better ingredients and of higher quality even at a higher price. According to the National Bureau of Statistics of China, the amount of disposable income per capita nationwide in the PRC has increased from approximately $3,325.7 in 2015 to approximately $4,653.0 in 2019, representing a CAGR of 8.8%. The improved living standards have therefore stimulated the consumption of staple food, such as bakery products, in the PRC.

 

Integration of Enterprise Resource Planning (ERP). ERP generally refers to an integrated application of business management software that fully administers the daily operations of a business, such as procurement procedures, production processes, and the distribution of sales. A holistic ERP enables manufacturers to facilitate information flow and foster error-free transactions, which ultimately enhances the business performance and optimizes operation efficiency. Specifically, ERP, such as Systems Applications and Products in Data Processing (SAP), has been increasingly adopted by business enterprises in the bakery product manufacturing and retail market in the PRC. Market participants use ERP to adjust their business strategies and optimize their operational capabilities in order to manage costs and maximize their profit.

 

Expansion of E-commerce channels. The popularity of online and on-demand food delivery platforms, such as Ele.me and Meituan Waimai, in the PRC over the recent years has encouraged bakery product manufacturers and retailers to adjust their business models to suit consumers’ demand for convenient food delivery. For example, Ebeecake in Beijing has prioritized the e-commerce channel in their sales methods and has dedicated itself to provide consumers a unique experience through their online platform and third-party platforms, such as JD.com. As the bakery product manufacturers and retailers face more intense competition in the PRC, it is expected that more market participants will expand their e-commerce channels to attract potential consumers.

 

Changes in marketing strategies. With a growing awareness of a healthy lifestyle among the Chinese consumers, bakery product manufacturers and retailers have launched low calorie, low carbohydrates, and vegan products with the addition of dietary fiber together with extensive marketing to meet the trend. Additionally, they have focused on the packaging and appearance of bakery products to appeal to consumers and increase the likelihood of their products being shared via social media platforms. Bakery product manufacturers and retailers also conduct advertising campaigns through their own social media accounts.

 

Competition Overview

 

The bakery product market in the PRC is highly fragmented and competitive with no single leading firm. According to the Frost & Sullivan Report, there were more than 1,400 bakery product manufacturers with more than 8,500 retail outlets in the PRC and the top five market participants contributed to an aggregate market share of approximately 6.6% in terms of revenue in 2019. More specifically, there were more than 40 bakery product manufacturers with over 100 retail outlets in Xinjiang in 2019. The competition among the bakery product manufacturers and retailers in the PRC is expected to become more intense in the future as more international enterprises enter the Chinese market and some other big food manufacturing companies expand their product portfolios and enter the bakery product market to directly compete with existing market participants. In addition, some small-sized manufacturers may enter the bakery product market to provide exotic and unique bakery products.

 

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OVERVIEW OF BAKERY PRODUCT MARKET IN THE UNITED STATES

 

Market Size

 

The bakery product market in the United States is considered as a relatively mature market, as products such as bread, cakes, and pastries have been one of the staple foods in the western culture. According to the Frost & Sullivan Report, commercial bakeries generally refer to establishments that primarily engaged in manufacturing fresh and frozen bread and bread-type rolls and other fresh bakery products, such as bagels, biscuits, and cakes. The retail sales value of commercial bakeries recorded had steadily climbed from approximately $28.12 billion in 2015 to approximately $33.54 billion in 2019, representing a CAGR of 4.5%. However, as a result of lockdown measures and social-distancing practices due to the outbreak of COVID-19 across the United States, the retail sales value of commercial bakeries has dropped in 2020. However, it is expected that the retail sales performance of commercial bakeries will start to recover once the disease is effectively under control, and therefore, the retail sales value of commercial bakeries is anticipated to reach approximately $33.17 billion by the end of 2024, representing a CAGR of 7.8%.

 

 

Source: The Frost & Sullivan Report

 

The retail sales value of commercial bakeries in New York City has experienced a moderate growth from approximately $1.25 billion in 2015 to approximately $1.73 billion in 2019, representing a CAGR of 8.5%. Commercial bakeries in New York City have been providing a wide range of bakery products, such as cakes, bagels, breads, cookies, and pies, with different flavors, and have remained one of the most popular types of stores in the city. The COVID-19 outbreak has adversely affected consumer commercial bakeries in New York City, causing the retail sales value to decrease to an expected $1.08 billion in 2020. As New York City gradually recovers from its lockdown, the businesses of commercial bakeries are expected to gradually recover and the retail sales value of commercial bakeries in New York City is expected to reach approximately $1.58 billion by the end of 2024, representing a CAGR of 10.0%.

 

 

Source: The Frost & Sullivan Report

 

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Market Drivers and Development Trends

 

Improving quality of life. According to the Bureau of Economic Analysis of the United States Department of Commerce, the per capita disposable personal income in the United States increased from approximately $42,953 in 2015 to approximately $49,763 in 2019, representing a CAGR of 3.8%. Because of such an increase in per capital disposable personal income, consumers are more willing to pay more to purchase premium and healthier bakery products, such as low-carbohydrates, gluten-free, and trans-fat-free bakery products, in order to pursue a better lifestyle.

 

Wide spectrum of distribution network. Apart from selling their products through traditional brick-and-mortar stores, bakery product manufacturers nowadays also utilize the Internet for marketing and sales. For example, the emergence of online food-ordering platforms, such as Seamless, Postmates, and Uber Eats, has provided an additional business opportunity for bakery product manufacturers and retailers to expand their distribution networks, which ultimately increases their customer bases and sales volumes of their products across the United States.

