UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of September 2024

 

Commission File Number: 001-41663

 

Chanson International Holding

 

B9 Xinjiang Chuangbo Zhigu Industrial Park

No. 100 Guangyuan Road, Shuimogou District

Urumqi, Xinjiang, China 830017

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

Form 20-F Form 40-F

 

 

 

 

 

 

Explanatory Note

 

Chanson International Holding (the “Company”) is filing this report of foreign private issuer on Form 6-K to report its financial results for the six months ended June 30, 2024 and to discuss its recent corporate developments.

 

Attached as exhibits to this report of foreign private issuer on Form 6-K are:

 

(1)

the unaudited condensed consolidated interim financial statements and related notes as Exhibit 99.1;

 

(2)Management’s Discussion and Analysis of Financial Condition and Results of Operations as Exhibit 99.2;

 

(3)

a press release dated September 27, 2024, titled “Chanson International Holding Announces First Half of Fiscal Year 2024 Financial Results” as Exhibit 99.3; and

 

(4)Interactive Data File disclosure as Exhibit 101 in accordance with Rule 405 of Regulation S-T.

 

1

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Statements in this report of foreign private issuer with respect to the Company’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of the Company. Forward-looking statements include, but are not limited to, those statements using words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,” “intend,” “seek,” “may,” “might,” “could” or “should,” and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management’s assumptions, judgments and beliefs in light of the information currently available to it. The Company cautions investors that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, including but not limited to, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition and pricing, government regulation, and other risks contained in reports filed by the Company with the U.S. Securities and Exchange Commission. Therefore, investors should not place undue reliance on such forward-looking statements. Actual results may differ significantly from those set forth in the forward-looking statements.

 

All such forward-looking statements, whether written or oral, and whether made by or on behalf of the Company, are expressly qualified by the cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, the Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.

 

2

 

 

EXHIBIT INDEX

 

Exhibit No.   Description
99.1   Unaudited Condensed Consolidated Financial Statements and Related Notes as of June 30, 2024 and for the Six Months Ended June 30, 2024 and 2023
99.2   Management’s Discussion and Analysis of Financial Condition and Results of Operations
99.3   Press release titled “Chanson International Holding Announces First Half of Fiscal Year 2024 Financial Results”
101.INS   Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH   Inline XBRL Taxonomy Extension Schema Document.
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB   Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104   Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

 

3

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Chanson International Holding
     
Date: September 27, 2024 By: /s/ Gang Li
  Name: Gang Li
  Title: Chief Executive Officer

 

 

4

 

 

Exhibit 99.1

 

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

Unaudited Condensed Consolidated Financial Statements    
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023   F-2
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the six months ended June 30, 2024 and 2023   F-3
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2024 and 2023   F-4
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023   F-5
Notes to Unaudited Condensed Consolidated Financial Statements   F-6 - F-31

 

 

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2024   2023 (Audited) 
ASSETS        
CURRENT ASSETS:        
Cash and cash equivalents  $4,107,830   $1,481,302 
Accounts receivable   2,022,587    1,995,067 
Inventories   785,327    723,905 
Long term loan to a third-party, current   1,999,507    
-
 
Prepaid expenses and other current assets   4,287,721    5,134,173 
     13,202,972     9,334,447 
           
NON-CURRENT ASSETS:          
Operating lease right-of-use assets   12,922,888    13,059,561 
Property and equipment, net   5,006,112    5,462,063 
Intangible assets, net   140,625    150,000 
Long term security deposits   843,793    894,715 
Prepayment for the software, equipment and product development   140,000    790,000 
Long term debt investment   6,359,014    6,534,575 
Long term loan to a third-party   
-
    2,066,822 
Long term prepaid expenses   108,313    142,113 
     25,520,745     29,099,849 
             
TOTAL ASSETS  $38,723,717   $38,434,296 
           
LIABILITIES          
CURRENT LIABILITIES:          
Short-term bank loans  $3,086,939   $2,683,692 
Accounts payable   2,120,980    1,919,189 
Due to a related party   46,675    48,042 
Taxes payable   77,015    96,176 
Deferred revenue   7,338,357    7,085,696 
Operating lease liabilities, current   2,448,062    2,198,192 
Other current liabilities   620,251    697,702 
     15,738,279     14,728,689 
           
NON-CURRENT LIABILITIES          
Operating lease liabilities, non-current   10,931,463    11,691,251 
     10,931,463     11,691,251 
             
TOTAL LIABILITIES    26,669,742     26,419,940 
           
COMMITMENTS AND CONTINGENCIES   
 
    
 
 
           
SHAREHOLDERS’ EQUITY          
Ordinary shares, $0.001 par value, 50,000,000 shares authorized; 12,425,319 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively:   
 
    
 
 
Class A ordinary share, $0.001 par value, 44,000,000 shares authorized; 6,755,319 shares and 6,485,319 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively   6,755    6,485 
Class B ordinary share, $0.001 par value, 6,000,000 shares authorized; 5,670,000 and 5,940,000 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively   5,670    5,940 
Additional paid-in capital   11,800,472    11,800,472 
Statutory reserve   447,231    447,231 
Accumulated deficit   (126,842)   (150,254)
Accumulated other comprehensive loss    (79,311)    (95,518)
TOTAL SHAREHOLDERS’ EQUITY   12,053,975    12,014,356 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $38,723,717   $38,434,296 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-2

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)

 

   For the Six Months Ended
June 30,
 
   2024   2023 
REVENUE  $7,542,682   $8,811,287 
COST OF REVENUE   4,415,407    4,478,716 
GROSS PROFIT   3,127,275    4,332,571 
           
OPERATING EXPENSES          
Selling expenses   2,230,905    2,444,292 
General and administrative expenses   1,456,499    1,774,419 
Total operating expenses   3,687,404    4,218,711 
           
(LOSS) INCOME FROM OPERATIONS   (560,129)   113,860 
           
OTHER INCOME (EXPENSE)          
Interest (expense) income, net   (25,278)   14,007 
Other income (loss), net   314,670    (11,843)
Interest income from long term debt investment   359,014    171,616 
Total other income, net   648,406    173,780 
           
PROFIT BEFORE INCOME TAX EXPENSE   88,277    287,640 
           
INCOME TAX EXPENSE   (64,865)   (2,880)
NET INCOME   23,412    284,760 
Foreign currency translation gain (loss)   16,207    (305,867)
           
TOTAL COMPREHENSIVE INCOME (LOSS)  $39,619   $(21,107)
           
Earnings per ordinary share - basic and diluted
  $0.002   $0.027 
Weighted average shares - basic and diluted
   12,425,319    10,666,906 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-3

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

   Ordinary Shares   Additional        Retained
Earnings
   Accumulated Other   Total 
   Class A
Shares
   Amount   Class B
Shares
   Amount   Paid-in
Capital
   Statutory Reserve   (Accumulated
Deficit)
   Comprehensive
Income (Loss)
   Shareholders’
 Equity
 
Balance, January 1, 2023    3,060,000   $3,060    5,940,000   $5,940   $869,400   $447,231   $(183,842)  $35,260   $1,177,049 
                                              
Issuance of ordinary shares in initial public offerings, gross    3,390,000    3,390    
-
    
-
    13,556,610    
-
    
-
    
-
    13,560,000 
Cost directly related to the initial public offering    -    
-
    -    
-
    (2,589,152)   
-
    
-
    
-
    (2,589,152)
Net income    -    
-
    -    
-
    
-
    
-
    284,760    
-
    284,760 
Foreign currency translation loss    -     -      -      -      -       -      -       (305,867)   (305,867)
Balance, June 30, 2023    6,450,000   $6,450    5,940,000   $5,940   $11,836,858   $447,231   $100,918   $(270,607)  $12,126,790 
                                              
Balance, January 1, 2024    6,485,319   $6,485    5,940,000   $5,940   $11,800,472   $447,231   $(150,254)  $(95,518)  $12,014,356 
                                              
Conversion of Class B ordinary shares into Class A ordinary shares    270,000    270    (270,000)   (270)   
-
    
-
    
-
    
-
    
-
 
Net income    -    
-
    -    
-
    
-
    
-
    23,412    
-
    23,412 
Foreign currency translation gain    -     -      -      -      -       -      -       16,207       16,207 
Balance, June 30, 2024    6,755,319   $6,755    5,670,000   $5,670   $11,800,472   $447,231   $(126,842)  $(79,311)  $12,053,975 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-4

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Six Months Ended
June 30,
 
   2024   2023 
Cash flows from operating activities:        
Net income  $23,412   $284,760 
Adjustments to reconcile net income to net cash provided by operating activities:          
Amortization of operating lease right-of-use assets   1,697,141    1,422,155 
Depreciation   445,787    402,784 
Impairment loss on property and equipment   
-
    5,434 
Accrued interest income from long term debt investment   (359,014)   (171,616)
Interest income from loan to a third-party   (44,877)   (21,452)
Changes in operating assets and liabilities:          
Accounts receivable   (40,507)   (772,933)
Inventories   (65,027)   88,841 
Prepaid expenses and other current assets   286,121    73,944 
Long term security deposits   49,350    (17,375)
Long term prepaid expenses   32,953    21,534 
Accounts payable   213,875    216,032 
Taxes payable   (19,020)   (109,830)
Deferred revenue   299,816    522,418 
Other current liabilities   (79,738)   35,633 
Operating lease liabilities   (1,634,128)   (1,370,175)
Net cash provided by operating activities   806,144    610,154 
           
Cash flows from investing activities:          
Purchase of property and equipment   (34,268)   (152,022)
Proceeds from disposal of property and equipment   34,562    
-
 
Payment made for long term debt investment   
-
    (6,000,000)
Interest income received from long term debt investment   534,575    
-
 
Advance of loans to third parties   
-
    (3,900,000)
Repayment from loans to third parties   862,088    
-
 
Prepayment for the software, equipment and product development   
-
    (1,200,000)
Net cash provided by (used in) investing activities   1,396,957    (11,252,022)
           
Cash flows from financing activities:          
Gross proceeds from initial public offerings   
-
    13,560,000 
Direct costs disbursed from initial public offerings proceeds   
-
    (1,529,631)
Proceeds from short-term bank loans   422,095    
-
 
Payments made to a related party   (56,298)   (1,612,215)
Payments made for deferred offering costs   
-
    (312,125)
Prepayment for the related service after listing   
-
    (450,000)
Net cash provided by financing activities   365,797    9,656,029 
           
Effect of exchange rate fluctuation on cash and cash equivalents   57,630    (457,647)
           
Net increase (decrease) in cash and cash equivalents   2,626,528    (1,443,486)
Cash and cash equivalents, beginning of period   1,481,302    2,915,470 
Cash and cash equivalents, end of period  $4,107,830   $1,471,984 
           
Supplemental cash flow information          
Cash paid for income taxes  $40,889   $9,436 
Cash paid for interest  $68,450   $8,364 
           
Non-cash operating, investing and financing activities          
Reduction of right-of-use assets and operating lease obligations due to early termination of lease agreement  $60,277   $
-
 
Right of use assets obtained in exchange for operating lease liabilities  $1,697,141   $1,103,383 
Deferred IPO cost offset with additional paid-in capital  $
-
   $1,059,521 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-5

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 — ORGANIZATION AND BUSINESS DESCRIPTION

 

Chanson International Holding (“Chanson International,” or the “Company”), formerly known as RON Holding Limited, was incorporated under the laws of the Cayman Islands on July 26, 2019 as a holding company. Chanson International owns 100% of the equity interests of Deen Global Limited (“Deen Global”), a limited liability company incorporated under the laws of British Virgin Islands (“BVI”) on August 13, 2019. Deen Global owns 100% of the equity interests of Jenyd Holdings Limited (“Jenyd”), a business company incorporated in accordance with the laws and regulations of Hong Kong on September 13, 2019.

 

Chanson International, Deen Global, and Jenyd are currently not engaging in any active business operations and merely acting as holding companies.

 

Xinjiang United Family Trading Co., Ltd. (“Xinjiang United Family”), is a company incorporated on August 7, 2009 in the People’s Republic of China (the “PRC”), with a registered capital of RMB6 million (approximately $0.88 million). On September 27, 2020, the original shareholders of Xinjiang United Family signed a share transfer agreement and transferred their 100% ownership interest in Xinjiang United Family to Jenyd, and accordingly Xinjiang United Family became a wholly foreign-owned enterprise (“WFOE”) and a wholly-owned subsidiary of Jenyd.

 

Xinjiang United Family operates a bakery chain in China’s Xinjiang autonomous region under the brand name of “George●Chanson.” The chain currently consists of five directly-owned high-end bakery stores in the City of Urumqi and 41 bakery stores organized as individually-owned businesses known as the United Family Group (each a “UFG entity” and, collectively, the “UFG entities”) in Xinjiang region. The UFG entities are owned by the original shareholders of Xinjiang United Family but operated under a series of contractual agreements signed between the owners of these UFG entities and Xinjiang United Family.

 

On April 17, 2015, Xinjiang United Family incorporated a wholly-owned subsidiary, George Chanson (NY) Corp. (“Chanson NY”), in the State of New York, which owns and operates Chanson 23rd Street LLC (“Chanson 23rd Street”), a modern European-style café and eatery that specializes in the art of making French-style viennoiseries and pastries in the heart of Manhattan’s Flatiron District. On February 20, 2020, the Company’s Chairman, Mr. Gang Li, formed Chanson 355 Greenwich LLC (“Chanson Greenwich”), a New York limited liability company, and subsequently 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. Chanson Greenwich is another boutique café in Manhattan opened in December 2021, and closed in the second half of fiscal year 2023. On April 21, 2021, Chanson NY formed a wholly owned subsidiary, Chanson Management LLC, a Delaware limited liability company. On August 5, 2021, Chanson NY formed a wholly owned subsidiary, Chanson 1293 3rd Ave LLC (“Chanson 3rd Ave”), a New York limited liability company. On March 21, 2022, Chanson NY formed a wholly owned subsidiary, Chanson 2040 Broadway LLC (“Chanson Broadway”), a New York limited liability company. Chanson 3rd Ave and Chanson Broadway are another two boutique cafés opened in March 2023 and July 2023, respectively.

 

Reorganization

 

In connection with its initial public offering, the Company has undertaken a reorganization of its legal structure (the “Reorganization”). The Reorganization involved the incorporation of Chanson International, Deen Global, and Jenyd, the entry into a Share Transfer Agreement to transfer the ownership interest in Xinjiang United Family from its original shareholders to Jenyd, and the signing of a series of contractual agreements between Xinjiang United Family and the owners of the UFG entities. After the Reorganization, Chanson International became the ultimate holding company of Xinjiang United Family and Xinjiang United Family became the primary beneficiary of the UFG entities through the VIE Agreements, as further discussed below.

 

F-6

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Xinjiang United Family entered into a series of contractual arrangements with the owners of the 22 UFG entities on May 2, 2020, and with the owners of three newly established UFG entities in fiscal year 2020, five newly established UFG entities in fiscal year 2021, one newly established UFG entity in fiscal year 2022, nine newly established UFG entity in fiscal year 2023, and nine newly established UFG entities in fiscal year 2024, respectively. Three of these UFG entities were closed in fiscal year 2021, three of these UFG entities were closed in fiscal year 2023 and two of these UFG entities were closed in fiscal year 2024. These agreements include Exclusive Service Agreements, Pledge Agreements, Call Option Agreements, Operating Rights Proxy and Powers of Attorney Agreements and Spousal Consents (collectively, the “VIE Agreements”). Pursuant to the above VIE Agreements, Xinjiang United Family has the exclusive right to provide the UFG entities with consulting services related to business operations including operational and management consulting services. The VIE Agreements obligate Xinjiang United Family to absorb all of the risk of loss from business activities of these UFG entities and entitle Xinjiang United Family to receive all of their residual returns. In essence, Xinjiang United Family has gained the power to direct activities of the UFG entities that most significantly impact their economic performance, and the right to receive benefits from the UFG entities that could potentially be significant to them. Therefore, the Company believes that Xinjiang United Family has a controlling financial interest in and is the primary beneficiary of the UFG entities and these UFG entities should be considered as Variable Interest Entities (“VIEs”) under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 Consolidation. Hereinafter, the five bakery stores directly owned by Xinjiang United Family and the UFG entities controlled through the VIE Agreements are collectively referred to as the “PRC Stores.”

