Chanson International Holding — FY2023 Form 20-F
Reporting period: Fiscal year ended December 31, 2023; filed April 30, 2024. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context
Chanson operates bakery and café stores in Xinjiang, China, and New York City. At year-end it reported 37 PRC Stores and three U.S. Stores; the Greenwich location closed in October 2023. The Cayman Islands parent is a holding company and consolidates 32 PRC individually owned businesses through contractual VIE arrangements, rather than direct equity ownership. The VIEs generated 54% of consolidated revenue in 2023.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $17.25 million | $13.27 million |
| Gross profit / gross margin | $8.15 million / 47.2% | $6.10 million / 46.0% |
| Operating loss | $(0.61) million | $(1.44) million |
| Net income (loss) | $33,588 | $(1.29) million |
| Operating cash flow | $(2.95) million | $0.55 million |
| Cash and cash equivalents at year-end | $1.48 million | $2.92 million |
- Revenue rose 30.0%. China revenue increased 50.8% to $14.31 million as stores recovered from 2022 COVID-related closures; U.S. revenue fell 22.3% to $2.94 million amid stronger competition and the Greenwich closure.
- Comparable-store sales increased 48.7% in China and decreased 29.2% in the U.S. The company attributed the U.S. decline mainly to local competition.
- Gross margin improved 1.2 percentage points overall. China gross margin increased to 49.7%, while U.S. gross margin fell to 35.0% from 44.8%, affected by new-store fixed costs, promotions, inventory spoilage, and higher input costs.
- Operating expenses were $8.76 million, up from $7.54 million. The company remained loss-making at the operating level; net income included $763,505 of total other income, including $534,575 of interest income from a long-term debt investment.
- Net loss attributable to the U.S. and others segment was $1.68 million; China segment net income was $1.72 million.
Financial position, cash flow, and liquidity
- Investing activities used $10.46 million, principally including a $6.0 million five-year investment arrangement with Worthy Credit, $3.9 million in advances of loans to third parties, and spending on software, equipment, product development, and property and equipment. Financing activities provided $12.06 million, largely from the IPO and short-term bank borrowing.
- Short-term bank loans on the balance sheet were $2.68 million, versus $2.78 million shown in the contractual-obligations schedule; the filing does not reconcile the difference clearly. The loans were generally due within one year and included rates of 3.55% to 5.50%. Operating lease liabilities totaled $13.89 million; undiscounted future lease payments were $16.52 million.
- Working capital was negative approximately $5.4 million, including $7.09 million of deferred revenue from prepaid membership cards and vouchers. Management notes that this deferred revenue does not require a cash refund, but expects about $2.8 million of costs as products are produced and sold.
- Accounts receivable were $2.00 million; the company said approximately $0.4 million had been collected after year-end and expected the remaining balance to be collected by December 31, 2024. Prepaid expenses and other current assets rose to $5.13 million, including $2.23 million in supplier advances and loans to third parties.
- The company reported total assets of $38.43 million, total liabilities of $26.42 million, and shareholders’ equity of $12.01 million. It declared no dividends and does not expect to pay them in the foreseeable future.
Changes, outlook, risks, and unusual items
- Outlook: Management expects FY2024 revenue and net income to increase significantly versus FY2023, citing recovery, planned cost controls, and improved operating efficiency. It planned four additional PRC stores in FY2024 and six additional U.S. stores by FY2026. These are expectations, not guaranteed guidance.
- Liquidity assessment: Management believes resources will cover needs for at least 12 months from issuance of the financial statements, relying on operating cash flow, bank facilities, IPO proceeds, and financial support pledged by the controlling shareholder. The company had $1.48 million of cash and negative working capital at year-end.
- Unusual investment and lending: The $6.0 million Worthy Credit arrangement promises a 12% annual return over five years; the company recorded $534,575 of related interest income in 2023. It also lent $2.0 million to Liberty Asset Management at 4.5% for two years and made short-term, non-interest-bearing loans to other parties. These exposures warrant scrutiny given the operating cash outflow and low year-end cash balance.
- Store closure and impairment: Chanson Greenwich permanently closed October 31, 2023. The company recorded a $272,350 impairment on property and equipment associated with the closure.
- Control weakness: Management concluded internal control over financial reporting and disclosure controls were ineffective at December 31, 2023 due to insufficient in-house accounting personnel with U.S. GAAP and SEC reporting expertise. Management plans to hire qualified staff and provide training. The auditor did not attest to internal controls.
- Key risks: The VIE arrangements are untested in PRC courts and may be difficult to enforce; investors have no direct equity in the VIEs. PRC regulatory, foreign-exchange, and cash-transfer restrictions; geographic concentration; competition and input-cost inflation; food permits and employee benefit contributions; and the controlling shareholder’s influence are additional risks. Gang Li held approximately 93.61% of voting power as reported in the filing.
- Other contingencies: Two VIE entities and one PRC branch were applying to renew food business permits; some entities had operated before obtaining permits. The company disclosed inadequate social-insurance and housing-fund contributions for some PRC employees, though it had not received a payment order as of the report date. No material legal proceedings were reported. The consolidated financial statement audit opinion was unqualified.
Important facts for investors to verify
- Collection of receivables and supplier advances, and repayment and credit quality of the Worthy Credit investment and third-party loans.
- Cash conversion and the sustainability of the FY2024 profit outlook, given negative operating cash flow and the small reported net profit.
- The short-term loan balance, maturity schedule, renewals, guarantees, and the difference between reported loan balances and contractual obligations.
- U.S. store-level profitability and whether the newer locations can offset competitive pressure, discounts, and the Greenwich closure.
- Progress in remediating the material weakness in financial reporting controls.
- Renewal of PRC food permits, employee contribution exposure, and the legal enforceability and practical operation of the VIE structure.