 

Rise of social media platforms. Social media platforms, such as Twitter, Facebook, and Instagram, have served as the fundamental component of digital and social marketing in the retail sector nowadays. It has encouraged customers to post user-generated contents, including product reviews and comments, on the Internet and foster customer-to-customer interactions. As a result, bakery products manufacturers and retailers may understand customers’ preferences on the flavor of bakery products and keep updated with the latest consumer market trends through online social media platforms, and develop new recipes and enrich their product portfolio. In addition, as potential customers of a company can be relatively easily reached through social media, successful social media campaigns, such as content promotion and influence of opinion leaders, can spur product sales growth and boost the brand awareness and value proposition of bakery product manufacturers and retailers.

 

Competition Overview

 

The bakery product market in the United States is highly competitive and fragmented with a number of small to medium size manufacturers specializing in a wide variety of bakery products, such as French patisseries, bread, cookies, and cakes. According to the Frost & Sullivan Report, there are more than 3,000 commercial bakeries and over 7,000 retail bakeries across the United States, of which there are more than 280 commercial bakeries and over 360 retail bakeries in New York City in 2019. The competition among these players mainly focuses on price, quality, product differentiation, marketing strategies, and nutritional values. Successful marketing strategies and product differentiation are the key factors as they facilitate manufacturers to establish their brand image, and customers are more likely to purchase products from a well-known brand.

 

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OVERVIEW OF RESTAURANT BUSINESS IN NEW YORK CITY

 

According to the Frost & Sullivan Report, the retail sales value of restaurant business in New York City had grown at a CAGR of 5.6% from approximately $37.30 billion in 2015 to approximately $46.44 billion in 2019. The increase in retail sales value of restaurant business was mainly due to a growing disposable income per capita of residents in New York City, more diverse restaurant categories available to customers, and a rising number of travelers to New York City. However, due to the COVID-19 outbreak in 2020, residents were asked to comply with social-distancing measures and mass gatherings were limited, which has brought tremendous impact to restaurant businesses in New York City and the retail sales value of restaurant business is expected to decrease to approximately $30.42 billion in 2020. As New York City gradually recovers from its lockdown, the retail sales of restaurant business in New York City is expected to recover and reach approximately $46.52 billion by the end of 2024, representing a CAGR of 11.2% from 2020 to 2024.

 

 

Source: The Frost & Sullivan Report

 

The restaurant market in New York City is highly competitive and fragmented. In 2019, there were more than 7,000 establishments of full-service restaurants across New York City. Market players in the restaurant market compete with their product offerings, such as availability of international cuisines, as well as food quality and prices.

 

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BUSINESS

 

Overview

 

We manufacture and sell a wide selection of bakery products, seasonal products (i.e. products sold during particular holiday seasons), and beverage products; we also offer eat-in services in some of our stores. We currently focus our business in Xinjiang of the PRC and New York City and plan to expand to other regions of the PRC and the U.S., with a goal of opening three to five new stores in China annually and 10 new stores in the United States during the next five years. We 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 our products.

 

We sell our products primarily through (i) a bakery chain consisting of 29 stores operated by Xinjiang United Family and its VIEs, under our “George●Chanson” brand in Xinjiang, and (ii) through Chanson 23rd Street in New York City. We are also currently renovating spaces for the opening of a new store in New York City. Selling through our own stores allows us to run our entire operation more efficiently and to exercise greater control over the quality of our products and the presentation of our brand, and to better manage customer experience in our stores. We also sell our products on our digital platforms and through third-party online food ordering platforms. Our current customer base consists of both individual and corporate customers. To expand our customer base, we have developed a variety of marketing and sale strategies, such as increasing our presence on social media platforms, devising pricing and discounting programs, and improving customer in-store experience.

 

For our PRC Stores, we manufacture the majority of bakery products in our central factory located in Urumqi, Xinjiang, prepare beverage products within the stores, and contract third-party manufacturers to produce seasonal products. For Chanson 23rd Street, we 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 our kitchen in the store. To ensure the quality and safety of our products, we 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, we have implemented a rigorous quality control system covering our entire operation process and mandated internal training to improve our employees’ awareness and knowledge of food safety.

 

We have a dedicated and highly-experienced product development team that constantly creates new products that reflect market trends and are designed to meet customer demand. As of March 2021, we had more than 190 types of bakery products and seasonal products on sale in our PRC Stores, including over 80 types of new products introduced to the market since 2019, and 92 types of eat-in menu items and bakery products on sale at Chanson 23rd Street, including 25 types of new products introduced to the market since 2019. We also offer a large number of beverage products in our PRC Stores and Chanson 23rd Street and update our drink menus seasonally and in response to ever changing customer demand. By continuously offering new products and refining our product formulas to enhance existing products, we believe that we are able to steadily bring in new customers and drive the frequency of our existing customers’ visits to our stores, digital platforms, and store page on third-party platforms.

 

For the fiscal years ended December 31, 2019 and 2018, we had total revenue of $12,577,135 and $11,963,674, and net income of $945,468 and $758,973, respectively. Our PRC Stores accounted for 81.1% and 80.3% of our total revenue for those fiscal years, respectively, and Chanson 23rd Street accounted for 18.9% and 19.7%, respectively.

 

For the six months ended June 30, 2020 and 2019, we had total revenue of $5,006,575 and $6,321,775, and a net loss of $45,903 and net income of $579,747, respectively. Our PRC Stores accounted for 85.2% and 77.4% of our total revenue for the six months ended June 30, 2020 and 2019, respectively, and Chanson 23rd Street accounted for 14.8% and 22.6%, respectively.