  

The Company, together with its wholly owned subsidiaries are under common control by the same shareholders before and after the Reorganization and therefore the consolidation of the Company and its subsidiaries has been accounted for at historical cost.

 

After the Reorganization, the unaudited condensed consolidated financial statements of the Company include the following entities:

 

Name of Entity  Date of
Incorporation
  Place of
Incorporation
  % of
Ownership
  Principal Activities
Chanson International  July 26, 2019  Cayman Islands  Parent, 100%  Investment holding
             
Deen Global  August 13, 2019  British Virgin Islands  100%  Investment holding
             
Jenyd  September 13, 2019  Hong Kong  100%  Investment holding
             
Xinjiang United Family  August 7, 2009  PRC  100%  Consultancy and information technology support; sells bakery products to customers
             
41 UFG entities  2012 to 2024  PRC  VIEs  Sells bakery products to customers
             
Chanson NY  April 17, 2015  New York  100%  Holding company. Consultancy and information technology support
             
Chanson 23rd Street  December 18, 2015  New York  100%  Eat-in services and bakery products and beverage products
             
Chanson Greenwich  February 20, 2020  New York  100%  Eat-in services and bakery products and beverage products, closed in the second half of fiscal year 2023
             
Chanson Management LLC  April 21, 2021  Delaware  100%  Consultancy and management support
             
Chanson 3rd Ave  August 5, 2021  New York  100%  Eat-in services and bakery products and beverage products
             
Chanson Broadway  March 21, 2022  New York  100%  Eat-in services and bakery products and beverage products

 

F-7

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The VIE contractual arrangements

 

The UFG entities are controlled by the Company through contractual arrangements in lieu of direct equity ownership by the Company or any of its subsidiaries.

 

A VIE is an entity that either has a total equity investment that is insufficient to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity, or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary of, and must consolidate, the VIE.

 

Xinjiang United Family is deemed to have a controlling financial interest in and be the primary beneficiary of the UFG entities because it has both of the following characteristics:

 

  The power to direct activities at the UFG entities that most significantly impact such entities’ economic performance, and

 

  The obligation to absorb losses of, and the right to receive benefits from, the UFG entities that could potentially be significant to such entities.

 

Pursuant to the contractual arrangements with the UFG entities, the UFG entities pay service fees equal to all of their net profit after tax payments to Xinjiang United Family. At the same time, Xinjiang United Family is obligated to absorb all of their losses. Such contractual arrangements are designed so that the operation of the UFG entities is for the benefit of Xinjiang United Family and, ultimately, the Company.

 

Risks associated with the VIE structure

 

The Company believes that the contractual arrangements with the UFG entities and their respective owners are in compliance with PRC laws and regulations and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce such contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:

 

  revoke the business and operating licenses of the Company’s PRC subsidiary and the UFG entities;

 

  discontinue or restrict the operations of any related-party transactions between the Company’s PRC subsidiary and the UFG entities;

 

  limit the Company’s business expansion in China by way of entering into contractual arrangements;

 

  impose fines or other requirements with which the Company’s PRC subsidiary and the UFG entities may not be able to comply;

 

  require the Company or the Company’s PRC subsidiary and the UFG entities to restructure the relevant ownership structure or operations; or

 

  restrict or prohibit the Company’s use of the proceeds from its public offering to finance the Company’s business and operations in China.

 

F-8

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company’s ability to conduct its consulting services business may be negatively affected if the PRC government were to carry out of any of the aforementioned actions. As a result, the Company may not be able to consolidate the UFG entities in its unaudited condensed consolidated financial statements as it may lose the ability to direct activities of the UFG entities and receive economic benefits from the UFG entities. The Company, however, does not believe such actions would result in the liquidation or dissolution of the Company and its PRC subsidiary and the UFG entities. The financial position, operation, and cash flow of the UFG entities are material to total assets and liabilities presented on the unaudited condensed consolidated balance sheets and revenue, expenses, and net income presented on the unaudited condensed consolidated statements of operations and other comprehensive income (loss) as well as the cash flows from operating, investing, and financing activities presented on the unaudited condensed consolidated statements of cash flows.

 

The Company did not provide any financial support to the UFG entities for the six months ended June 30, 2024 and 2023. The Company had no contractual obligation to provide financial support to the VIEs as of June 30, 2024 and December 31, 2023. The amount of the revenue-producing assets held by the VIEs was $1,987,164, including $450,607 of bakery production equipment, $101,454 of office equipment and furniture, and $1,435,103 of leasehold improvement, with the accumulated depreciation of $1,274,721, so net of these property, plant, and equipment was $712,443 as of June 30, 2024. The amount of the revenue-producing assets held by the VIEs was $2,122,335, including $561,693 of bakery production equipment, $116,012 of office equipment and furniture, and $1,444,630 of leasehold improvement, with the accumulated depreciation of $1,165,886, so net of these property, plant, and equipment was $956,449 as of December 31, 2023. The following financial statement amounts and balances of the UFG entities were included in the accompanying unaudited condensed consolidated financial statements after elimination of intercompany transactions and balances:

 

   June 30,
2024
   December 31,
2023
 
Current assets  $10,806,361   $8,637,907 
Non-current assets   4,879,159    4,765,561 
Total assets  $15,685,520   $13,403,468 
Current liabilities  $9,092,890   $7,730,323 
Non-current liabilities   1,521,254    1,655,365 
Total liabilities  $10,614,144   $9,385,688 

 

   For the Six Months Ended
June 30,
 
   2024   2023 
Net revenue  $4,246,441   $4,562,762 
Net income  $552,045   $1,213,299 

 

Initial Public Offering

 

On April 3, 2023, the Company closed its initial public offering (the “IPO”) of 3,390,000 Class A ordinary shares, par value $0.001 per share (“Class A Ordinary Shares”), at a public offering price of $4.00 per Class A Ordinary Share. The Company’s Class A Ordinary Shares began trading on the Nasdaq Capital Market under the ticker symbol “CHSN” on March 30, 2023.  

 

F-9

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and principles of consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities Exchange Commission and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal years ended December 31, 2023, 2022 and 2021. Operating results for the six-month period ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

 

The accompanying unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries and the VIEs. All intercompany balances and transactions are eliminated upon consolidation.

 

Uses of estimates

 

In preparing the 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 unaudited condensed consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the assessment of the expected credit losses for receivables, valuation of inventories, useful lives of property and equipment and intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities, realization of deferred tax assets and revenue recognition. Actual results could differ from those estimates.

 

Cash and cash equivalents

 

Cash includes currency on hand and deposits held by banks that can be added or withdrawn without limitation. The Company maintains a significant amount of its bank accounts in the PRC. The Company considers all highly liquid investment instruments with an original maturity of three months or less from the date of purchase to be cash equivalents.

 

Accounts receivable

 

Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for credit losses, as necessary. Accounts are written off against the allowance after efforts at collection prove unsuccessful. As of June 30, 2024 and December 31, 2023, the allowance for credit losses was both $nil.

 

Credit Losses

 

On January 1, 2023, the Company adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The adoption of the credit loss accounting standard has no material impact on the Company’s consolidated financial statements as of January 1, 2023.

 

F-10

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company’s account receivables and other receivables included in prepaid expenses and other current assets on the unaudited condensed consolidated balance sheets are within the scope of ASC Topic 326. The Company makes estimates of expected credit and collectability trends for the allowance for credit losses based upon assessment of various factors, including historical experience, the age of the accounts receivable and other receivables balances, credit-worthiness of the customers and other debtors, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from the customers and other debtors. The Company also provides specific provisions for allowance when facts and circumstances indicate that the receivable is unlikely to be collected.

 

ASC Topic 326 is also applicable to short-term and long-term loans to third parties. Management estimates the allowance for credit losses on loans not sharing similar risk characteristics on an individual basis. The key factors considered when determining the above allowances for credit losses include estimated loan collection schedule, discount rate, and assets and financial performance of the borrowers.

 

Expected credit losses are recorded as allowance for credit losses on the unaudited condensed consolidated statements of operations and comprehensive income (loss). After all attempts to collect a receivable have failed, the receivable is written off against the allowance. In the event the Company recovers amounts previously reserved for, the Company will reduce the specific allowance for credit losses.

 

Leases

 

Lessee accounting

 

The Company follows FASB ASC No. 842, Leases (“Topic 842”). The Company leases office spaces, bakery store facilities, employee dormitories, and a vehicle, which are classified as operating leases in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases (with the exception of short-term leases, usually with initial term of 12 months or less) on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

At the commencement date, the Company recognizes the lease liability at the present value of the lease payments not yet paid, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate for the same term as the underlying lease. The ROU asset is recognized initially at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All ROU assets are reviewed for impairment annually. There was no impairment for ROU lease assets as of June 30, 2024 and December 31, 2023.

 

In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in Topic 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in Topic 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.

 

F-11

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Due to the COVID-19 pandemic, the Company renegotiated the leases for some of its PRC stores and New York stores. Based on the nature of the agreements reached with the landlords, the Company has accounted for rent concessions as if they were part of the enforceable rights and obligations of the existing lease contracts and did not account for the concessions as lease modifications. As of the date of this report, the Company has received a total of lease concessions amounting to $1,199,978, and among which, $7,654 and $9,783 was received during the six months ended June 30, 2024 and 2023, respectively. The Company accounted for the concession as negative variable lease payments with a corresponding reduction in the lease liability. The Company has continued to recognize lease expenses on a straight-line basis for its leases over the related lease terms.

 

Inventories

 

Inventories of the Company consist of ingredient materials, finished goods, packaging 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. The Company periodically evaluates 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 six months ended June 30, 2024 and 2023, no inventory reserve was recorded because no slow-moving, obsolete, or damaged inventory was identified.

 

Property and equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are provided using the straight-line method over their expected useful lives, as follows:

 

   Useful life
Bakery production equipment  5-8 years
Office equipment and furniture  3-5 years
Automobiles  5 years
Leasehold improvement  Lesser of useful life and lease term

 

Expenditures for repair and maintenance, which do not materially extend the useful lives of the assets, are charged to expenses as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the unaudited condensed consolidated statements of operations and comprehensive income (loss) in other income or expenses. 

 

Intangible assets

 

Intangible assets consist primarily of purchased software. Intangible assets are stated at cost less accumulated amortization, which are amortized using the straight-line method with the estimated useful lives of 8 years.

 

Impairment of long-lived assets

 

Long-lived assets with finite lives, primarily property and equipment, and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. Impairment of long-lived assets was $272,350 and $272,350 as of June 30, 2024 and December 31, 2023, respectively.  

 

F-12

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Revenue recognition

 

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

 

The Company currently generates its revenue through its bakery/café stores as well as through online sales. The Company recognizes revenue from bakery/café sales upon delivery of the related food and other products to the customer and fulfillment of all performance obligations. Revenue is recognized net of any discounts, sales incentives, sales taxes, and value added taxes that are collected from customers and remitted to tax authorities.

 

In the PRC Stores, the Company sells membership cards that do not have an expiration date and from which the Company does not deduct non-usage fees from outstanding card balances. Membership cards are reloadable and redeemable at any of the Company’s store locations. Amounts loaded into these cards are initially recorded as deferred revenue. When membership cards are redeemed at stores, the Company recognizes revenue and reduces the deferred revenue. While the Company continues 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 the Company’s historical redemption patterns. Membership card breakage is recorded as revenue in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Membership card breakage was immaterial for the six months ended June 30, 2024 and 2023.

 

In the PRC Stores, the Company maintains 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. The Company establishes corresponding liabilities in deferred revenue for the membership cards and the free cash vouchers upon issuance. The Company allocates the consideration received proportionately between the membership cards and cash vouchers based on their face values. Revenue is recognized at the allocated amount upon redemption of membership cards and cash vouchers, at which point, the Company delivers products to customers and reduces 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. The Company did not have contract assets as of June 30, 2024 and December 31, 2023. The Company’s contract liabilities, which are reflected in its unaudited condensed consolidated balance sheets as deferred revenue of $7,338,357 and $7,085,696 as of June 30, 2024 and December 31, 2023, respectively, consist primarily of customer payments for the membership cards and the fair value of the cash vouchers under the Company’s customer loyalty programs. These amounts represent the Company’s unsatisfied performance obligations as of the balance sheet dates. The amount of revenue recognized in the six months ended June 30, 2024 and 2023 that was included in the opening deferred revenue was $3,505,674 and $3,945,400, respectively. As of June 30, 2024, the aggregate amount of unredeemed membership cards and cash vouchers was $7,338,357. The Company will recognize revenue when customers redeem the membership cards or cash vouchers in store purchases. Based on the Company’s historical experience, a significant portion of the redemption is expected to occur during the first two years after June 30, 2024 and the remaining between the third and fifth year.

 

F-13

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Disaggregation of revenue

 

The Company disaggregates its revenue by geographic areas, as the Company believes it best depicts how the nature, amount, timing, and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenue for the six months ended June 30, 2024 and 2023 is disclosed in Note 17 of the unaudited condensed consolidated financial statements.

 

Fair value of financial instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

  Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

  Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

  Level 3 — inputs to the valuation methodology are unobservable.

 

Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, other current assets, short-term loans to third parties, current portion of long-term loan to a third party, short-term bank loan, accounts payable, due to a related party, taxes payable, current portion of operating lease liabilities, current and other current liabilities, approximates the fair value of the respective assets and liabilities as of June 30, 2024 and December 31, 2023 based upon the short-term nature of the assets and liabilities. The fair value of long-term debt investment and loan to a third party, as well as non-current portion of operating lease liabilities approximates their recorded values as their stated interest rates approximate the rates currently available.

 

Foreign currency translation

 

The functional currency of the Company’s PRC subsidiary and the UFG entities is the Chinese Yuan (“RMB”) and the functional currency of the Company’s U.S. subsidiaries is the U.S. Dollars (“US$”). RMB amounts in the Company’s unaudited condensed consolidated financial statements have been translated into the reporting currency US$. Assets and liabilities of the Company are translated at the exchange rate at each reporting period end date. Equity is translated at historical rates. Income and expense accounts are translated at the average rate of exchange during the reporting period. The resulting translation adjustments are reported under other comprehensive income (loss). Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations.

 

RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

 

F-14

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table outlines the currency exchange rates that were used in creating the unaudited condensed consolidated financial statements in this report:

 

    For the
Six Months Ended
June 30,
    For the
Year Ended
December 31,
 
    2024    2023    2023 
Period/Year-end spot rate   US$1=RMB7.1268      US$1=RMB7.2556     US$1=RMB7.0798  
Average rate   US$1=RMB7.1074     US$1=RMB6.9263     US$1=RMB7.0748  

 

Income taxes

 

The Company accounts 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 unaudited condensed 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 six months ended June 30, 2024 and 2023. The Company does not believe there was any uncertain tax provision as of June 30, 2024 and December 31, 2023.

 

The Company’s operating subsidiary in China is subject to the income tax laws of the PRC. The Company’s operating subsidiaries in United States are subject to the tax law of the United States. As of June 30, 2024, for the tax years ended December 31, 2019 through December 31, 2023, the Company’s PRC subsidiaries remained open for statutory examination by PRC tax authorities, and for the tax years ended December 31, 2021 through December 31, 2023, the Company’s United States subsidiaries remained open for statutory examination by U.S. tax authorities.