 

Our PRC Stores primarily generate revenue through sale of bakery products, seasonal products, and beverage products. For the fiscal years ended December 31, 2019 and 2018, revenue derived from sale of bakery products accounted for 90.7% and 88.5% of our PRC Stores’ revenue, revenue derived from sale of seasonal products accounted for 6.9% and 8.6% of our PRC Stores’ revenue, and revenue derived from sale of beverage products accounted for 2.4% and 2.9% of our PRC Stores’ revenue, respectively. For the six months ended June 30, 2020 and 2019, revenue derived from sale of bakery products accounted for 91.6% and 91.8% of our PRC Stores’ revenue, revenue derived from sale of seasonal products accounted for 6.3% and 5.5%, and revenue derived from sale of beverage products accounted for 2.1% and 2.7%, respectively.

 

Chanson 23rd Street primarily generates revenue through offering eat-in services and sale of bakery products and beverage products. For the fiscal years ended December 31, 2019 and 2018, revenue derived from offering eat-in services accounted for 45.5% and 34.1% of Chanson 23rd Street’s revenue, revenue derived from sale of bakery products accounted for 40.3% and 43.9% of Chanson 23rd Street’s revenue, and revenue derived from sale of beverage products accounted for 14.2% and 22.0% of Chanson 23rd Street’s revenue, respectively. For the six months ended June 30, 2020 and 2019, revenue derived from offering eat-in services accounted for 35.0% and 39.2% of Chanson 23rd Street’s revenue, revenue derived from sale of bakery products accounted for 45.5% and 46.9%, and revenue derived from sale of beverage products accounted for 19.5% and 13.9%, respectively.

 

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Our Competitive Strengths

 

We believe we have the following competitive strengths:

 

Trendy Brand Reflecting Healthy Food Concepts

 

We aim to promote long-term, healthy diets, and have integrated healthy food concepts and nutritious elements into all lines of our products. We 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 our customers. We believe our differentiated approach will continue to strengthen the loyalty of existing customers to our brand and will attract new customers to both our products and brand.

 

Strict Quality Control

 

Product quality has always been one of our top priorities. We start quality control with our 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. We also continuously introduce new production equipment with up-to-date industry technologies while making further improvements and adjustments to existing production equipment based on our product features and our actual production needs. As a result, we have effectively decreased defective rates of all product lines in our central factory and enhanced the quality of our products.

 

We 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. Our 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, we 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 our production mode. Through such an integrated approach, we 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, we focus on constant innovation to improve the taste, texture, formula, and packaging of our products, forming a virtuous cycle that has enabled us to introduce new products periodically. We keep separate product lines for our PRC Stores and Chanson 23rd Street, and have introduced over 80 types of new products in our PRC Stores and 25 types of new products in Chanson 23rd Street since 2019. We typically evaluate the profitability of our products annually or semi-annually by considering factors such as cost of revenue increases and competitive pricing strategies. We have historically been able to terminate less profitable products, and launch similar new products and refine our 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 our products to be competitive, our research and development (“R&D”) team members frequently participate in industry conferences and engage with industry experts. Through years of efforts, we have also developed a systematic approach to refine product packaging. For instance, we seamlessly combine functionality with aesthetics by integrating automatic packaging and packaging techniques with a heat-sealing feature and stylish graphic designs. To keep our organization rejuvenated with innovative ideas, we 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 our internal training programs to equip our employees with a strong sense of business and competitiveness.

 

Advantageous Information Management System

 

To maximize our operation efficiency and distribute our resources based on a data-centric principle, we have adopted the ERP System in our PRC 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 our 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, we are able to locate and verify details of all the processed transactions in our PRC Stores and even determine the cost of every single kind of products. Chanson 23rd Street has not adopted and currently has no plan to adopt the ERP System since operations of the store is not as complex as those of the PRC Stores.

 

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Well-Developed Distribution Network in Xinjiang

 

We highly value the development of our distribution network. With years of experience in marketing and selling products in the food industry in Xinjiang, we have adopted a core strategy that focuses on developing a network of stores and supplementing the network with other distribution channels. We have 29 stores in three well-developed cities of Xinjiang, namely Urumqi, Changji, and Shihezi. The relatively low labor cost in Xinjiang and our long-term, sustainable business relationships with established local supermarkets that enjoy high levels of brand loyalty, such as Youhao Supermarket and Huijia Supermarkets, strengthen our power to control front-end product sales, prepare us with a solid foundation to explore new market opportunities, and improve our operation efficiency. We also sell products through our digital platforms and collaboration with third-party online food ordering platforms such as Meituan-Dianping and Koubei. To maintain a close connection between the point of sale of each distribution channel and our production team, we primarily use our own transportation team to transport products. Third-party companies sometimes provide ancillary logistic support. We designed and effectively implemented various marketing strategies in our distribution network in Xinjiang to introduce new products and promote marketing campaigns within short periods of time.

 

Experienced Management and Professional Teams

 

Our senior management team, led by Mr. Cheng Chen, our chief executive officer, and Ms. Jihong Cai, our chief financial officer, has deep expertise and a proven track of record in managing brands and operating food and retailing businesses. Our professional team is comprised of highly-skilled and dedicated employees and third-party consultants with wide ranging experience in services, product development, business development, and marketing. For instance, the R&D department of our PRC Stores is led by Mr. Fufen Wang, Mr. Shangke Zhong, and Mr. Yiguang Mo, all of whom have decades of experience in the bakery industry and are certified by the Ministry of Human Resources and Social Security of the PRC as National Advanced Chefs specializing in pastry and bakery in the PRC. Chanson 23rd Street has hired third-party consultants to help develop recipes and train staff. Its consultants include Chef Rory Macdonald, who worked at several Michelin-starred restaurants and is known for his six-course, omakase-style, dessert tasting menus that have earned extensive acclaim. 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

 

We plan to explore new markets while enhancing our current presence in the Xinjiang market and the New York City market by analyzing our sales data and features of customer trends in different regions, continuously focusing on improving customer in-store experience, further expanding our distribution networks, and exploring new partnership opportunities.

 

We have formed Chanson Greenwich in preparation for the opening of a new store in the Tribeca area of New York City in 2021 and are currently renovating the space. After opening our new store in Tribeca, we plan to open 10 additional stores in New York City during the next five years. The cellar space at our store in Tribeca is designed to be used as our central kitchen to produce bakery products, which will be delivered to these future stores on a daily basis. Such a store organization structure, we believe, will significantly reduce our costs for equipment and personnel, while satisfying our customers’ need for ready-to-eat and high-quality food. We believe that the operation and business concepts of our new stores will allow us to successfully enter other markets underlining urban, fast-paced lifestyles similar to first-tier cities in the U.S. and the PRC.

 

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Enhance In-Store Customer Experience and Customer Services

 

To improve customer in-store experience and the visibility of our brand image across different regions, we have renovated the majority of our stores during the last four years. Our vision is to create a store environment consisting of a clean, modern interior design, with open kitchens, relaxing music playing, soft light, and the smell of freshly-made bakery products. In addition to implanting fundamental brand values into renovation, we also give individual store managers flexibility in decorating their store and arranging the display of our products in ways that match characteristics of the region where the store is located and cater to local customers’ needs. To enhance customer services, we have been systematically training and will continuously provide standardized training to our store employees, so they are able to present themselves in consistent manners and provide high-quality services that uphold our brand image. We firmly believe that a relaxing café environment, which allow customers to use our stores as their go-to places for multiple social purposes, in-store experiences with elements distinctively associated with our brand, and high-quality services will allow us to stand out from our competitors.

 

Keep Implementing Healthy and Nutritious Diet Principles in Product Development

 

As a socially responsible company, our corporate mission is to promote healthy, nutritious, and conscious eating. To further align our actions with our vision, we 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 our existing and future products through measures and procedures that have been approved by industry experts.

 

Increase Brand Awareness

 

We will continue to increase customer awareness and excitement for the “George●Chanson,” “Patisserie Chanson,” and “Chanson” brands and drive customer loyalty through our marketing efforts, social media presence, continued store expansion, and growing e-commerce sales. Our 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. We will also continue to leverage our growing social media presence to increase our online sales and drive additional store visits within existing and new markets. We see a significant opportunity to increase our brand visibility in the New York City market, which will be a key area of focus in our marketing strategy going forward.

 

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Our PRC Stores

 

Products

 

In our PRC Stores, we currently offer more than 190 types of bakery products and seasonal products, together with a large number of beverage products. We derived 90.7% and 88.5% of our revenue from the sales of bakery products, 6.9% and 8.6% of our revenue from the sales of seasonal products, and 2.4% and 2.9% of our revenue from the sales of beverage products during the fiscal years ended December 31, 2019 and 2018, respectively. We derived 91.6% of our revenue from the sales of bakery products, 6.3% from the sales of seasonal products, and 2.1% from the sales of beverage products during the six months ended June 30, 2020, respectively. We constantly research on the latest European pastry and bakery trends to improve our product presentation and packaging. As the result of our effort, our products have been consistently praised by our customers as healthy, fresh, and stylish, and are commonly perceived as popular gift choices among our customers.

 

 

Our bakery products include packaged bakery products (cakes, bread, and snacks), birthday cakes, and made-in-store pastries. Our bestselling bakery products are little puffs, chocolate cakes, cheese cakes, whole-wheat bread, multigrain bread, original-flavor cookies, amber-walnut cookies, seven-inch fruit cakes, croissants, and almond pudding.

 

Our seasonal products include mooncakes and zongzi (sticky-rice ball stuffed with different fillings and wrapped in bamboo leaves). Our bestselling seasonal products are red-bean flavored mooncakes, sweet-date flavored zongzi, and flower flavored zongzi.

 

Our beverage products include store-made beverages and juice products. Our bestselling beverage products are strawberry flavored latte, orange-and-lemon flavored tea, and freshly squeezed orange juice.

 

Manufacturing and Logistics

 

We produce packaged bakery products at our central factory before shipping them to our stores. For birthday cakes and made-in-store pastries, we primarily only produce semi-finished products, such as various sweet dough and plain cakes at our central factory and ship them to our stores, leaving the final processing of made-in-store pastries and the decoration of birthday cakes to our employees at the stores. As of March 2021, 26 of our PRC Stores were equipped with ovens to produce made-in-store pastries and to meet additional customer demand for our products on a daily basis, and the other three stores got made-in-store pastries directly from our central factory.

 

We contract third-party producers to produce seasonal products, mainly zongzi (sticky-rice ball stuffed with different fillings and wrapped in bamboo leaves) and mooncakes to meet customer demand during Dragon Boat Festival and Mid-Autumn Festival, which are traditional Chinese holidays and respectively take place at the end of the second quarter and the beginning of the third quarter of a year. Typically, third-party producers need a period of 45 to 60 days to process our supply orders, produce seasonal products, and deliver them to us. Customers’ demand for our seasonal products usually concentrates on the one or two months before these holidays. We sell seasonal products to individual and corporate customers.

 

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Whether we 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, our sales plan during that year, and the production capacity of the third-party producer. By promptly communicating with and maintaining sustainable relationship with a group of third-party producers, our sales team is prepared to deal with additional customer orders during a particular season.