 

Value added tax (“VAT”)

 

The Company’s subsidiary Xinjiang United Family and its four branch offices are general tax payers. The applicable VAT rate is 13% based on the Chinese tax law. VAT is reported as a deduction to revenue when incurred. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. The UFG entities were formed as individually-owned businesses, which are generally subject to a lower VAT rate of 3% and the local PRC tax authority has the jurisdiction to assess and determine their VAT obligation or exemption on a case-by-case basis. From April 1, 2021 to December 31, 2022, based on the new tax regulation, individually-owned businesses whose monthly deemed Taxable Net Income (“TNI”) is less than RMB150,000 are exempted from paying VAT. From January 1, 2023 to December 31, 2027, based on the new tax regulation, individually-owned businesses whose monthly deemed Taxable Net Income (“TNI”) is less than RMB100,000 are exempted from paying VAT. All but three of the UFG entities are currently exempted from paying VAT, since the deemed TNI of each of these UFG entities is currently less than RMB100,000 for the six months ended June 30, 2024. If customers need to obtain a special VAT invoice, the UFG entities that are exempted from paying VAT would apply to the local tax authority to issue the special VAT invoice on their behalf, with the tax authority levying VAT at a rate of 1%. Their VAT eligibility is subject to periodical reassessment, and they may lose or regain the exemption status as determined by the tax authorities on a case-by-case basis.

 

F-15

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Warrant accounting

 

The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent interim period end date while the warrants are outstanding.

 

For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations and comprehensive income (loss).

 

As the warrants issued upon the initial public offering meet the criteria for equity classification under ASC 815, therefore, the warrants are classified as equity.

 

Earnings per share

 

The Company computes earnings per share (“EPS”) in accordance with ASC 260, Earnings per Share (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average ordinary shares outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential ordinary shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. As of June 30, 2024 and December 31, 2023, there were no dilutive shares.

 

Comprehensive income (loss)

 

Comprehensive income (loss) consists of two components, net income and other comprehensive income (loss). The foreign currency translation income (loss) resulting from the translation of the financial statements expressed in RMB to US$ is reported in other comprehensive income (loss) in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

 

Risks and uncertainties

 

Political and economic risk

 

The operations of the Company are located in the PRC and United States. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in the PRC and United States, as well as by the general state of the PRC and United States economy. The Company’s results may be adversely affected by changes in the political, regulatory, and social conditions in the PRC and United States. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note 1, such experience may not be indicative of future results.

 

F-16

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Foreign currency exchange risk

 

A majority of the Company’s revenue and expense transactions are denominated in RMB and most of the Company and its subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to effect the remittance.

 

Credit risk

 

As of June 30, 2024 and December 31, 2023, $3,969,742 and $864,426 of the Company’s cash was on deposit at financial institutions in the PRC. On May 1, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks, established in China are required to purchase deposit insurance for deposits in RMB and in foreign currency placed with them. This Deposit Insurance Regulation would not be effective in providing complete protection for the Company’s accounts in the PRC, as its aggregate deposits are much higher than the compensation limit. As of June 30, 2024, a significant balance of cash was on deposit with one bank, and total unprotected cash amounted to approximately $3.8 million as of June 30, 2024. However, the Company has not experienced any losses in such accounts and believes that the risk of failure of any of these PRC banks is remote.

 

As of June 30, 2024 and December 31, 2023, $81,354 and $$555,799 of the Company’s cash was on deposit at financial institutions in the U.S. which were insured by the Federal Deposit Insurance Corporation subject to certain limitations. The Company has not experienced any losses in such accounts.

 

For the six months ended June 30, 2024 and 2023, the Company’s substantial assets were located in the PRC and the U.S. and the Company’s substantial revenue was derived from its subsidiaries and the UFG entities located in the PRC and the U.S.

 

Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.

 

Concentrations

 

No single customer accounted for more than 10% of the Company’s revenue for the six months ended June 30, 2024 and 2023.

 

As of June 30, 2024 and December 31, 2023, no customer accounted for more than 10% of the Company’s total accounts receivable balance.

 

For the six months ended June 30, 2024, two suppliers accounted for 14.0% and 11.6% of the Company’s total purchases, respectively. For the six months ended June 30, 2023, two suppliers accounted for 18.0% and 14.7% of the Company’s total purchases, respectively. As of June 30, 2024, one supplier accounted for 13.5% of the Company’s total accounts payable balance. As of December 31, 2023, three suppliers accounted for 14.9%, 11.1% and 11.0% of the Company’s total accounts payable balance, respectively.

 

F-17

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recent accounting pronouncements

 

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures.” This ASU expands required public entities’ segment disclosures, including disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items and interim disclosures of a reportable segment’s profit or loss and assets. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company adopted this guidance on January 1, 2024 and the adoption of this ASU did not have a material impact on its financial statements.

 

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. This ASU requires additional quantitative and qualitative income tax disclosures to enable financial statements users better assess how an entity’s operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. This ASU is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company plans to adopt this guidance effective January 1, 2025 and the adoption of this ASU is not expected to have a material impact on its financial statements.

 

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

 

NOTE 3 — GOING CONCERN 

 

As reflected in the unaudited condensed consolidated financial statements, the Company’s cash provided by operating activities was $0.8 million for the six months ended June 30, 2024 as compared to cash provided by operating activities was $0.6 million for the same period of last year. Total cash and cash equivalents increased by $2.6 million to $4.1 million as of June 30, 2024 from $1.5 million as of December 31, 2023. As of June 30, 2024, negative working capital was approximately $2.5 million, including deferred revenue of approximately $7.3 million, which was reported as current liability, but will not require cash payment in the future. Management expects to spend about $2.9 million when the Company produces and sells the products and realizes the deferred revenue.

 

In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources and ability to obtain additional financial support in the future, and its operating and capital expenditure commitments. As of June 30, 2024, the Company had cash of approximately $4.1 million. The Company expects to open another five stores in PRC in fiscal year 2024. In addition, the Company will further implement initiatives to control costs and improve its operating efficiency in fiscal year 2024. Therefore, revenue and net income are expected to increase in second half of fiscal year 2024 as compared to the same period of last year.

 

Currently, the Company is working to improve its liquidity and capital sources primarily through cash flows from operation, debt financing, financial support from its principal shareholder, equity financing and the proceeds the Company received from the IPO. Furthermore, the Company’s controlling shareholder, Mr. Gang Li, has made pledges to provide continuous financial support to the Company for at least 12 months from the issuance of the unaudited condensed consolidated financial statements. In order to fully implement its business plan and sustain continued growth, the Company may also seek equity financing from outside investors when necessary. Based on the current operating plan, management believes that the above-mentioned measures collectively will provide sufficient liquidity for the Company to meet its future liquidity and capital requirement for at least 12 months from the date of the unaudited condensed consolidated financial statements.

 

F-18

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 4 — ACCOUNTS RECEIVABLE, NET

 

The Company’s accounts receivable primarily include balance generated from selling bakery products to local corporate customers, billed but has not been collected as of the balance sheet dates. Accounts receivable consisted of the following:

 

   June 30,
2024
   December 31,
2023
 
Accounts receivable  $2,022,587   $1,995,067 
Less: allowance for credit losses   
-
    
-
 
Total accounts receivable, net  $2,022,587   $1,995,067 

 

NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS, NET

 

Prepaid expenses and other current assets consisted of the following:

 

    June 30,
2024
    December 31,
2023
 
Advance to suppliers (1)   $ 3,270,302     $ 2,225,301  
Prepaid expenses (2)     728,718       1,306,507  
Other receivables (3)     288,701       852,469  
Short-term loans to third parties (4)    
-
      749,896  
Less: allowance for credit losses    
-
     
-
 
Total prepaid expenses and other current assets, net   $ 4,287,721     $ 5,134,173  

 

(1) Advance to suppliers primarily consists of advance payments paid to suppliers for purchases of raw materials for bakery products.

 

(2) Prepaid expenses primarily represent prepaid rental expenses, professional fees, and other miscellaneous expenses for the Company’s bakery stores.

 

(3) Other receivables are mainly business advances to officers and staff for business travel and sundry expenses. It also includes $100,000 and $500,000 receivable due from a third party as of June 30, 2024 and December 31, 2023, as the Company entered into a cooperation agreement with the third party, and grants the third party a license to use the Chanson Greenwich’s store for events.

 

(4) During the year ended December 31, 2023, the Company lent totaling $1.9 million to several third parties. These short-term loans to third-parties are mainly used for short-term funding to support the Company’s external business partners. These loans bear no interest and have terms of no more than one year. The Company received the repayment of loans to third parties totaling $1.2 million during the year ended December 31, 2023 and the remaining of $0.7 million was received during the six months ended June 30, 2024.

 

NOTE 6 — INVENTORIES

 

Inventories consisted of the following:

 

    June 30,
2024
    December 31,
2023
 
Ingredient materials   $ 439,946     $ 414,595  
Package and other materials     117,234       114,398  
Finished goods     228,147       194,912  
Total inventories   $ 785,327     $ 723,905  

 

F-19

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7 — LONG TERM LOAN TO A THIRD-PARTY

 

Long term loan to a third-party consisted of the following:

 

   June 30,
2024
   December 31,
2023
 
Long term loan to a third-party  $1,999,507   $2,066,822 
Total long term loan to a third-party  $1,999,507   $2,066,822 
           
Current portion of loan to a third-party   1,999,507    - 
           
Non-current portion of loan to a third-party   -    2,066,822 

 

On April 3, 2023, the Company entered a loan agreement with Liberty Asset Management Capital Limited (the “Borrower”) to lend the Borrower $2.0 million for two years, with a maturity date of April 3, 2025. The loan has a fixed interest rate of 4.5% per annum. The Company recorded interest income of $44,877 and $21,452 for the six months ended June 30, 2024 and 2023, respectively.

 

NOTE 8 — LEASES

 

The Company leases office spaces, bakery store facilities, employee dormitories and a vehicle under non-cancelable operating leases, with terms ranging from 1 to 15 years. The Company considers those renewal or termination options that are reasonably certain to be exercised in the determination of the lease term and initial measurement of ROU assets and lease liabilities. Lease expenses are recognized on a straight-line basis over the lease term. Leases with initial term of 12 months or less are not recorded on the balance sheet.

 

The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company discounts lease payments based on an estimate of its incremental borrowing rate.

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

The table below presents the operating lease related assets and liabilities recorded on the balance sheets.

 

   June 30,
2024
   December 31,
2023
 
ROU lease assets  $12,922,888   $13,059,561 
           
Operating lease liabilities – current  $2,448,062   $2,198,192 
Operating lease liabilities – non-current   10,931,463    11,691,251 
Total operating lease liabilities  $13,379,525   $13,889,443 

 

F-20

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of June 30, 2024 and December 31, 2023:

 

   June 30,
2024
   December 31,
2023
 
Remaining lease term and discount rate:        
Weighted average remaining lease term (years)   7.06    7.52 
Weighted average discount rate *   4.29%   4.22%

 

* The Company used incremental borrowing rate of 6.98% for its lease contracts entered prior to fiscal year 2022 in the PRC. For lease contracts entered from fiscal year 2022 to the first half of fiscal year 2023, the Company used new incremental borrowing rate of 3.95%. For lease contracts entered in and after the second half of fiscal year 2023, the Company used new incremental borrowing rate of 5.00%. The Company used incremental borrowing rate of 3.75% for its lease contracts in the United States.

 

During the six months ended June 30, 2024 and 2023, the Company incurred total operating lease expenses of $1,708,117 and $1,734,513, respectively.

 

The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2024:

 

Remainder of 2024  $1,488,075 
2025   2,456,025 
2026   2,216,393 
2027   2,149,220 
2028   1,971,789 
Thereafter   5,508,510 
Total lease payments   15,790,012 
Less: imputed interest   (2,410,487)
Present value of lease liabilities  $13,379,525 

 

NOTE 9 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net, consisted of the following:

 

    June 30,
2024
    December 31,
2023
 
Bakery production equipment   $ 1,666,077     $ 1,646,294  
Automobiles     99,765       100,427  
Office equipment and furniture     828,586       825,337  
Leasehold improvements     6,552,571       6,606,385  
Subtotal     9,146,999       9,178,443  
Less: accumulated depreciation     (3,868,537 )     (3,444,030 )
Less: impairment on property and equipment     (272,350 )     (272,350 )
Total property and equipment, net   $ 5,006,112     $ 5,462,063  

 

With the increased competition, Chanson Greenwich was closed in the second half of fiscal year 2023. The Company performed evaluation on whether the carrying amount of the property and equipment of Chanson Greenwich could be recoverable, and recorded an impairment of $272,350 as of June 30, 2024 and December 31, 2023.

 

Depreciation expenses were $445,787 and $402,784 for the six months ended June 30, 2024 and 2023, respectively.

 

F-21

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 10 — PREPAYMENT FOR THE SOFTWARE, EQUIPMENT AND PRODUCT DEVELOPMENT

 

Prepayment for the software, equipment and product development consisted of the following:

 

    June 30,
2024
    December 31,
2023
 
Peblla Inc. (“Peblla”) (a)   $ 140,000     $ 140,000  
Luo and Long General Partner (“Luo and Long”) (b)    
-
      550,000  
Wisdom Investment Service Inc (“Wisdom”) (c)    
-
      100,000  
Total prepayment for the software, equipment and product development   $ 140,000     $ 790,000  

 

(a) On March 28, 2023, the Company signed a three-year research and development framework agreement with Peblla with a total value of $1.0 million. Pursuant to the agreement, Peblla will develop software for the Company, including cashier system, customized mobile application, a customer loyalty program and gift card system and online ordering website, etc. During the year ended December 31, 2023, the Company made prepayment of $290,000 to Peblla for this software development project. In December 2023, certain systems with value of $150,000 was completed and put into use, and hence was transferred to intangible assets in the consolidated balance sheet, and the remaining $140,000 prepayment to Peblla was recorded as a prepayment for software development on the balance sheet as of June 30, 2024 and December 31, 2023. However, Peblla had experienced delays in the later stages of development and was unable to meet Chanson’s evolving requirements, therefore, the agreement was terminated in June 2024. Certain systems with value of $140,000 was completed and put into use, and hence was transferred to intangible assets in July 2024.  

 

(b) On April 1, 2023, the Company entered into an agreement with Luo and Long with a total value of $750,000, and the Company made prepayment of $550,000 as of December 31, 2023. Pursuant to the agreement, Luo and Long would design and provide equipment for the Company’s new central factory. The equipment was originally expected to be delivered before January 31, 2024. However, due to the delay in production process of the qualified equipment, the agreement was terminated and $550,000 was refunded to the Company during the six months ended June 30, 2024.

 

(c) On April 3, 2023, the Company entered into an agreement with Wisdom, pursuant to which, Wisdom was responsible to conduct market research to identify the most current automated cocktail mixing robots available in the market, subsequently procure two robots on behalf of the Company and provide other related services, including delivering, installation and maintenance services. The total contract amount is $200,000, which was fully prepaid by the Company. Since Wisdom failed to procure the qualified robots for the Company, the agreement was terminated and $100,000 was refunded in December 2023, and the remaining of $100,000 was refunded in January 2024.

 

F-22

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 11 — LONG TERM DEBT INVESTMENT

 

On March 31, 2023, the Company entered into a five-year agreement with Worthy Credit Limited (“Worthy Credit”), pursuant to which, the Company made payment of $6.0 million to Worthy Credit, and authorized Worthy Credit to invest the Company’s funds to provide loan services for housing mortgage applicants, with rates of return of 12% per annum. The qualification of the applicants was approved by the approval board, which was composed of the members of the Company and Worthy Credit. The Company recorded investment income of $359,014 and $171,616 for the six months ended June 30, 2024 and 2023, respectively.

 

NOTE 12 — SHORT-TERM BANK LOANS

 

Short-term bank loans consisted of the following:

 

   June 30,
2024
   December 31,
2023
 
Huaxia Bank (1)  $420,946   $423,741 
Bank of China (2)   1,403,155    1,412,469 
Tianshan Rural Commercial Bank (3)   841,892    423,741 
Xinjiang Urumqi Rural Commercial Bank (4)   420,946    423,741 
Total short-term bank loans  $3,086,939   $2,683,692 

 

(1) On December 22, 2023, Xinjiang United Family entered into a loan agreement with Huaxia Bank to borrow RMB3.0 million ($420,946) as working capital for a year, with a maturity date of December 20, 2024. The loan bears a fixed interest rate of 5.00% per annum. The loan was guaranteed by Ms. Baolin Wang, the legal representative of Xinjiang United Family, and Urumqi Plastic Surgery Hospital Co., Ltd., a related party that is controlled by Mr. Gang Li, the Chairman of the Company.