 

Product transportation to our stores is carried out by our own transportation team. As of March 2021, our transportation team had four trucks capable of transporting an aggregate of 4.6 tons of goods. All of those trucks have been incorporated into the ERP System. Depending on product features, our 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. Our -32.8 degree Fahrenheit large freezer and our 323 square feet cold-storage facilities can adequately house the operation of cold-chain transportation.

 

Distribution Channels

 

Stores

 

We currently have 29 PRC Stores in three cities of Xinjiang, namely Urumqi, Changji, and Shihezi. Instead of franchising, we choose to directly operate all of our PRC Stores because it allows us 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 our stores and to more efficiently manage our entire business operation through the ERP System. We plan to continue operating our stores directly in the foreseeable future.

 

We employ a rigorous analytical process to identify new store locations, whereby we evaluate locations based on market characteristics, demographic characteristics, including income and education levels, the presence of key anchor stores and co-tenants, population density, convenience for parking and other means of transportation, and the overall surrounding environment, among other factors. Before entering into a lease agreement, our management team conducts comprehensive research on lease prices near the selected location and identify factors causing any price difference. We also actively monitor and manage the performance of our stores and seek to incorporate information learned through the monitoring process into our future site selection decisions. We believe we have a flexible site selection model, whereby our stores can be located in both street and mall locations. We have grown our store base in both locations since our first store opened in 2012, with 14 stores in street locations and 15 stores in malls as of March 2021.

 

Digital Platforms

 

Customers can place orders at the website of our PRC Stores, www.xsong.com.cn. On our website, we sell birthday cakes and seasonal products, and promote seasonal and membership deals. We have a team of professionals working on refining the website to improve our online interaction with customers and the efficiency of customers’ online ordering process. For the fiscal years ended December 31, 2019 and 2018, the product sales made through our website accounted for 0.02% and 0.03% of our total sales, respectively. For the six months ended June 30, 2020, the product sales made through our website accounted for 3.65% of our total sales.

 

In February 2020, we launched a new online store, which is linked to our official account on WeChat and focuses on selling seven-inch or larger cakes. Customers may place orders directly through their mobile phones and get their cakes quickly delivered by our own transportation team.

 

Third-Party Platforms

 

We list our bakery products on third-party online food ordering platforms such as Meituan-Dianping and Koubei. Customers can order through its mobile app and website, and pick up the ordered bakery products at our stores or have them delivered by the carriers of these platforms. For the fiscal years ended December 31, 2019 and 2018, the sales made through third-party platforms accounted for 4.62% and 1.59% of our total sales, respectively. For the six months ended June 30, 2020, the sales made through third-party platforms accounted for 3.65% of our total sales.

 

Store Experience

 

Our PRC Stores have sizes ranging from 482 square feet to 2,640 square feet. 26 of our PRC Stores have seats, with an average capacity of eight guests. Our internal teams have designed these stores and coordinated the whole renovation process to ensure the best presentation of our products and brand image. Our PRC Stores have been designed to possess a warm, inviting, and modern ambiance, with glass display cases and vintage cake stands showcasing baked goods that sit high upon marble counters. We believe that it is with this inviting and accessible atmosphere that we have cultivated a loyal customer base in residential and commercial markets.

 

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Our 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.

 

Our Flagship Store

 

On November 29, 2019, we opened our flagship store, Hongshan Lifestyle Store, in Urumqi. At approximately 2,640 square feet and with 26 seats, the store features glass display cases, an open kitchen, and a cocktail bar, and sells bread, desserts, sandwiches, custom cakes, and beverages. Our flagship store is an important marketing platform that allows us to showcase our vision of a comfortable yet distinguishable store environment and connect with our customers in a new way, and for our customers to immerse themselves in an atmosphere that encompasses who we are.

 

 

Membership and Customers

 

We issue free membership cards that are rechargeable with cash in our PRC Stores to encourage higher spending by customers and strengthen their loyalty to our brand. Both corporate and individual customers can get membership cards, add money onto the cards, and use them to purchase products in our PRC Stores. By using our membership cards, customers will enjoy benefits such as free cash vouchers that can be used to purchase our products 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 one of our members. As of March 2021, we had approximately 358,400 members. For the fiscal years ended December 31, 2019 and 2018, the sales to members collectively accounted for 39.54% and 46.33% of our total sales, respectively. For the six months ended June 30, 2020, the sales to members collectively accounted for 47.97% of our total sales.

 

We sell bakery products from our PRC Stores to both individual and corporate customers.

 

Our individual customers come from a variety of age groups and social backgrounds. There are three methods for them to purchase our products, namely, purchasing products at our stores with cash or credit cards, getting membership cards and using membership cards to make a purchase at our stores, and ordering our products on digital platforms.

 

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Our corporate customers 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 our customers buying seasonal products are corporate customers (though the number of individual customers who purchased zongzi from us increased during Dragon Boat Festival of 2020). We have already developed and maintained stable relationship with several corporate customers over the years. Our top corporate customers for the fiscal year ended December 31, 2019 included Urumqi Public Traffic Group Co., Ltd., Bank of Kunlun Co., Ltd. Urumqi Branch Office, Xinjiang Medical University, Bank of Communications Limited Xinjiang Branch Office, Xinjiang Medical University Affiliated Tumor Hospital, and the Trade Union Committee of Agricultural Bank of China Urumqi Branch Office. Our top corporate customers for the fiscal year ended December 31, 2018 included Changji Hui Autonomous Prefecture People’s Hospital, the Sales Department of China Construction Bank Co. Ltd. Xinjiang Uygur Autonomous Region Branch, Shenhua Xinjiang Chemical Industry Co. Ltd., the Trade Union Committee of Science Research Institute of National Network Xinjiang Electric Power Co. Ltd., and Urumqi Blood Center. Our top corporate customers for the six months ended June 30, 2020 included the Sales Department of China Construction Bank Co. Ltd. Xinjiang Uygur Autonomous Region Branch, Urumqi City Rail Group Co., Ltd., Labor Union of Xinjiang University of Finance and Economics, and Labor Union of CAAC Xinjiang Regional Administration.