 

(2) On September 7, 2023, Xinjiang United Family entered into a loan agreement with Bank of China to borrow RMB10.0 million ($1,403,155) as working capital for a year, with a maturity date of September 6, 2024. The loan bears a fixed interest rate of 3.55% per annum. The loan is guaranteed by the Company’s controlling shareholder Mr. Gang Li and his family member, Ms. Ying Xiong. In addition, Xinjiang United Family pledged its trademark rights as collateral to guarantee the Company’s loan from Bank of China.  The loan was repaid in full upon maturity.

 

(3)

On November 15, 2023, Xinjiang United Family entered into a loan agreement with Tianshan Rural Commercial Bank to borrow RMB3.0 million ($420,946) as working capital for a year, with a maturity date of November 14, 2024. The loan bears a fixed interest rate of 5.50% per annum. The loan is guaranteed by the Company’s controlling shareholder Mr. Gang Li and his family member, Ms. Ying Xiong.

 

On December 19, 2023, Xinjiang United Family entered into another loan agreement with Tianshan Rural Commercial Bank to borrow RMB3.0 million ($420,946) as working capital for a year, with a maturity date of December 18, 2024. The loan was withdrawn on January 29, 2024 and bears a fixed interest rate of 5.50% per annum. The loan is guaranteed by the Company’s controlling shareholder Mr. Gang Li and his family member, Ms. Ying Xiong, and two third parties.

 

(4) On December 26, 2023, Xinjiang United Family entered into a loan agreement with Xinjiang Urumqi Rural Commercial Bank to borrow RMB3.0 million ($420,946) as working capital for a year, with a maturity date of December 25, 2024. The loan bears a fixed interest rate of 5.50% per annum. The loan is guaranteed by two third-parties, Mr. Xiaochen Wang and his family member.

 

The Company incurred interest expenses of $68,450 and $8,364 for the six months ended June 30, 2024 and 2023, respectively.

 

F-23

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 13 — RELATED PARTY TRANSACTIONS

 

a. Due to a related party

 

As of June 30, 2024, due to a related party of $46,675 primarily represented advances provided by Mr. Gang Li, Chairman of the Company, to fund the Company’s operations. These payables were unsecured, non-interest bearing, and due on demand. All expenses and liabilities were paid by Mr. Gang Li on behalf of the Company, and recorded in the Company’s unaudited condensed consolidated financial statements in a timely manner. The outstanding amount is expected to be repaid before December 31, 2024.

 

b. Other related party transactions

 

Several related parties provided guarantees in connection with the Company’s short-term bank loans (see Note 12).

 

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 Mr. Gang Li, provided approximately 5,382 square feet office space for the Company’s headquarters without charge. The term of the agreement is from January 1, 2020 to June 25, 2028, unless otherwise terminated by either party.

 

NOTE 14 — TAXES

 

(a) Corporate Income Taxes (“CIT”)

 

Cayman Islands

 

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains, or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or, after execution, brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on the issue of shares by, or any transfers of shares of, Cayman Islands companies (except those which hold interests in land in the Cayman Islands). There are no exchange control regulations or currency restrictions in the Cayman Islands.

 

Payments of dividends and capital in respect of our ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our ordinary shares, as the case may be, nor will gains derived from the disposal of our ordinary shares be subject to Cayman Islands income or corporation tax.

 

British Virgin Islands

 

Deen Global is incorporated in the BVI as an offshore holding company and is not subject to tax on income or capital gain under the laws of BVI.

 

Hong Kong

 

Jenyd is incorporated in Hong Kong and is subject to profit taxes in Hong Kong at a rate of 8.25% on assessable profits up to HK$2,000,000, and 16.5% on any part of assessable profits over HK$2,000,000. However, Jenyd did not generate any assessable profits arising in or derived from Hong Kong for the six months ended June 30, 2024 and 2023, and accordingly no provision for Hong Kong profits tax was made in these periods.

 

F-24

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

PRC

 

Under the Enterprise Income Tax (“EIT”) Law of the PRC, domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays, or exemptions may be granted on a case-by-case basis. The Company’s subsidiary Xinjiang United Family and its four branch offices were incorporated in the PRC. During the six months ended June 30, 2023, Xinjiang United Family and all its three branch offices qualified as small-scaled minimal profit enterprises. According to the Announcement on Implementing the Preferential Income Tax Policies for Small-Scale Minimal Profit Enterprise on March 14, 2022 and March 26, 2023, the taxable income not more than RMB3 million is subject to a reduced rate of 5% during the period from January 1, 2023 to December 31, 2024. During the six months ended June 30, 2024, Xinjiang United Family and all its four branch offices did not qualify as small-scaled minimal profit enterprises and were subject to 25% income tax rate.

 

The UFG entities are individually-owned businesses, which are not subject to the EIT Law of the PRC, but the Individual Income Tax. The Measures for Individual Income Tax Calculation of Individual Industrial and Commercial Households, or the “Measures,” were adopted by the State Administration of Taxation on December 19, 2014 and promulgated on December 27, 2014, and amended on June 15, 2018. According to Article 7 of the Measures, for the income from production and operation of individually-owned businesses, the amount of taxable income shall be the balance of the total income of each tax year after deducting costs, expenses, taxes, losses and other expenditures, and allowable compensation for losses in previous years. Income tax for an individually-owned business can generally be assessed on an actual basis or a deemed basis, which the UFG entities apply. Therefore, income tax for the UFG entities is levied as a fixed-rate income tax at 1% of TNI as assessed by the local tax authority. According to Announcement No. 12 [2021] and Announcement No. 6 [2023] of the State Taxation Administration, the tax rate is reduced by half to 0.5% during the period from January 1, 2021 to December 31, 2024. For the six months ended June 30, 2023, 13 of these UFG entities were subject to income tax assessed at 0.5% of TNI that ranged from RMB33,000 to RMB180,000 per month. For the six months ended June 30, 2024, 12 of these UFG entities were subject to income tax assessed at 0.5% of TNI that ranged from RMB33,000 to RMB180,000 per month. The rest of these UFG entities were exempted from paying income tax. During the six months ended June 30, 2024 and 2023, the total tax exemption of the UFG entities were $12,505 and $7,665, respectively. As of June 30, 2024, for the tax years ended December 31, 2019 through December 31, 2023 the Company’s UFG entities remained open for statutory examination by PRC tax authorities. In addition, the TNI and tax rate of the Company’s UFG entities are subject to periodical reassessment by the local tax authority. If the local tax authority determined that income tax for the UFG entities should be levied at a higher TNI or higher tax rate, the Company would be obligated to pay additional income tax for the UFG entities. Along with the continuing growth of business, the Company expects that the tax rates of these UFG entities are likely to increase in the future in the annual assessment based on the past performance.

 

United States

 

The Company’s subsidiaries in the U.S. are subject to a U.S. federal corporate income tax rate of 21%.

 

Income before provision for income taxes is attributable to the following geographic locations for the six months ended June 30, 2024 and 2023:

 

   For the Six Months Ended
June 30,
 
   2024   2023 
Cayman Islands  $403,760   $193,068 
PRC   644,983    1,274,683 
United States   (960,466)   (1,180,111)
Total income before income taxes  $88,277   $287,640 

 

F-25

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The components of the income tax provision were as follows:

 

   For the Six Months Ended
June 30,
 
   2024   2023 
Current tax provision        
Cayman Islands  $
-
   $
-
 
BVI   
-
    
-
 
Hong Kong   
-
    
-
 
PRC   64,865    2,880 
United States   
-
    
-
 
   $64,865   $2,880 
Deferred tax provision          
Cayman Islands  $
-
   $
-
 
BVI   
-
    
-
 
Hong Kong   
-
    
-
 
PRC   
-
    
-
 
United States   
-
    
-
 
    
-
    
-
 
Income tax provisions  $64,865   $2,880 

 

Reconciliation of the differences between the income tax provision computed based on PRC statutory income tax rate and the Company’s actual income tax provision for the six months ended June 30, 2024 and 2023 are as follows:

 

   For the Six Months Ended
June 30,
 
   2024   2023 
Income tax expense computed based on PRC statutory rate  $22,069   $71,910 
Favorable tax rate and tax exemption impact in PRC entities (a)   (96,381)   (315,790)
Effect of rate differential for non-PRC entities   (62,521)   (1,063)
Change in valuation allowance   201,698    247,823 
Total income tax provisions  $64,865   $2,880 

 

(a) During the six months ended June 30, 2024, Xinjiang United Family and all its four branch offices were subject to 25% income tax rate. During the six months ended June 30, 2023, the Company’s subsidiary, Xinjiang United Family, and its three branch offices, qualified as small-scaled minimal profit enterprise and subject to a favorable tax rate of 2.5%. For the six months ended June 30, 2023, 13 of these UFG entities were subject to income tax assessed at 0.5% of TNI that ranged from RMB33,000 to RMB180,000 per month. For the six months ended June 30, 2024, 12 of these UFG entities were subject to income tax assessed at 0.5% of TNI that ranged from RMB33,000 to RMB180,000 per month. The rest of the UFG entities were exempted from paying income tax. For the six months ended June 30, 2024 and 2023, the tax saving as the result of the favorable tax rates and tax exemption amounted to $96,381 and $315,790, respectively, and per share effect of the favorable tax rate and tax exemption was $0.01 and $0.03, respectively.

 

F-26

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company’s deferred tax assets, net was comprised of the following:

 

   June 30
2024
   December 31,
2023
 
Net operating loss  $3,124,927   $2,923,229 
Impairment of property and equipment   57,193    57,193 
Total deferred tax assets   3,182,120    2,980,422 
Valuation allowance   (3,182,120)   (2,980,422)
Total deferred tax assets, net  $
-
   $
-
 

 

The Company’s operations in the U.S. incurred a cumulative net operating loss (“NOL”) which may reduce future federal taxable income. As of December 31, 2023, the cumulative NOL was $13,920,136. During the six months ended June 30, 2024, the U.S. operations incurred an additional NOL of $960,466, resulting in a cumulative NOL of $14,880,602 as of June 30, 2024, among which approximately $2,882,465 will expire in 2037 and the remaining balance is carried forward indefinitely. 

 

The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. Management considers new evidence, both positive and negative, that could affect the Company’s future realization of deferred tax assets including its recent cumulative earnings experience, expectation of future income, the carry forward periods available for tax reporting purposes and other relevant factors. The Company determined that it is more likely than not its deferred tax assets could not be realized due to uncertainty on future earnings in the U.S. operations. The Company provided a 100% valuation allowance for its deferred tax assets as of June 30, 2024 and December 31, 2023, respectively.

 

(b) Taxes payable

 

Taxes payable consisted of the following:

 

   June 30
2024
   December 31,
2023
 
Income tax payable  $4,484   $33,628 
Other taxes payable   72,531    62,548 
Total taxes payable  $77,015   $96,176 

 

NOTE 15 – SHAREHOLDERS’ EQUITY

 

Ordinary Shares

 

Chanson International (formerly known as RON Holding Limited) was incorporated under the laws of the Cayman Islands on July 26, 2019. Upon incorporation, the authorized share capital of the Company was US$50,000 divided into 50,000 ordinary shares of par value US$1.00 each and 100 ordinary shares were issued. The issuance of these 100 ordinary shares, and the 1,000-for-1 share split (as described below) and the subsequent share issuances are considered as a part of the Reorganization of the Company, which was retroactively applied as if the transaction occurred at the beginning of the period presented (see Note 1).

 

F-27

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On March 27, 2021, the Company’s shareholders and board of directors approved (i) the subdivision of the Company’s authorized and issued share capital at a ratio of 1,000-for-1 share such that the authorized share capital of the Company was amended to US$50,000 divided into 50,000,000 ordinary shares of par value US$0.001 each and the 100 ordinary shares of a par value of $1 then issued and outstanding were subdivided into 100,000 ordinary shares of a par value of $0.001 (the “1,000-for-1 share split”); (ii) the creation of Class A Ordinary Shares and Class B ordinary shares, par value $0.001 per share (“Class B Ordinary Shares”, and collectively with Class A Ordinary Shares, “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 vote of all shareholders, 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; (iii) the re-designation of 3,000 ordinary shares held by Haily Global Limited into 3,000 Class B Ordinary Shares; and (iv) issuances of Class A Ordinary Shares and Class B Ordinary Shares to the 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 (the “share issuances”). The Company believes the 1,000-for-1 share split and the share issuances should be considered as a part of the Reorganization of the Company and accounted for on a retroactive basis pursuant to ASC 260. The Company has retroactively restated all shares and per share data for all periods presented.

 

Initial Public Offering

 

On April 3, 2023, the Company closed its IPO of 3,390,000 Class A Ordinary Shares at a public offering price of $4.00 per Class A Ordinary Share for the total gross proceeds of $13.6 million before deducting underwriting discounts and other related expenses. Net proceeds of the Company’s IPO were approximately $12.0 million. The Company’s Class A Ordinary Shares began trading on the Nasdaq Capital Market under the ticker symbol “CHSN” on March 30, 2023.

  

Representative Warrants

 

In connection with the Company’s IPO, the Company agreed to issue warrants to the representative of several underwriters (“Representative warrants”), exercisable for a period of four and a half years commencing six months from the date of commencement of sales of the offering, to purchase 67,800 Class A Ordinary Shares at $4.00 per Class A Ordinary Share. As the Representative warrants are considered indexed to the Company’s own stock and meet the criteria for equity classification according to ASC :815-40, therefore, the Representative warrants are classified as equity on the unaudited condensed consolidated balance sheets. On December 13, 2023, 35,319 Class A Ordinary Share were issued as the Representative warrants were fully exercised on a cashless basis.

 

Conversion of Ordinary Shares

 

On February 5, 2024, the Company’s shareholder Haily Global Limited elected to convert 270,000 Class B Ordinary Shares on a one-for-one basis into 270,000 Class A Ordinary Shares, which was duly approved by the Company’s board of directors.

 

As a result, the Company had 44,000,000 authorized Class A Ordinary Shares of a par value of $0.001, of which 6,755,319 shares and 6,485,319 Class A Ordinary Shares were issued and outstanding as of June 30, 2024 and December 31, 2023, respectively, and the Company had 6,000,000 authorized Class B Ordinary Shares of a par value of $0.001, of which 5,670,000 and 5,940,000 Class B Ordinary Shares were issued and outstanding as of June 30, 2024 and December 31, 2023. In total, the Company had 50,000,000 authorized Ordinary Shares of par value of $0.001 each, of which 12,425,319 shares were issued and outstanding as of June 30, 2024 and December 31, 2023.

 

F-28

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Statutory Reserve

 

The Company’s PRC subsidiary is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. The statutory reserve may be applied against prior year losses, if any, and may be used for general business expansion and production or increase in registered capital, but are not distributable as cash dividends. As of June 30, 2024 and December 31, 2023, the balance of the statutory reserves was $447,231 and $447,231, respectively, which is equal to 50% of the entity’s registered capital.

 

Restricted net assets

 

The Company’s PRC subsidiary and the UFG entities are restricted in their ability to transfer a portion of their net assets, equivalent to their statutory reserves and their share capital to the Company in the form of loans, advances, or cash dividends. The payment of dividends by entities organized in China is subject to limitations, procedures, and formalities. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. As of June 30, 2024 and December 31, 2023, the total restricted net assets amounted to $1,325,631 and $1,325,631, respectively.

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. As of June 30, 2024 and December 31, 2023, there were no legal claims and litigation against the Company.

 

NOTE 17 – SEGMENT REPORTING

 

In accordance with ASC 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the “CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s CODM for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the CODM, reviews operation results by locations. Based on management’s assessment, the Company has determined that it has two operating segments, China and the United States and others.