 

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 our bakery products of our PRC Stores are sold in Xinjiang. Our major competitors 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. We compete for customers primarily on the basis of the price and quality of our 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.

 

We 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, we anticipate to directly compete with them when we expand to other regional markets in the PRC in the future.

 

Chanson 23rd Street

 

Under Chanson 23rd Street, which is located in New York City’s Flatiron District, we operate Patisserie Chanson on the ground floor and Thyme Bar in the underground cellar.

 

Patisserie Chanson is a modern European-style café and eatery that specializes in the art of dessert making. 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 we opened in February 2020, which features various to-go cocktails. The opening menu of Thyme Bar was designed by Colin Stevens, who created every drink with a sustainable and low-waste approach, repurposing waste from nearby restaurants, like coffee grounds from Patisserie Chanson. Thyme Bar was one of the first bars in New York City to pivot and offer to-go cocktails and has been able to successfully maintain and evolve this business model through the COVID-19 outbreak. In August 2020, Jeremy Le Blanche became the new Head Bartender of Thyme Bar and introduced “The Thyme Bar Experience,” a floriography-based cocktail prix-fixe menu with food pairings designed for the outdoor dining age.

 

Patisserie Chanson and Thyme Bar have both received positive media coverage since their openings. The French-style chocolate fondants of Patisserie Chanson have been reported by Vogue on April 14, 2017 as one of the most seasonally appropriate pastel-hued desserts for Easter season in New York City, and Thyme Bar has been reported by Forbes on April 16, 2020 to be among 11 of the best cocktails-to-go bars in New York and again on October 28, 2020 for crafting to-go cocktails that are “sippable art.”

 

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Products

 

In Chanson 23rd Street, we currently offer 92 types of eat-in menu items and bakery products, together with a large number of beverage products. We make these products in the kitchen or bar of the store and serve them to eat-in customers or sell them in our store. We derived 45.5% and 34.1% of Chanson 23rd Street’s revenue from offering eat-in services, 40.3% and 43.9% from the sales of bakery products, and 14.2% and 22.0% from the sales of beverage products during the fiscal years ended December 31, 2019 and 2018, respectively. We derived 35.0% of Chanson 23rd Street’s revenue from offering eat-in services, 45.5% from the sales of bakery products, and 19.5% from the sales of beverage products during the six months ended June 30, 2020.

 

 

Our eat-in menu includes sandwiches, salads, toasts, croissants, soups, and desserts. Our bestselling menu items include avocado toast, smoked salmon croissant, and black truffle grilled cheese.

 

Our bakery products include cakes, bread, sweets, birthday cakes, and pastries. Our bestselling bakery products include kouign amann, kouign amann (salted caramel), and croissant.

 

Our beverage products include store-made coffee, herbal tea, fruit juices, and alcoholic beverages. Our bestselling beverage products include latte, cappuccino, brewed coffee, and “Thyme 2 Go” cocktails, which are bottled cocktails have been pre-chilled and pre-diluted.

 

Store Design

 

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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.

 

The design of Chanson 23rd Street intends to deliver a modern, clean, and inviting atmosphere with marble tables and counters, enhanced with abundant light and wooden fixture accents, and a layout that optimizes the available space and serves as a setting for a wide variety of occasions. Our open kitchen showcases our preparation processes and exemplified our commitment to freshness. We believe this layout achieves this atmosphere and makes us a desirable destination at any time of day.

 

Our Dining and Shopping Experience

 

We offer a variety of dining and purchasing options in Chanson 23rd Street. Customers can either grab our 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 generally provides bakery products and eat-in services from 7 a.m. to 5 p.m. daily and its bar is open from 7 p.m. to midnight daily. Due to the COVID-19 outbreak, Chanson 23rd Street is currently providing outdoor dining only and delivery and pickup services from 8 a.m. to 5 p.m. on weekdays and from 9 a.m. to 5 p.m. at weekends, and its bar is open from 3 p.m. to 7 p.m. from Monday to Wednesday, 5 p.m. to 10 p.m. on Thursday and Friday, and 12 p.m. to 9 p.m. at weekends.

 

Chanson 23rd Street offers delivery and pickup services within New York City (not including Staten Island). Customers may order sandwiches, desserts, French pastries, breakfast foods, brunch and lunch foods, beverages, and to-go cocktails via our website, patisseriechanson.com, and through third-party delivery partners, including Grubhub, Uber Eats, Caviar, Postmates, and Seamless.

 

In addition, Chanson 23rd Street offers corporate catering services in the New York City area. Our 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, we 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 47.39% and 20.38% of the total revenue of Chanson 23rd Street for the fiscal years ended December 31, 2019 and 2018, respectively, and 66.18% for the six months ended June 30, 2020.

 

Éclair Making Class

 

Chanson 23rd Street typically offers a 30 minutes pastry lesson on filling and decorating éclairs every Sunday from 4 p.m. to 5 p.m. for $29 per person. Participants learn the essential techniques for making éclairs under the guide of a chef instructor and may take éclairs they made home to taste with family and friends. Chanson 23rd Street has suspended the éclair making classes due to the COVID-19 outbreak.