 

F-29

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table presents the segment information for the six months ended June 30, 2024 and 2023, respectively:

 

    For the Six Months Ended
June 30, 2024
 
    China     United
States and others
    Total  
Revenue   $ 6,501,871     $ 1,040,811     $ 7,542,682  
Cost of revenue     3,439,202       976,205       4,415,407  
Gross profit   $ 3,062,669     $ 64,606     $ 3,127,275  
Net income (loss)   $ 580,118     $ (556,706 )   $ 23,412  
Interest (expense) income, net   $ (68,319 )   $ 43,041     $ (25,278 )
Provision for income tax   $ 64,865     $
-
    $ 64,865  
Depreciation   $ 237,245     $ 208,542     $ 445,787  
Capital expenditures   $ 29,081     $ 5,187     $ 34,268  

 

    For the Six Months Ended
June 30, 2023
 
    China     United
States
    Total  
Revenue   $ 7,011,172     $ 1,800,115     $ 8,811,287  
Cost of revenue     3,461,864       1,016,852       4,478,716  
Gross profit   $ 3,549,308     $ 783,263     $ 4,332,571  
Net income (loss)   $ 1,271,801     $ (987,041 )   $ 284,760  
Interest  (expense) income, net   $ (7,522 )   $ 21,529     $ 14,007  
Provision for income tax   $ 2,880     $
-
    $ 2,880  
Depreciation and amortization   $ 219,282     $ 183,502     $ 402,784  
Capital expenditures   $ 96,835     $ 1,255,187     $ 1,352,022  

 

   June 30,
2024
   December 31,
2023
 
Total assets:        
China  $16,771,726   $12,954,728 
United States   21,951,991    25,479,568 
Total assets  $38,723,717   $38,434,296 
           
Total liabilities:          
China  $18,482,014   $14,860,078 
United States   8,187,728    11,559,862 
Total liabilities  $26,669,742   $26,419,940 

 

F-30

 

 

CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 18 – SUBSEQUENT EVENTS

 

On September 13, 2024, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors identified therein for a best efforts follow-on public offering (the “Offering”) of (i) 8,980,251 Class A Ordinary Shares, par value $0.001 per share (“Shares”) and (ii) 8,980,251 common warrants to purchase 8,980,251 Class A Ordinary Shares (“Common Warrants”), at an exercise price of $0.972 per share, exercisable within one year anniversary of the closing of the Offering. The Shares and Common Warrants were sold at a combined public offering price of $0.81 per share and accompanying warrants. Each Class A Ordinary Share were sold together with one Common Warrant. The Offering was closed on September 17, 2024, and the Company received aggregate gross proceeds of $7.3 million from the Offering, before deducting offering expenses and commissions, excluding the exercise of any Common Warrants. On September 24, 2024, 3,890,749 Class A Ordinary Share were issued as the 5,893,829 common warrants were exercised on a cashless basis.

 

The Company evaluated the subsequent events through September 27, 2024, which is the date of the issuance of these unaudited condensed consolidated financial statements, and concluded that there are no additional subsequent events except disclosed above that would have required adjustment or disclosure in the unaudited condensed consolidated financial statements.

 

 

F-31

 

 

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Exhibit 99.2

 

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 unaudited condensed consolidated financial statements and related notes that appear elsewhere in the report on Form 6-K of which this document is a part. In addition to historical consolidated financial information, the following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in our annual report on Form 20-F for the fiscal year ended December 31, 2023, particularly under the caption “Item 3. Key Information—D. Risk Factors.”  

 

Key financial performance indicators

 

We consider a variety of financial and operating measures in assessing the performance of our business. The key financial performance measures we use are revenue, comparable store sales, gross profit and gross margin, selling, general, and administrative expenses (“SG&A expenses”), and operating income.

 

Revenue

 

Our revenue is derived primarily from sales of bakery and other products under the operating entities’ “George●Chanson,” “Patisserie Chanson,” and “Chanson” brand names. As of June 30, 2024, the operating entities managed and operated 46 stores in the PRC (the “PRC Stores”) and three stores in the U.S. (the “U.S. Stores”). Our revenue is periodically influenced by the efficiency of sales promotions and the introduction and discontinuance of sales and promotion incentives. Growth of our revenue is primarily driven by expansion of the operating entities’ store base in existing and new markets as well as comparable store sales growth, described in “—Comparable Store Sales.” Revenue is impacted by competition, current economic conditions, pricing, inflation, product mix and availability, promotion, and spending habits of the operating entities’ customers. The product offerings of the PRC Stores and the U.S. Stores across diverse product categories support growth in revenue by attracting new customers and encouraging repeat visits from their existing customers.

 

Comparable Store Sales

 

Comparable store sales measure the performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year. Comparable store sales are important points of analysis for the operating entities, as comparable store sales can be helpful to them in making future decisions regarding existing stores and new locations. The operating entities often drill down into comparable store sales figures to determine the exact cause of changes in revenue. The operating entities also use comparable store sales to evaluate current and likely future performance and as a measure of revenue growth to evaluate how established stores have performed over time compared to new stores.

 

For simplicity, our comparable store sales consist of revenue from the operating entities’ stores only after they have had two full years of operations, which is when we believe comparability is achieved. Our comparable store definition includes stores that have been remodeled, expanded, or relocated in their existing location or respective geographic areas, but excludes stores that have been closed for an extended period or are planned to be closed or disposed of. Comparable store sales figures are presented as a percentage that indicates the relative amount of revenue increase or decrease, excluding the impact of foreign currency translation.

 

Opening new stores is a primary component of our growth strategy and, as the operating entities continue to execute on their growth strategy, we expect a significant portion of their revenue growth will be attributable to revenue from new stores. Accordingly, comparable store sales are one of the measures the operating entities use to assess the success of their growth strategy.

 

 

 

 

A variety of factors affect our comparable store sales, including, among others, consumer trends, competition, current economic conditions, pricing, inflation, changes in the operating entities’ product mix, the success of their marketing programs, and the COVID-19 pandemic. During the six months ended June 30, 2024, the comparable store sales in China (excluding the impact of foreign currency translation) decreased by 10.4%. The post-COVID-19 economy in China has recovered at a slower pace than expected, and the spending behavior of consumers have been affected by various factors such as the economic downward pressure and lack of consumer confidence. As a result, our comparable store sales in China decreased due to the decline in average spending per customer and the consumption downgrade. During the six months ended June 30, 2024, the comparable store sales in the U.S. decreased by 11.5%, mainly due to increased competition from rivals operating in the same area.

 

Gross Profit and Gross Margin

 

Gross profit is the difference between revenue and cost of revenue. Our cost of revenue consists of labor costs, costs of ingredients used to prepare the operating entities’ bakery products, inventory write-off due to discarded bakery products, packaging costs, freight charges, utility costs, rent expenses of manufacturing space, depreciation of production equipment, and other overhead costs. Ingredients costs account for the largest portion of our cost of revenue. Supplies and prices of the operating entities’ various ingredients can be affected by a variety of factors, such as weather, seasonal fluctuations, demand, political environment, and economic conditions. An increase in the price of any ingredients used in the operating entities’ bakery products could result in an increase in costs from their suppliers, and the operating entities may not be able to increase prices to cover increased costs, which would have an adverse effect on their operating results and profitability. In order to negotiate more favorable prices on ingredients, the operating entities have been and will continue to be directly involved in sourcing ingredients from qualified suppliers and try to lock in ingredient prices for typically six to twelve months through non-cancelable purchase commitments, when they expect the price to increase. Over the past years, the operating entities have invested significant time and energy to achieve cost reduction and productivity improvement in their supply chain. The operating entities have focused on reducing ingredient and packaging costs through increased volume buying, direct purchasing, and price negotiations, as well as strengthening inventory management from raw materials to finished goods to reduce the spoilage and wastage. On the other hand, labor is a primary component in the cost of operating the operating entities’ business. Increased labor costs due to competition, increased minimum wage or employee benefits costs, or otherwise, would adversely impact the operating entities’ operating expenses. In addition, the operating entities’ success depends on their ability to attract, motivate, and retain qualified employees, including store managers and staff, to keep pace with their growth strategy.

 

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

 

SG&A Expenses

 

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

 

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SG&A expenses generally increase as the operating entities grow their store base and invest in corporate infrastructure. The operating entities have made significant investments in talent retention and storefront upgrades over the past years which have resulted in higher SG&A expenses. Our SG&A expenses are expected to continue increasing in the future as the operating entities invest to open new stores, launch new products, increase brand awareness, attract new customers, and increase their market penetration. To support their growth, the operating entities will continue to increase headcount, particularly in the sales and marketing departments. This increase in headcount will drive higher payroll and employee-related expenses. Our operating entities also continue to invest in product innovation and promote sales growth. We expect our SG&A expenses to continue to increase in absolute dollars as we incur increased costs related to the growth of our business and our operation.

 

Operating Income

 

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

 

A. Operating Results

 

Comparison of Results of Operations for the Six Months Ended June 30, 2024 and 2023

    

The following table summarizes the results of our operations during the six months ended June 30, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase or decrease during such periods.

 

   For the six months ended
June 30,
   Variance 
   2024   2023   Amount   % 
Revenue  $7,542,682   $8,811,287   $(1,268,605)   (14.4)%
Cost of revenue   4,415,407    4,478,716    (63,309)   (1.4)%
Gross profit   3,127,275    4,332,571    (1,205,296)   (27.8)%
                     
OPERATING EXPENSES                    
Selling expenses   2,230,905    2,444,292    (213,387)   (8.7)%
General and administrative expenses   1,456,499    1,774,419    (317,920)   (17.9)%
Total operating expenses   3,687,404    4,218,711    (531,307)   (12.6)%
                     
(LOSS) INCOME FROM OPERATIONS   (560,129)   113,860    (673,989)   (591.9)%
                     
OTHER INCOME (EXPENSES)                    
Interest (expense) income, net   (25,278)   14,007    (39,285)   (280.5)%
Other income (expense), net   314,670    (11,843)   326,513    (2,757.0)%
Interest income from long term debt investment   359,014    171,616    187,398    109.2%
Total other income, net   648,406    173,780    474,626    273.1%
                     
INCOME BEFORE INCOME TAX EXPENSE   88,277    287,640    (199,363)   (69.3)%
                     
INCOME TAX EXPENSE   64,865    2,880    61,985    2,152.3%
                     
NET INCOME  $23,412   $284,760   $(261,348)   (91.8)%

 

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Revenue

 

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

 

Our total revenue decreased by $1,268,605, or 14.4%, from $8,811,287 for the six months ended June 30, 2023 to $7,542,682 for the six months ended June 30, 2024. The decrease in our revenue was due to decreased revenue from both the stores in China and the U.S., as discussed in greater details below.

 

The following table sets forth the breakdown of our revenue for the six months ended June 30, 2024 and 2023, respectively:

 

   For the Six Months Ended June 30,   Variance 
   2024   %   2023   %   Amount   % 
China                        
Bakery products  $5,920,596    78.5%  $6,386,294    72.4%  $(465,698)   (7.3)%
Other products   581,275    7.7%   624,878    7.1%   (43,603)   (7.0)%
Subtotal: revenue from China   6,501,871    86.2%   7,011,172    79.5%   (509,301)   (7.3)%
                               
United States                              
Bakery products   240,923    3.2%   234,783    2.7%   6,140    2.6%
Beverage products   629,280    8.3%   1,002,252    11.4%   (372,972)   (37.2)%
Eat-in services   170,608    2.3%   563,080    6.4%   (392,472)   (69.7)%
Subtotal: revenue from the United States   1,040,811    13.8%   1,800,115    20.5%   (759,304)   (42.2)%
                               
Total Revenue  $7,542,682    100.0%  $8,811,287    100.0%  $(1,268,605)   (14.4)%

 

China

 

The PRC Stores accounted for 86.2% and 79.5% of our total revenue for the six months ended June 30, 2024 and 2023, respectively. Revenue from the PRC Stores decreased by $509,301, or 7.3%, from $7,011,172 for the six months ended June 30, 2023 to $6,501,871 for the six months ended June 30, 2024. The decrease was mainly due to the decreased revenue from bakery products as well as from other products.

 

Revenue from bakery products decreased by $465,698, or 7.3%, from $6,386,294 for the six months ended June 30, 2023 to $5,920,596 for the six months ended June 30, 2024. The post-COVID-19 economy in China has recovered at a slower pace than expected, and the spending behavior of consumers have been affected by various factors such as the economic downward pressure and lack of consumer confidence. As a result, our revenue from bakery products decreased due to the decline in average spending per customer and the consumption downgrade during the six months ended June 30, 2024.

 

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Revenue from other products decreased by $43,603, or 7.0%, from $624,878 for the six months ended June 30, 2023 to $581,275 for the six months ended June 30, 2024. The decrease was mainly due to decreased revenue from seasonal products, which was partially offset by increased revenue from beverage products. Revenue from seasonal products decreased by $71,561, or 16.4%, from $436,004 for the six months ended June 30, 2023 to $364,443 for the six months ended June 30, 2024. The decrease was due to the consumption downgrade as mentioned above. The average spending per customer declined because our customers preferred lower-priced seasonal products during the six months ended June 30, 2024. Revenue from beverage products increased by $27,958, or 14.8%, from $188,874 for the six months ended June 30, 2023 to $216,832 for the six months ended June 30, 2024, mainly due to the increased revenue from freshly brewed coffee products, as the PRC Stores are focusing on expanding the business of coffee beverages and more coffee bakery stores were opened in the six months ended June 30, 2024.

 

United States

 

Revenue from the U.S. Stores decreased by $759,304, or 42.2%, from $1,800,115 for the six months ended June 30, 2023 to $1,040,811 for the six months ended June 30, 2024. The decrease was mainly due to decreased revenue from beverage products and eat-in services, which was partially offset by the slightly increased revenue from bakery products.

 

Revenue from bakery products remained relatively stable with a slight increase by $6,140, or 2.6%, from $234,783 for the six months ended June 30, 2023 to $240,923 for the six months ended June 30, 2024. The increase was due to the increased revenue from bakery products of approximately $106,000, generated by Chanson 3rd Ave and Chanson Broadway. The increase in revenue from bakery products was partially offset by the decreased revenue from Chanson Greenwich of approximately $90,000. Many famous bakery brands have opened new stores in New York City, customers now have more choices and revenue from bakery products of Chanson 23rd Street and Chanson Greenwich were affected. With the increased competition, Chanson Greenwich closed its business operation in the second half of fiscal year 2023.

 

Revenue from beverage products decreased by $372,972, or 37.2%, from $1,002,252 for the six months ended June 30, 2023 to $629,280 for the six months ended June 30, 2024, primarily due to the closure of Chanson Greenwich as mentioned above. The decrease was also attributable to increased competition from rivals operating in the same area. After the cocktail bars of the U.S. Stores launched several new types of cocktail products with new flavors and styles, such products became popular among customers and the cocktail bars were often fully booked by reservation. However, our rivals operating in the same area also launched many types of attractive cocktail products, so customers currently have more choices, and revenue from beverage products were adversely affected during the six months ended June 30, 2024.

 

Revenue from eat-in services decreased by $392,472, or 69.7%, from $563,080 for the six months ended June 30, 2023 to $170,608 for the six months ended June 30, 2024. The decrease was mainly due to the decreased revenue from Chanson Greenwich of approximately $402,000 as a result of the closure of its business as mentioned above. Moreover, the decrease was due to the slightly decreased revenue from Chanson 23rd Street of approximately $12,000, as Chanson 23rd Street adjusted its menu items and customers were adjusting to the new products. The decrease in revenue from eat-in services was partially offset by the increased revenue from eat-in services of approximately $22,000, generated by Chanson 3rd Ave and Chanson Broadway.

 

Cost of Revenue

 

Our cost of revenue consists of food ingredient costs, packaging costs, workforce related costs, overhead costs such as store rental and utilities for food production and processing, depreciation, and amortization.