 

Customers

 

The majority of sales of Chanson 23rd Street are to individual customers and Chanson 23rd Street also supplies bread and desserts to corporate customers, including coffee shops and cafes in New York City. Chanson 23rd Street generated 53.25% and 86.46% of its revenue from sales to individual customers and 46.75% and 13.54% from sales to corporate customers during the fiscal years ended December 31, 2019 and 2018, respectively, and 47.99% from sales to individual customers and 52.01% from sales to corporate customers during the six months ended June 30, 2020. Revenue generated from the top three corporate customers accounted for approximately 39% and 10% of the revenue of Chanson 23rd Street during the fiscal years ended December 31, 2019 and 2018, respectively, and approximately 50.3% during the six months ended June 30, 2020. Chanson 23rd Street increased its efforts to develop corporate customers in 2019 and increased its share of revenue from corporate customers considerably. Due to the impact of the COVID-19 outbreak, development of corporate customers has slowed down in 2020. As a result, we expect sales to individual customers to remain the most significant sales channel of Chanson 23rd Street for the near future.

 

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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 Chanson 23rd Street are sold in New York City. Our major competitors are internationally and domestically renowned bakery chain-stores in New York City, including Paris Baguette, Maison Kayser, and Le Pain Quotidien, and bakery product manufacturers including Grupo Bimbo, S.A.B. de C.V., and Toly Bread Co. In addition, we 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. We compete for customers primarily on the basis of price, quality, product differentiation, marketing strategies, and nutritional values.

 

Suppliers

 

We carefully select suppliers based on product quality and authenticity, and we seek to develop long-term relationships with them. Each year, we conduct a rigorous selection and evaluating process that gives us a chance to review our relationship with current suppliers and to explore relationships with new suppliers who are experienced and professionally trustworthy and strive for providing high-quality raw materials. We have been able to use the information learned from new suppliers to evaluate our agreements with current suppliers. We do not engage in any hedging agreements to manage our exposure to fluctuations in the price of food commodities. Our PRC Stores and Chanson 23rd Street negotiate and manage supply arrangements separately.

 

Our PRC Stores enter into supply agreements in the ordinary course of business with our suppliers, pursuant to a form of supply agreement typically for a one-year term. For some raw materials, such as butter, our suppliers provide a certain quantity of raw materials at a fixed price and deliver them separately based upon our needs; for other raw materials, such as eggs, our suppliers provide raw materials at prices determined when we place our orders. If the price of certain imported raw material is expected to rise, suppliers will provide a written notice to us at least one month in advance and we will then decide whether to order additional raw materials before the price increases. Suppliers deliver to our central factory approximately twice per week on Mondays and Fridays. After suppliers deliver, our payment per order is calculated based on the actual number of qualified products that meet our verification standards. Usually, we are given one to three months to complete the payment per order. Top suppliers of our PRC Stores during the fiscal year ended December 31, 2019 included Urumqi Zhixin Huajia Commerce and Trade Co., Ltd. (“Zhixin Huajia”), Urumqi Jinda Food Raw Material Co., Ltd. (“Jinda”), Urumqi Fukangyuan Commerce and Trade Co., Ltd. (“Fukangyuan”), and Urumqi Jinmaosheng Commerce and Trade Co., Ltd. (“Jinmaosheng”). Their supply constituted 25%, 9%, 7%, and 6% of our PRC Stores’ total raw materials in terms of monetary value in that fiscal year, respectively. Top suppliers of our PRC Stores during the fiscal year ended December 31, 2018 included Zhixin Huajia, Jinda, Fukangyuan, and Jinmaosheng. Their supply constituted 28%, 10%, 8%, and 7% of our PRC Stores’ total raw materials in terms of monetary value in that fiscal year, respectively. Top suppliers of our PRC Stores during the six months ended June 30, 2020 included Zhixin Huajia, Jinda, Xinjiang Chiatai Food Co., Ltd., and Fukangyuan. Their supply constituted 26%, 8%, 7%, and 6% of our PRC Stores’ total raw materials in terms of monetary value in that period, respectively.

 

Chanson 23rd Street orders raw materials from suppliers based on its needs, instead of entering into long-term supply agreements with its suppliers. We are able to ensure consistent delivery and competitive pricing because of our long-term business relationships with these suppliers. Suppliers of sugar and flour deliver to Chanson 23rd Street weekly and suppliers of vegetables and fruits do so daily. Top suppliers of Chanson 23rd Street during the fiscal year ended December 31, 2019 included Dairyland USA Corporation, Baldor, and Paris Gourmet. Their supply constituted 44%, 16.93%, and 15.06% of Chanson 23rd Street’s total raw materials in terms of monetary value in that fiscal year, respectively. Top suppliers of Chanson 23rd Street during the fiscal year ended December 31, 2018 included Dairyland USA Corporation, Baldor, and Paris Gourmet. Their supply constituted 45.45%, 15.74%, and 13.54% of Chanson 23rd Street’s total raw materials in terms of monetary value in that fiscal year, respectively. Top suppliers of Chanson 23rd Street during the six months ended June 30, 2020 included Dairyland USA Corporation, Paris Gourmet, and Baldor. Their supply constituted 40.09%, 20.82%, and 13.95% of Chanson 23rd Street’s total raw materials in terms of monetary value in that period, respectively.

 

Food Safety

 

Food safety is essential to our success and we have established procedures to help ensure that our customers enjoy safe and quality food.

 

During the procurement of raw materials, our procurement team and compliance team evaluate the quality and applicability of the submitted samples of raw materials, as well as suppliers’ capability to meet deadlines. We re-evaluate those suppliers who we have previously collaborated with on a yearly basis to meet our changing production needs. For suppliers who add additives into the products they supply to us, we require them to warrant that additives in their products comply with food safety requirements and standards according to relevant laws and regulations. We also periodically examine the freshness of all raw materials and make sure that our storage conditions are properly to preserve their freshness.