 

Our overall cost of revenue remained relatively stable with a slight decrease by $63,309, or 1.4%, from $4,478,716 for the six months ended June 30, 2023 to $4,415,407 for the six months ended June 30, 2024. The decrease in our cost of revenue was due to decreased cost of revenue from the PRC Stores and the U.S. Stores.

 

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The following table sets forth the breakdown of our cost of revenue for the six months ended June 30, 2024 and 2023, respectively:

 

   For the Six Months Ended June 30,   Variance 
   2024   %   2023   %   Amount   % 
China                        
Bakery products  $3,180,350    72.0%  $3,209,942    71.7%  $(29,592)   (0.9)%
Other products   258,852    5.9%   251,922    5.6%   6,930    2.8%
Subtotal: cost of revenue from China   3,439,202    77.9%   3,461,864    77.3%   (22,662)   (0.7)%
                               
United States                              
Bakery products   345,158    7.8%   155,689    3.5%   189,469    121.7%
Beverage products   472,133    10.7%   564,686    12.6%   (92,553)   (16.4)%
Eat-in services   158,914    3.6%   296,477    6.6%   (137,563)   (46.4)%
Subtotal: cost of revenue from the United States   976,205    22.1%   1,016,852    22.7%   (40,647)   (4.0)%
                               
Total Cost of Revenue  $4,415,407    100.0%  $4,478,716    100.0%  $(63,309)   (1.4)%

 

China

 

Cost of revenue from the PRC Stores relatively stable with a slight decrease by $22,662, or 0.7%, from $3,461,864 for the six months ended June 30, 2023 to $3,439,202 for the six months ended June 30, 2024. The decrease was primarily due to the decreased cost of revenue of bakery products, which was partially offset by the increased cost of revenue of other products.

 

Cost of revenue from sales of bakery products decreased by $29,592, or 0.9%, from $3,209,942 for the six months ended June 30, 2023 to $3,180,350 for the six months ended June 30, 2024, mainly due to the decrease in sales of bakery products. The percentage of decrease in cost of revenue was less than that in revenue during the same period, due to the high fixed cost in the six months ended June 30, 2024, as discussed in “—Gross Profit and Gross Margin” below in more details.

 

Cost of revenue from other products relatively stable with a slight increase by $6,930, or 2.8%, from $251,922 for the six months ended June 30, 2023 to $258,852 for the six months ended June 30, 2024. Cost of revenue from seasonal products decreased by $19,102, or 11.8%, from $162,157 for the six months ended June 30, 2023 to $143,055 for the six months ended June 30, 2024, mainly due to the decrease in sales of seasonal products. The percentage of decrease in cost of revenue was less than that in revenue during the same period, due to more discounts offered to our customers in the six months ended June 30, 2024 as discussed in “—Gross Profit and Gross Margin” below. The cost of revenue from beverage products increased by $26,032, or 29.0%, from $89,765 for the six months ended June 30, 2023 to $115,797 for the six months ended June 30, 2024, mainly due to the increase in sales of coffee products. The percentage of increase in cost of revenue was more than that in revenue during the same period, due to more discounts offered to our customers in the six months ended June 30, 2024, as discussed in “—Gross Profit and Gross Margin” below.

 

United States

 

Cost of revenue from the U.S. Stores decreased by $40,647, or 4.0%, from $1,016,852 for the six months ended June 30, 2023 to $976,205 for the six months ended June 30, 2024. The decrease was due to the decreased cost of revenue from beverage products and eat-in services, which was partially offset by the increased cost of revenue from bakery products.

 

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Cost of revenue from sales of bakery products increased by $189,469, or 121.7%, from $155,689 for the six months ended June 30, 2023 to $345,158 for the six months ended June 30, 2024. The increase was primarily due to the increased cost of revenue from Chanson 3rd Ave and Chanson Broadway. The increase in cost of revenue from sales of bakery products was partially offset by the decreased cost of revenue from Chanson 23rd Street and Chanson Greenwich, which was in line with their decreased revenue from bakery products. The percentage of increase in cost of revenue was more than that in revenue during the same period, due to the increased spoilage and wastage of inventory, and the high fixed costs of Chanson 3rd Ave and Chanson Broadway, as discussed in “—Gross Profit and Gross Margin” below.

 

Cost of revenue from sales of beverage products decreased by $92,553, or 16.4%, from $564,686 for the six months ended June 30, 2023 to $472,133 for the six months ended June 30, 2024, due to the decrease in sales of beverage products from the U.S. Stores. The percentage of decrease in cost of revenue was less than that in revenue during the same period, due to more discounts offered to our customers, and the high fixed costs of Chanson 3rd Ave and Chanson Broadway in the six months ended June 30, 2024, as discussed in “—Gross Profit and Gross Margin” below.

 

Cost of revenue from eat-in services decreased by $137,563, or 46.4%, from $296,477 for the six months ended June 30, 2023 to $158,914 for the six months ended June 30, 2024. The percentage of decrease in cost of revenue was less than that in revenue, due to the increased spoilage and wastage of inventory, and the high fixed costs of Chanson 3rd Ave and Chanson Broadway, as discussed in “—Gross Profit and Gross Margin” below.

 

Gross Profit and Gross Margin

 

Our gross profit decreased by $1,205,296, or 27.8%, from $4,332,571 for the six months ended June 30, 2023 to $3,127,275 for the six months ended June 30, 2024. The decrease was mainly attributable to the decrease in revenue from the PRC Stores and the U.S. Stores. Our gross margin decreased by 7.7 percentage points from 49.2% for the six months ended June 30, 2023 to 41.5% for the six months ended June 30, 2024.

 

The following table sets forth the breakdown of our gross profit for the six months ended June 30, 2024 and 2023, respectively:

 

   For the Six Months Ended June 30,   Variance 
   2024   Margin %   2023   Margin %   Amount   % 
China                        
Bakery products  $2,740,246    46.3%  $3,176,352    49.7%  $(436,106)   (13.7)%
Other products   322,423    55.5%   372,956    59.7%   (50,533)   (13.5)%
Subtotal: gross margin and margin % from China   3,062,669    47.1%   3,549,308    50.6%   (486,639)   (13.7)%
                               
United States                              
Bakery products   (104,235)   (43.3)%   79,094    33.7%   (183,329)   (231.8)%
Beverage products   157,147    25.0%   437,566    43.7%   (280,419)   (64.1)%
Eat-in services   11,694    6.9%   266,603    47.3%   (254,909)   (95.6)%
Subtotal: gross margin and margin % from the United States   64,606    6.2%   783,263    43.5%   (718,657)   (91.8)%
                               
Total Gross Margin and Margin %  $3,127,275    41.5%  $4,332,571    49.2%  $(1,205,296)   (27.8)%

 

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China

 

Gross profit from PRC Stores decreased by $486,639, or 13.7%, from $3,549,308 for the six months ended June 30, 2023 to $3,062,669 for the six months ended June 30, 2024. The decrease was mainly attributable to the overall decrease in sales. The gross margin decreased by 3.5 percentage points from 50.6% for the six months ended June 30, 2023 to 47.1% for the six months ended June 30, 2024.

 

The gross profit of bakery products decreased by $436,106, or 13.7%, from $3,176,352 for the six months ended June 30, 2023 to $2,740,246 for the six months ended June 30, 2024, and the gross margin of bakery products decreased by 3.4 percentage points from 49.7% for the six months ended June 30, 2023 to 46.3% for the six months ended June 30, 2024. Due to the consumption downgrade as mentioned above, the revenue of bakery products decreased in the six months ended June 30, 2024. However, our fixed costs incurred remained stable, such as rental expense and salaries related expenses, which led to lower gross margin during the six months ended June 30, 2024 as compared to the same period last year.

 

The gross profit of other products decreased by $50,533, or 13.5%, from $372,956 for the six months ended June 30, 2023 to $322,423 for the six months ended June 30, 2024, and the gross margin decreased by 4.2 percentage points from 59.7% for the six months ended June 30, 2023 to 55.5% for the six months ended June 30, 2024. The gross margin of seasonal products decreased by 2.1 percentage points from 62.8% for the six months ended June 30, 2023 to 60.7% for the six months ended June 30, 2024. As a result of consumption downgrade as mentioned above, we offered more sales promotions and price discounts to attract more customers, which resulted in a decrease in gross margin of seasonal products for the six months ended June 30, 2024 as compared to the same period last year. The gross margin of beverage products decreased by 5.9 percentage points from 52.5% for the six months ended June 30, 2023 to 46.6% for the six months ended June 30, 2024. Many famous coffee chain brands opened new stores in Xinjiang and offers products at very low prices to expand their market shares. With the increased competition from our rivals, we had to offer more sales promotions and price discounts to attract more customers. Therefore, our gross margin of beverage products decreased during the six months ended June 30, 2024 as compared to the same period last year.

  

United States

 

Gross profit from the U.S. Stores decreased by $718,657, or 91.8%, from $783,263 for the six months ended June 30, 2023 to $64,606 for the six months ended June 30, 2024. The decrease was mainly attributable to the overall decrease in revenue. The gross margin decreased by 37.3 percentage points from 43.5% for the six months ended June 30, 2023 to 6.2% for the six months ended June 30, 2024.

 

The gross profit of bakery products decreased by $183,329, or 231.8%, from gross profit of $79,094 for the six months ended June 30, 2023 to gross loss of $104,235 for the six months ended June 30, 2024, and the gross margin of bakery products decreased by 77.0 percentage points, from 33.7% for the six months ended June 30, 2023 to (43.3)% for the six months ended June 30, 2024. The decrease in gross margin was mainly attributable to Chanson 3rd Ave and Chanson Broadway. Revenue generated by Chanson 3rd Ave and Chanson Broadway were relatively low at the starting stage, and in addition, the customer visits were adversely affected as the building where Chanson 3rd Ave was located was under renovation in the six months ended June 30, 2024. However, the fixed costs we incurred, such as rental expense, salaries related expenses as well as other overhead expenses were much higher than the revenue earned, which led to negative gross margin from Chanson 3rd Ave and Chanson Broadway for the six months ended June 30, 2024. Meanwhile, due to the increased competition from rivals operating in the same area as mentioned above, customer demand was harder to estimate and higher spoilage of inventory, excess raw materials and bakery products with short storage life was incurred. Together with the increased price of raw materials, the gross margin of bakery products significantly decreased in the six months ended June 30, 2024.

 

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The gross profit of beverage products decreased by $280,419, or 64.1%, from $437,566 for the six months ended June 30, 2023 to $157,147 for the six months ended June 30, 2024, and the gross margin of beverage products decreased by 18.7 percentage points, from 43.7% for the six months ended June 30, 2023 to 25.0% for the six months ended June 30, 2024. The decreased gross margin was primarily attributable to the negative gross margin contributed from Chanson 3rd Ave and Chanson Broadway due to the reasons as mentioned above. Meanwhile, due to increased competition from rivals operating in the same area, the U.S. Stores offered more promotions and discounts in order to make their beverage products more appealing to the customers. Therefore, the gross margin of beverage products decreased during the six months ended June 30, 2024.

 

The gross profit of eat-in services decreased by $254,909, or 95.6%, from $266,603 for the six months ended June 30, 2023 to $11,694 for the six months ended June 30, 2024, and the gross margin of eat-in services decreased by 40.4 percentage points from 47.3% for the six months ended June 30, 2023 to 6.9% for the six months ended June 30, 2024. The decreased gross margin was mainly due to the negative gross margin contributed from Chanson 3rd Ave and Chanson Broadway, higher spoilage of inventory as well as increased price of raw materials as mentioned above.

 

Operating Expenses

 

The following table sets forth the breakdown of our operating expenses for the six months ended June 30, 2024 and 2023.

 

   For the Six Months Ended June 30, 
   2024   2023   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
Total revenue  $7,542,682    100.0%  $8,811,287    100.0%  $(1,268,605)   (14.4)%
Total operating expenses:                              
Selling expenses   2,230,905    29.6%   2,444,292    27.7%   (213,387)   (8.7)%
General and administrative expenses   1,456,499    19.3%   1,774,419    20.1%   (317,920)   (17.9)%
Total operating expenses  $3,687,404    48.9%  $4,218,711    47.8%  $(531,307)   (12.6)%

 

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. Our selling expenses accounted for 29.6% and 27.7% of our revenue for the six months ended June 30, 2024 and 2023, respectively.

 

Selling expenses decreased by $213,387, or 8.7%, from $2,444,292 for the six months ended June 30, 2023 to $2,230,905 for the six months ended June 30, 2024. The decrease was mainly due to the decreased selling expenses of approximately $248,000 incurred by Chanson Greenwich, as Chanson Greenwich was closed in the second half of fiscal year 2023. The decrease in selling expenses was partially offset by the increased selling expenses of approximately $67,000 generated by the Chanson 3rd Ave and Chanson Broadway, the new stores opened in March 2023 and July 2023, respectively.

 

9

 

 

General and Administrative Expenses

 

Our general and administrative expenses primarily consist of administrative employee salaries, welfare and insurance expenses, depreciation, and professional service expenses. Our general and administrative expenses accounted for 19.3% and 20.1% of our revenue for the six months ended June 30, 2024 and 2023, respectively.

 

General and administrative expenses decreased by $317,920, or 17.9%, from $1,774,419 for the six months ended June 30, 2023 to $1,456,499 for the six months ended June 30, 2024. The decrease was primarily due to the closure of Chanson Greenwich as mentioned above.

 

Other Income (Loss), Net

 

Our other income (loss), net primarily consists of gain or loss from disposal of fixed assets, rental income and government subsidies. Other income, net significantly increased by $326,513, or 2,757.0%, from other expense, net of $11,843 for the six months ended June 30, 2023 to other income, net of $314,670 for the six months ended June 30, 2024. During the year ended December 31, 2023, the Company entered into a cooperation agreement with a third party, and granted the third party a license to use the Chanson Greenwich’s store for events, which resulted in a net other income of approximately $332,000 recorded during the six months ended June 30, 2024.

 

Interest Income from Long Term Debt Investment

 

On March 31, 2023, the Company entered into a five-year agreement with Worthy Credit Limited (“Worthy Credit”), pursuant to which, the Company made payment of $6.0 million to Worthy Credit, and authorized Worthy Credit to invest the Company’s funds to provide loan services for housing mortgage applicants, with rates of return of 12% per annum. The Company recorded interest income of $359,014 and $171,616 for the six months ended June 30, 2024 and 2023, respectively.

 

Provision for Income Taxes

 

Our provision for income taxes was $64,865 and $2,880 for the six months ended June 30, 2024 and 2023, respectively. Under the PRC Enterprise Income Tax Law (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 Trading Co., Ltd. (“Xinjiang United Family”) and its three branch offices were incorporated in the PRC. During the six months ended June 30, 2023, Xinjiang United Family and all its three branch offices qualified as small-scaled minimal profit enterprises. According to the Announcement on Implementing the Preferential Income Tax Policies for Small-Scale Minimal Profit Enterprise on March 14, 2022 and March 26, 2023, the taxable income not more than RMB3 million is subject to a reduced rate of 5% during the period from January 1, 2023 to December 31, 2024. During the six months ended June 30, 2024, Xinjiang United Family and all its four branch offices did not qualify as small-scaled minimal profit enterprises and were subject to 25% income tax rate.