 

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During the actual production, we have designed and applied rigorous standards and requirements to oversee product formulas, product craftsmanship, and production process. We also regularly organize mandatory firm-wide trainings to teach our employees appropriate ways of applying food safety measures in different scenarios and to enhance their awareness and understanding of food safety as a whole. Without the approval of training managers, employees cannot work on production lines or in kitchens. Our quality-control team also analyzes production sectors that may influence product quality and safety, formulating corresponding methods to prevent potential negative effects. Before transporting or selling our products, we conduct strict final examination on them according to food industry standards to ensure that our products have high quality and are safe to consume.

 

We only sell our bakery products on the day when they are made and our light meals and beverage products on a made-to-order basis, and we make sure that any unsold or leftover products and unused semi-finished products are promptly disposed of, so as to offer our customers the freshest products that conform to stringent food safety standards on a day-to-day basis. We have also established systematic and efficient procedures to swiftly recall any product that imposes potential or existing food safety issues to our customers, whose health and safety are always most important to us. As of the date of this prospectus, we have never had to recall any product. To further improve our quality and safety control, we conduct periodic customer satisfaction surveys to learn about customers’ needs and quality of our products from their perspectives.

 

Inventory Management

 

In our PRC Stores and central factory, we 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. Our specialists also design emergency plans to deal with critical circumstances under which our 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 we can effectively reduce costs and production waste.

 

  For packaged bakery products, we adopt a sale-history based method to estimate production quota because it allows us to effectively address the short-lived feature of bakery products, to ensure our customers are presented with fresh bakery products, to maintain flexibility in production planning, and to strengthen our ability to effectively reduce inventory; and
     
  For our made-in-store pastries and birthday cakes, we 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, we 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 Chanson 23rd Street, our store manager or head chef determines the amount of raw materials to be ordered on a weekly or daily basis based on his or her experience and recent sales trends of our products. We usually keep inventories low and rely on in-time deliveries from suppliers. We take stock of our inventory at the end of each month to understand the amount of raw material used.

 

Marketing and Sale Strategies

 

Pricing and Discounting

 

We determine our product prices on the basis of various factors, including the consumption power of our targeted customer groups, market demand for specific products, product cost, prices of competitive products, and the macroeconomic environment. Such method gives us the space to change prices flexibly if circumstances require us to do so and allows us to better respond to customers’ changing sensitivity to price. This advantageous approach has allowed us, and, we expect will continue, to attract more customers and reinforce and further expand brand loyalty. We plan to further refine our calculation formula to ensure that our product prices accurately and cautiously take into consideration both existing and potential market factors.

 

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On a periodic basis, we design and execute discounting strategies to stimulate sales. We have effectively adopted a number of discounting strategies, including: in our PRC Stores, (i) a member day on which our members enjoy 12% off original prices of all products each week, (ii) discounting activities on third-party digital platform, and (iii) discounting benefits enjoyable only through using credit cards issued by Shanghai Pudong Development Bank Co., Ltd; and in Chanson 23rd Street, (i) an “All Week Brunch” menu from 11:30 a.m. to 4:30 p.m. that allows our customers to try our café items and dessert items at the same time at a discounted price, (ii) a “Dessert Tasting” menu with seasonal selections from our dessert bar, and (ii) discounts to employees of nearby corporations, such as Estee Lauder and Tiffany.

 

Social Media

 

We enhance publicity of our products and the effectiveness of our other marketing strategies on major Chinese and U.S. social media platforms and our own websites.

 

For our PRC Stores, we operate an official account on WeChat, which had over 14,300 followers as of March 2021, and regularly post information of our new products, discounting activities, and brand development there. We also promote our products through Weibo and TikTok and had approximately 6,500 followers as of March 2021.

 

For Chanson 23rd Street, we operate two official accounts on Instagram, which had over 38,200 followers in total, and two official Facebook accounts, which had over 26,300 followers, as of March 2021. We regularly post pictures of Chanson 23rd Street and its products with detailed information of our new products and promotion activities, in order to attract potential customers and to promote our image as a modern European-style café and eatery that specializes in the art of dessert-making.

 

Properties

 

Our Properties in the PRC

 

We maintain our headquarters and central factory 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, Gang Li, provided approximately 5,382 square feet office space for our headquarters and 10,763 square feet for our central factory without charge. The term of the agreement is from January 1, 2020 to June 25, 2028, unless otherwise terminated by either party.

 

Our central factory has three production lines, which run 40 to 45 hours per week. Equipped with advanced production equipment, including egg-beating machines, proofing cabinets, dough mixers, ovens, hot stoves, and cold-storage facilities, our central factory has an annual production capacity of bakery products worth RMB30 million (approximately $4.43 million). During the fiscal year ended December 31, 2019, our central factory was at approximately 56.38% of the annual production capacity and produced bakery products and semi-finished products worth RMB16.91 million (approximately $2.45 million). As of the date of this prospectus, we do not have any plan to expand our production capacity by leasing more factories. We are confident that our facilities and factory can satisfy our current production needs.

 

We currently operate 29 stores in Xinjiang, with individual store sizes ranging from 482 square feet to 2,640 square feet and an average monthly rent of RMB23,440 (approximately $3,469). We lease all our 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 our PRC Stores as of March 2021:

    Store   City   Size (Square Feet)     Opened
1   Midong   Urumqi     579     April 2017
2   Dehui Wanda   Urumqi     1,111     January 2018
3   Changji Youhao   Changji     1,029     August 2015
4   Changji Huijia   Changji     861     September 2015
5   Hongshan   Urumqi     2,422     November 2017
6   Baisheng   Urumqi     883     October 2018
7   Zhongyangjun