 

10

 

 

The association between Xinjiang United Family and the VIEs is known as the “United Family Group” or “UFG.” The UFG Entities are individually-owned businesses, which are not subject to the EIT Law of the PRC, but the Individual Income Tax. The Measures for Individual Income Tax Calculation of Individual Industrial and Commercial Households, or the “Measures,” were adopted on December 19, 2014 and promulgated on December 27, 2014, and amended on June 15, 2018. According to Article 7 of the Measures, for the income from production and operation of individually-owned businesses, the amount of taxable income shall be the balance of the total income of each tax year after deducting costs, expenses, taxes, losses and other expenditures, and allowable compensation for losses in previous years. Income tax for an individually-owned business can generally be assessed on an actual basis or a deemed basis, which the UFG Entities apply. Therefore, income tax for the UFG Entities is levied as a fixed-rate income tax at 1% of the deemed Taxable Net Income (“TNI”) as assessed by the local tax authority. According to Announcement No. 12 [2021] and Announcement No. 6 [2023] of the State Taxation Administration, the tax rate is reduced by half to 0.5% during the period from January 1, 2021 to December 31, 2024. For the six months ended June 30, 2023, 13 of these UFG entities were subject to income tax assessed at 0.5% of TNI that ranged from RMB33,000 to RMB180,000 per month. For the six months ended June 30, 2024, 12 of these UFG entities were subject to income tax assessed at 0.5% of TNI that ranged from RMB33,000 to RMB180,000 per month. The rest of these UFG Entities were exempted from paying income tax. As of June 30, 2024, for the tax years ended December 31, 2019 through December 31, 2023, the UFG Entities remained open for statutory examination by PRC tax authorities. In addition, the TNI and tax rate of the UFG Entities are subject to periodical reassessment by the local tax authority. If the local tax authority determined that income tax for the UFG Entities should be levied at a higher TNI or higher tax rate, the UFG Entities would be obligated to pay additional income tax. Along with the continuing growth of business, we expect that the tax rates of these UFG Entities are likely to increase in the future in the annual assessment by the local tax authority based on past performance. If these UFG Entities change their forms of organization from individually-owned businesses to other corporate forms (such as limited liability company) as a result of their business development requirement, they will no longer enjoy the favorable tax rates and will be subject to the EIT Law, though we currently do not expect their forms of organization to change in the foreseeable future.

  

For the six months ended June 30, 2024 and 2023, the tax saving as the result of the favorable tax rates and tax exemption amounted to $96,381 and $315,790, respectively, and per share effect of the favorable tax rate and tax exemption was $0.01 and $0.03, respectively.

 

Net Income

 

As a result of the foregoing, we reported net income of $23,412 for the six months ended June 30, 2024 as compared to net income of $284,760 for the six months ended June 30, 2023.

 

B. Liquidity and Capital Resources

 

On April 3, 2023, we closed our initial public offering (“IPO”) of 3,390,000 Class A ordinary shares at a public offering price of $4.00 per Class A ordinary share for the total gross proceeds of $13.6 million before deducting underwriting discounts and other related expenses. Net proceeds of our IPO were approximately $12.0 million. Our Class A ordinary shares began trading on the Nasdaq Capital Market under the ticker symbol “CHSN” on March 30, 2023.

 

As of June 30, 2024, we had $4,107,830 in cash and cash equivalents as compared to $1,481,302 as of December 31, 2023. As of June 30, 2024, we had $2,022,587 accounts receivable balance, approximately 37.7%, or $0.8 million, of which has been subsequently collected. The remaining balance is expected to be collected before December 31, 2024. The collection of such receivables made cash available for use in our operations as working capital, if necessary.

 

As of June 30, 2024, we had approximately $3.1 million in short-term bank loans. We expect that we will be able to renew all of the existing bank loans upon their maturity based on our past experience and credit history.

 

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On June 30, 2021, Xinjiang United Family entered into a 10-year lease agreement for approximately 54,638 square feet of building space, where it constructed a new central factory, to expand the production capacity. The investment budget for the new central factory is approximately RMB17.8 million (approximately $2.5 million) after VAT deduction. There are two stages for the construction. The first stage includes: 1) construction and renovation that cost approximately RMB12.8 million (approximately $1.8 million); 2) installation of production equipment of approximately RMB1.4 million (approximately $0.2 million); and 3) miscellaneous projects of approximately RMB1.1 million (approximately $0.2 million). The first stage of the construction was completed in June 2022, and passed inspection in July 2022, and the new central factory started production in early August 2022. The original second stage includes the construction of two new production lines of approximately RMB2.5 million (approximately $0.3 million), which is expected to start in the second half of fiscal year 2023 and complete by the end of 2023. Due to the opening of coffee bakery stores in PRC in fiscal year 2023, the construction plan of beverage production line with a budget of RMB0.8 million (approximately $0.1 million) was cancelled. In addition, the start of the other moon cake production line with a budget of RMB1.7 million (approximately $0.2 million) was postponed to between fiscal year 2024 and 2025, and is now expected to be completed before the end of 2025. As of June 30, 2024, our contractual obligation under the central factory construction was approximately RMB0.3 million (approximately $0.04 million). As of June 30, 2024, we had spent approximately RMB15.0 million (approximately $2.1 million), and the future minimum expenditure is estimated to be RMB2.0 million (approximately $0.3 million). We plan to use cash flow from the operations of the PRC Stores to fund the future construction. Our payment made and future payment schedule under the central factory construction project are as follows:

 

    Payment made in     Future payment    
    Fiscal year
2021
    Fiscal year
2022
    Fiscal year
2023
    First half of
fiscal year
2024
    Remainder of fiscal year
2024
    Fiscal year
2025
    Total  
Contracts signed in fiscal year 2021:                                                        
Construction and renovation cost   $ 696,132     $ 450,121     $ 457,313     $ 38,619     $ 23,512     $ -     $ 1,665,697  
Other expenses related to construction     89,411       -       -       -       -       -       89,411  
Subtotal:     785,543       450,121       457,313       38,619       23,512       -       1,755,108  
                                                         
Contracts signed in fiscal year 2022:                                                        
Construction and renovation cost     -       118,359       -       -       14,270       -       132,629  
Other expenses related to construction     -       60,123       -       -       -       -       60,123  
Purchase of production equipment     -       197,431       -       -       -       -       197,431  
Subtotal:     -       375,913       -       -       14,270       -       390,183  
                                                         
Contract expected to be signed between fiscal year 2024 and 2025(1):                                                        
Moon cake production line construction     -       -       -       -       -       238,536       238,536  
Subtotal:     -       -       -       -       -       238,536       238,536  
Total   $ 785,543     $ 826,034     $ 457,313     $ 38,619     $ 37,782     $ 238,536     $ 2,383,827  

 

Note:

 

(1)No contracts were signed in the six months ended June 30, 2024, because the Company’s production needs have been largely satisfied after the construction projects were completed in 2022 and the Company did not make new construction plans in the six months ended June 30, 2024.

 

12

 

 

We also intend to open six additional new stores in the U.S. by fiscal year 2026, and the expected expenses related to opening these stores are approximately $3.0 million. We plan to use our cash on hand, cash flows from operations, the net proceeds we received from the IPO and equity financing from outside investors to open the new stores in the U.S.

 

As of June 30, 2024, two coffee bakery stores and eight bakery stores were opened. We currently plan to open another five stores, with a total budget of approximately RMB2.5 million (approximately $0.4 million) during the remainder of fiscal year 2024. We plan to use our cash on hand, cash flows from operations and equity financing from outside investors to fund the new stores.

 

As of June 30, 2024, we had a negative working capital of approximately $2.5 million, including deferred revenue of approximately $7.3 million, which was reported as current liability, but will not require cash payment in the future. We expect to spend about $2.9 million when we produce and sell the products and realize the deferred revenue.

 

In assessing our liquidity, our management monitors and analyzes our cash on hand, the proceeds we received from our IPO, our ability to generate sufficient revenue sources in the future, and our operating and capital expenditure commitments. As of June 30, 2024, we had cash and cash equivalents of approximately $4.1 million. The future capital expenditure on the central factory construction is expected to be approximately $37.8 thousand and $0.2 million in the remainder of fiscal year 2024 and fiscal year 2025, respectively. We believe that we would be able to make additional borrowings from banks based on past experience and our good credit history when necessary. In addition, we will further implement initiatives to control costs and improve our operating efficiency in fiscal year 2024. Therefore, revenue and net income are expected to increase in second half of fiscal year 2024 as compared to the same period of last year. Furthermore, our controlling shareholder, Mr. Gang Li, has made pledges to provide continuous financial support to our Company for at least 12 months from the issuance of our unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2024. In order to fully implement its business plan and sustain continued growth, the Company may also seek equity financing from outside investors when necessary. We believe our cash and cash equivalents on hand, our operating cash flows, the available bank facilities, the continuous support from our shareholder, the proceeds we received from the IPO and equity financing will be sufficient to meet our working capital needs over the next 12 months.

 

Currently, our main operations are conducted in China and a large portion of our revenue, expenses, cash and cash equivalents are denominated in RMB. Our holding company, however, may need dividends and other distributions on equity from our PRC subsidiary and the VIEs to satisfy its liquidity requirements. Although dividends may be freely remitted in or out of China in RMB or foreign currency according to the PRC regulations, our PRC subsidiary and the VIEs are restricted in their ability to transfer a portion of their net assets, equivalent to their reserves and their share capital, to the holding company in the form of loans, advances, or cash dividends. As of June 30, 2024 and December 31, 2023, the total restricted net assets equivalent amounted to $1,325,631 and $1,325,631, respectively.

 

13

 

 

Cash Flows for the Six Months Ended June 30, 2024 and 2023

 

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

 

   For the Six Months Ended
June 30,
 
   2024   2023 
Net cash provided by operating activities  $806,144   $610,154 
Net cash provided by (used in) investing activities   1,396,957    (11,252,022)
Net cash provided by financing activities   365,797    9,656,029 
Effect of exchange rate change on cash   57,630    (457,647)
Net increase (decrease) in cash and cash equivalents   2,626,528    (1,443,486)
Cash and cash equivalents at beginning of period   1,481,302    2,915,470 
Cash and cash equivalents at end of period  $4,107,830   $1,471,984 

 

Operating Activities

 

Net cash provided by operating activities was $806,144 for the six months ended June 30, 2024, mainly derived from net income of $23,412 for the period, and net changes in our operating assets and liabilities, which mainly included (i) a decrease in prepaid expenses and other current assets of $286,121 due to the decreased other receivable from a third party for using Chanson Greenwich’s store for events; (ii) an increase in accounts payable of $213,875 due to higher outstanding payments to suppliers; and (iii) an increase in deferred revenue of $299,816 due to the growing prepaid membership cards sales during the six months ended June 30, 2024.

 

Net cash provided by operating activities was $610,154 for the six months ended June 30, 2023, mainly derived from net income of $284,760 for the period, and net changes in our operating assets and liabilities, which mainly included (i) an increase in deferred revenue of $522,418 due to the growing prepaid membership cards sales; (ii) an increase in accounts receivable of $772,933 due to the increase in sales; and (iii) an increase in accounts payable of $216,032 due to higher outstanding payments to suppliers during the six months ended June 30, 2023.

 

Investing Activities

 

Net cash provided by investing activities amounted to $1,396,957 for the six months ended June 30, 2024, which primarily consisted of repayment from loans to third parties of $862,088 and repayment of interest income from long term debt investment of $534,575.

 

Net cash used in investing activities amounted to $11,252,022 for the six months ended June 30, 2023, which primarily consisted of payment made for long term debt investment of $6,000,000, payments made for loans to third parties of $3,900,000 and prepayments for the software, equipment and product development of $1,200,000.

 

Financing Activities

 

Net cash provided by financing activities was $365,797 for the six months ended June 30, 2024, which primarily consisted of proceeds from short-term bank loans of $422,095 and repayment of funds provided by a shareholder of $56,298.

 

Net cash provided by financing activities was $9,656,029 for the six months ended June 30, 2023, which primarily consisted of gross proceeds from IPO of $13,560,000, which was partially offset by costs disbursed from IPO proceeds of $1,529,631 and repayment of funds provided by a shareholder of $1,612,215.

 

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Contractual Obligations

 

As of June 30, 2024, our contractual obligations were as follows:

 

Contractual obligations  Total   Less than
1 year
   1-2 years   2-3 years   3-4 years   4-5 years   Thereafter 
Short-term bank loan (1)  $3,137,328   $3,137,328   $-   $-   $-   $-   $- 
Future lease payments (2)   15,790,012    1,488,075    2,456,025    2,216,393    2,149,220    1,971,789    5,508,510 
Central factory construction (3)   37,782    37,782    -    -    -    -    - 
Total  $18,965,122   $4,663,185   $2,456,025   $2,216,393   $2,149,220   $1,971,789   $5,508,510 

 

(1)

Repayment of short-term bank loans: as of June 30, 2024, our contractual obligation to repay the outstanding short-term bank loans totaled $3,137,328 and related to the following bank loans:

 

On September 7, 2023, Xinjiang United Family entered into a loan agreement with Bank of China to borrow RMB10.0 million ($1,403,155) as working capital for a year, with a maturity date of September 6, 2024. The loan bears a fixed interest rate of 3.55% per annum. The loan is guaranteed by the Company’s controlling shareholder Mr. Gang Li and his family member, Ms. Ying Xiong. In addition, Xinjiang United Family pledged its trademark rights as collateral to guarantee the Company’s loan from Bank of China. The loan was repaid in full upon maturity.

 

On November 15, 2023, Xinjiang United Family entered into a loan agreement with Tianshan Rural Commercial Bank to borrow RMB3.0 million ($420,946) as working capital for a year, with a maturity date of November 14, 2024. The loan bears a fixed interest rate of 5.50% per annum. The loan is guaranteed by the Company’s controlling shareholder Mr. Gang Li and his family member, Ms. Ying Xiong.

 

On December 19, 2023, Xinjiang United Family entered into another loan agreement with Tianshan Rural Commercial Bank to borrow RMB3.0 million ($420,946) as working capital for a year, with a maturity date of December 18, 2024. The loan was withdrawn on January 29, 2024 and bears a fixed interest rate of 5.50% per annum. The loan is guaranteed by the Company’s controlling shareholder Mr. Gang Li and his family member, Ms. Ying Xiong, and two third parties.

 

On December 22, 2023, Xinjiang United Family entered into a loan agreement with Huaxia Bank to borrow RMB3.0 million ($420,946) as working capital for a year, with a maturity date of December 20, 2024. The loan bears a fixed interest rate of 5.00% per annum. The loan was guaranteed by Ms. Baolin Wang, the legal representative of Xinjiang United Family, and Urumqi Plastic Surgery Hospital Co., Ltd., a related party that is controlled by Mr. Gang Li, the Chairman of the Company.

 

On December 26, 2023, Xinjiang United Family entered into a loan agreement with Xinjiang Urumqi Rural Commercial Bank to borrow RMB3.0 million ($420,946) as working capital for a year, with a maturity date of December 25, 2024. The loan bears a fixed interest rate of 5.50% per annum. The loan is guaranteed by two third parties, Mr. Xiaochen Wang and his family member. 

 

(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, 2024, our future lease payments totaled $15,790,012.

 

(3)Payment for central factory construction work: as of June 30, 2024, our contractual obligation to pay for central factory construction totaled $37,782, as discussed above in more details.

 

15

 

 

Trend Information

 

Other than as disclosed elsewhere in this report, we are not aware of any trends, uncertainties, demands, commitments, or events for the period from January 1, 2024 to June 30, 2024 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity, or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial condition.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2024 and December 31, 2023, we had not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties.

 

Inflation

 

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

 

Seasonality

 

We have not experienced, and do not expect to experience, any seasonal fluctuations in our results of operations for either our wheelchair business or living aids products business.

 

Key Factors that Affect Our Results of Operations

 

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

 

The operating entities’ business is affected by changes in consumer preferences and discretionary spending.

 

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

 

The operating entities’ revenue and growth could be adversely affected if their comparable store sales are less than expected.

 

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

  

16

 

 

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

 

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

 

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

 

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

 

If the operating entities are unable to compete successfully, their financial condition and results of operations may be harmed.

 

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

 

COVID-19 Affecting Our Results of Operations

 

In December 2019, a novel strain of coronavirus was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. The COVID-19 outbreak caused lockdowns, travel restrictions, and closures of businesses across the globe, and our business was adversely affected by COVID-19. In early December 2022, China announced a nationwide loosening of its zero-COVID policy, and the country faced a wave in infections after the lifting of these restrictions, but the spread of the COVID-19 appears to be under control currently. However, burdened by protracted property crisis, weak consumer and business confidence, mounting local government debts, and slow global growth, the post-COVID-19 economy in China has recovered at a slower pace than expected. The spending behavior of consumers have been affected by various factors, such as the economic downward pressure and lack of consumer confidence. As a result, our revenue from the PRC Stores decreased by $509,301, or 7.3% for the six months ended June 30, 2024 due to the decline in average spending per customer and the consumption downgrade. As we face many challenges from increased competition from rivals and changes in consumer behavior, we will continue to modify our business strategy and boost our revenue by opening more stores and developing more affordable products.

 

C. Critical Accounting Estimates 

 

Our discussion and analysis of our financial condition and results of operations are based upon our 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 unaudited condensed 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 and inventories, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, realization of deferred tax assets 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 report reflect the more significant judgments and estimates used in preparation of our unaudited condensed consolidated financial statements.

 

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

 

Uses of estimates

 

In preparing the 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 unaudited condensed consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the valuation of accounts receivable and inventories, useful lives of property and equipment and intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities, realization of deferred tax assets 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 credit losses, as necessary. Accounts are written off against the allowance after efforts at collection prove unsuccessful. As of June 30, 2024 and December 31, 2023, the allowance for credit losses was both $nil.

 

Credit Losses

 

On January 1, 2023, the Company adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The adoption of the credit loss accounting standard has no material impact on the Company’s unaudited condensed consolidated financial statements as of January 1, 2023.

 

The Company’s account receivables and other receivables included in prepaid expenses and other current assets on the unaudited condensed consolidated balance sheets are within the scope of ASC Topic 326. The Company makes estimates of expected credit and collectability trends for the allowance for credit losses based upon assessment of various factors, including historical experience, the age of the accounts receivable and other receivables balances, credit-worthiness of the customers and other debtors, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from the customers and other debtors. The Company also provides specific provisions for allowance when facts and circumstances indicate that the receivable is unlikely to be collected.

 

ASC Topic 326 is also applicable to short-term and long-term loans to third parties. Management estimates the allowance for credit losses on loans not sharing similar risk characteristics on an individual basis. The key factors considered when determining the above allowances for credit losses include estimated loan collection schedule, discount rate, and assets and financial performance of the borrowers.

 

Expected credit losses are recorded as allowance for credit losses on the unaudited condensed consolidated statements of operations and comprehensive income (loss). After all attempts to collect a receivable have failed, the receivable is written off against the allowance. In the event the Company recovers amounts previously reserved for, the Company will reduce the specific allowance for credit losses.

 

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Inventories

 

Inventories consist of ingredient materials, finished goods, packaging 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 six months ended June 30, 2024 and 2023, no inventory reserve was recorded because no slow-moving, obsolete, or damaged inventory was identified.

 

Revenue recognition

 

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

 

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

  

The PRC Stores sell membership cards that do not have an expiration date and from which the PRC Stores do not deduct non-usage fees from outstanding card balances. Membership cards are reloadable and redeemable at any of our store locations. Amounts loaded into these cards are initially recorded as deferred revenue. When membership cards are redeemed at stores, the PRC Stores recognize revenue and reduce the deferred revenue. While the PRC Stores continue to honor all membership cards presented for payments, management determines the likelihood of redemption to be remote for certain cards with long periods of inactivity (“breakage”), which is five years after the last usage based upon our historical redemption patterns. Membership card breakage is recorded as revenue in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Membership card breakage was immaterial for the six months ended June 30, 2024 and 2023.

 

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

 

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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 June 30, 2024 and December 31, 2023. Our contract liabilities, which are reflected in its unaudited condensed consolidated balance sheets as deferred revenue of $7,338,357 and $7,085,696 as of June 30, 2024 and December 31, 2023, respectively, consist primarily of customer payments for the membership cards and the fair value of the cash vouchers under our customer loyalty programs. These amounts represent our unsatisfied performance obligations as of the balance sheet dates. The amount of revenue recognized in the six months ended June 30, 2024 and 2023 that was included in the opening deferred revenue was $3,505,674 and $3,945,400, respectively. As of June 30, 2024, the aggregate amount of unredeemed membership cards and cash vouchers was $7,338,357. We will recognize revenue when customers redeem the membership cards or cash vouchers in store purchases. Based on our historical experience, a significant portion of the redemption is expected to occur during the first two years after June 30, 2024 and the remaining between the third and fifth year.

 

Income taxes

 

We account for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the unaudited condensed 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 six months ended June 30, 2024 and 2023. We do not believe there was any uncertain tax provision at June 30, 2024 and December 31, 2023.

 

Our operating subsidiary in China is subject to the income tax laws of the PRC. Our operating subsidiaries in United States are subject to the tax law of the United States. As of June 30, 2024, the tax years ended December 31, 2019 through December 31, 2023 for our PRC subsidiary remain open for statutory examination by PRC tax authorities, and the tax years ended December 31, 2021 through December 31, 2023 for our United States subsidiaries remain open for statutory examination by U.S. tax authorities.

 

Recent accounting pronouncements

 

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures.” This ASU expands required public entities’ segment disclosures, including disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items and interim disclosures of a reportable segment’s profit or loss and assets. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We adopted this guidance on January 1, 2024 and the adoption of this ASU did not have a material impact on our financial statements.

 

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. This ASU requires additional quantitative and qualitative income tax disclosures to enable financial statements users better assess how an entity’s operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. This ASU is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. We plan to adopt this guidance effective January 1, 2025 and the adoption of this ASU is not expected to 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 unaudited condensed consolidated financial position, statements of operations, and cash flows.

 

 

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Exhibit 99.3

 

Chanson International Holding Announces First Half of Fiscal Year 2024 Financial Results

 

URUMQI, China, Sep. 27, 2024 /PRNewswire/ -- Chanson International Holding (Nasdaq: CHSN) (the “Company” or “Chanson”), a provider of bakery, seasonal, and beverage products through its chain stores in China and the United States, today announced its unaudited financial results for the six months ended June 30, 2024.

 

Mr. Gang Li, Chairman of the Board of Directors and Chief Executive Officer of the Company, commented, “In the first half of fiscal year 2024, despite facing various challenges, we have shown resilience and adaptability in a dynamic market. While we experienced a slight decline in revenue, we have successfully maintained our gross margins at above 40%, by enforcing cost control measures and enhancing operating efficiency. Additionally, with an increased cash reserve as of June 30, 2024, we are in a solid position to manage market uncertainties. As we move forward, we remain confident in our long-term growth strategy and execution capabilities. Our expansion initiatives in both the United States and China are expected to remain a key focus of our growth. We aim to drive revenue by attracting new customers and encouraging repeat business from existing ones. Specifically, this is expected to be achieved by strengthening opportunistic purchasing, optimizing inventory management, maintaining strong store conditions, and effectively marketing both current and new product offerings. We believe that with all those efforts in place, we will navigate short-term headwinds and return to long-term growth in the near future.”

 

First Half of Fiscal Year 2024 Financial Summary

 

Total revenue was $7.5 million, compared to $8.8 million for the same period of last year.

 

Gross profit was $3.1 million, compared to $4.3 million for the same period of last year.

 

Gross margin was 41.5%, compared to 49.2% for the same period of last year.

 

Net income was $0.02 million, compared to $0.3 million for the same period of last year.

 

Basic and diluted earnings per share were $0.002, compared to $0.027 for the same period of last year.

 

 

 

First Half of Fiscal Year 2024 Financial Results

 

Revenue

 

Total revenue was $7.5 million for the six months ended June 30, 2024, which decreased by 14.4%, from $8.8 million for the same period of last year. The decrease in revenue was due to decreased revenue from both the stores in China (the “China Stores”) and the stores in the United States (the “United States Stores”).

 

China Stores

 

Revenue from the China Stores was $6.5 million for the six months ended June 30, 2024, which decreased by or 7.3%, from $7.0 million for the same period of last year. The decrease was mainly due to the decreased revenue from bakery products as well as from other products.
   
Revenue from bakery products was $5.9 million for the six months ended June 30, 2024, which decreased by 7.3%, from $6.4 million for the same period of last year. The post-COVID-19 economy in China has recovered at a slower pace than expected, and the spending behavior of consumers has been affected by various factors, such as the economic downward pressure and lack of consumer confidence. As a result, revenue from bakery products decreased due to the decline in average spending per customer and the consumption downgrade during the six months ended June 30, 2024.
   
Revenue from other products was $0.58 million for the six months ended June 30, 2024, which decreased by 7.0%, from $0.62 million for the same period of last year. The decrease was mainly due to decreased revenue from seasonal products, which was partially offset by increased revenue from beverage products. Revenue from seasonal products was $0.36 million for the six months ended June 30, 2024, which decreased by 16.4% from $0.44 million for the same period of last year. The decrease was due to the consumption downgrade as mentioned above. The average spending per customer declined because customers preferred lower-priced seasonal products during the six months ended June 30, 2024. Revenue from beverage products was $0.22 million for the six months ended June 30, 2024, an increase by 14.8% from $0.19 million for the same period of last year, mainly due to increased revenue from freshly brewed coffee products, as the China Stores are focusing on expanding the business of coffee beverages and more coffee bakery stores were opened in the six months ended June 30, 2024.

 

United States Stores

 

Revenue from the U.S. Stores was $1.0 million for the six months ended June 30, 2024, which decreased by 42.2% from $1.8 million for the same period of last year. The decrease was mainly due to decreased revenue from beverage products and eat-in services, which was partially offset by the slightly increased revenue from bakery products.
   
Revenue from bakery products remained relatively stable at $0.24 million for the six months ended June 30, 2024, with a slight increase by 2.6% from $0.23 million for the same period of last year. The increase was due to the increased revenue from bakery products of approximately $0.1 million, generated by Chanson 3rd Ave and Chanson Broadway. The increase in revenue from bakery products was partially offset by the decreased revenue from Chanson Greenwich of approximately $0.09 million. Many famous bakery brands have opened new stores in New York City, customers now have more choices and revenue from bakery products of Chanson 23rd Street and Chanson Greenwich were affected. With the increased competition, Chanson Greenwich closed its business operation in the second half of fiscal year 2023.

 

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Revenue from beverage products was $0.6 million for the six months ended June 30, 2024, which decreased by 37.2% from $1.0 million for the same period of last year, primarily due to the closure of Chanson Greenwich as mentioned above. The decrease was also attributable to increased competition from rivals operating in the same area. After the cocktail bars of the United States Stores launched several new types of cocktail products with new flavors and styles, such products became popular among customers and the cocktail bars were often fully booked by reservation. However, the rivals operating in the same area also launched many types of attractive cocktail products, so customers currently have more choices, and revenue from beverage products were adversely affected during the six months ended June 30, 2024.
   
Revenue from eat-in services was $0.2 million for the six months ended June 30, 2024, which decreased by 69.7% from $0.6 million for the same period of last year. The decrease was mainly due to the decreased revenue from Chanson Greenwich of approximately $0.4 million as a result of the closure of its business as mentioned above. Moreover, the decrease was due to the slightly decreased revenue from Chanson 23rd Street of approximately $0.01 million, as Chanson 23rd Street adjusted its menu items and customers were adjusting to the new products. The decrease in revenue from eat-in services was partially offset by increased revenue from eat-in services of approximately $0.02 million, generated by Chanson 3rd Ave and Chanson Broadway.

 

Gross Profit and Gross Margin

 

Gross profit was $3.1 million for the six months ended June 30, 2024, which decreased by 27.8% from $4.3 million for the same period of last year. Gross margin was 41.5% for the six months ended June 30, 2024, which decreased by 7.7% points from 49.2% for the same period of last year.

 

Operating Expenses

 

Operating expenses were $3.7 million for the six months ended June 30, 2024, compared to $4.2 million for the same period of last year.

 

Selling expenses were $2.2 million for the six months ended June 30, 2024, which decreased by 8.7%, from $2.4 million for the same period of last year. The decrease was mainly due to decreased selling expenses of approximately $0.2 million incurred by Chanson Greenwich, as Chanson Greenwich was closed in the second half of fiscal year 2023. The decrease in selling expenses was partially offset by increased selling expenses of approximately $0.07 million generated by the Chanson 3rd Ave and Chanson Broadway, the new stores opened in March 2023 and July 2023, respectively.

 

General and administrative expenses were $1.5 million for the six months ended June 30, 2024, which decreased by 17.9% from $1.8 million for the same period of last year. The decrease was primarily due to the closure of Chanson Greenwich as mentioned above.

 

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Net Income

 

Net income was $0.02 million for the six months ended June 30, 2024, compared to $0.28 million for the same period of last year.

 

Basic and Diluted Earnings per Share

 

Basic and diluted earnings per share were $0.002 for the six months ended June 30, 2024, compared to $0.027 for the same period of last year.

 

Balance Sheet

 

As of June 30, 2024, the Company had cash of $4.1 million, compared to $1.5 million as of December 31, 2023.

 

Cash Flow

 

Net cash provided by operating activities was $0.8 million for the six months ended June 30, 2024, compared to $0.6 million for the same period of last year.

 

Net cash provided by investing activities was $1.4 million for the six months ended June 30, 2024, compared to net cash used in $11.3 million for the same period of last year.

 

Net cash provided by financing activities was $0.4 million for the six months ended June 30, 2024, compared to $9.7 million for the same period of last year.

 

About Chanson International Holding

 

Founded in 2009, Chanson International Holding is a provider of bakery, seasonal, and beverage products through its chain stores in China and the United States. Headquartered in Urumqi, China, Chanson directly operates stores in Xinjiang, China and New York, United States. Chanson currently manages 46 stores in China, and three stores in New York City while selling on digital platforms and third-party online food ordering platforms. Chanson offers not only packaged bakery products but also made-in-store pastries and eat-in services, serving freshly prepared bakery products and extensive beverage products. Chanson aims to make healthy, nutritious, and ready-to-eat food through advanced facilities based on in-depth industry research, while creating a comfortable and distinguishable store environment for customers. Chanson’s dedicated and highly-experienced product development teams constantly create new products that reflect market trends to meet customer demand. For more information, please visit the Company’s website: http://ir.chanson-international.net/.

 

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Forward-Looking Statements

 

Certain statements in this announcement are forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and are based on the Company’s current expectations and projections about future events that the Company believes may affect its financial condition, results of operations, business strategy and financial needs. Investors 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. The Company undertakes no obligation to update or revise publicly any forward-looking statements to reflect subsequent occurring events or circumstances, or changes in its expectations, except as may be required by law. Although the Company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that such expectations will turn out to be correct, and the Company cautions investors that actual results may differ materially from the anticipated results and encourages investors to review other factors that may affect its future results in the Company’s registration statement and other filings with the U.S. Securities and Exchange Commission.

 

For investor and media inquiries, please contact:

 

Chanson International Holding

Investor Relations Department
Email: IR@chansoninternational.com

 

Ascent Investor Relations LLC
Tina Xiao
Phone: +1-646-932-7242
Email: investors@ascent-ir.com

 

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CHANSON INTERNATIONAL HOLDING AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

      December 31, 
   June 30,
2024
   2023
(Audited)
 
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents  $4,107,830   $1,481,302 
Accounts receivable   2,022,587    1,995,067 
Inventories   785,327    723,905 
Long term loan to a third-party, current   1,999,507    - 
Prepaid expenses and other current assets   4,287,721    5,134,173 
     13,202,972     9,334,447 
           
NON-CURRENT ASSETS:          
Operating lease right-of-use assets   12,922,888    13,059,561 
Property and equipment, net   5,006,112    5,462,063 
Intangible assets, net   140,625    150,000 
Long term security deposits   843,793    894,715 
Prepayment for the software, equipment and product development   140,000    790,000 
Long term debt investment   6,359,014    6,534,575 
Long term loan to a third-party   -    2,066,822 
Long term prepaid expenses   108,313    142,113 
     25,520,745     29,099,849 
             
TOTAL ASSETS  $38,723,717   $38,434,296 
           
LIABILITIES          
CURRENT LIABILITIES:          
Short-term bank loans  $3,086,939   $2,683,692 
Accounts payable   2,120,980    1,919,189 
Due to a related party   46,675    48,042 
Taxes payable   77,015    96,176 
Deferred revenue   7,338,357    7,085,696