Revenue and Financial Performance - UFG's revenue accounted for 62%, 54%, and 39% of total revenue for the years ended December 31, 2024, 2023, and 2022, respectively[39]. - For the year ended December 31, 2024, consolidated total revenue reached 17,252,662 in 2023, representing a growth of approximately 5.6%[66]. - The cost of revenue for 2024 was 9,105,337 in 2023, indicating an increase of about 21.1%[66]. - Net income for 2024 was reported at 629,740 in 2023[66]. - Income from VIEs for 2024 amounted to 1,765,358 in 2023, reflecting a growth of approximately 16.7%[66]. - Comprehensive income for 2024 was 97,190 in 2023[66]. - The company has not distributed any earnings or settled amounts owed under the VIE Agreements as of the date of the annual report[55]. VIE Structure and Agreements - Xinjiang United Family controls 52 VIEs through VIE Agreements, consolidating their financial results under U.S. GAAP[38]. - The VIE structure provides contractual exposure to foreign investment in China-based companies, presenting unique risks to investors[27]. - The VIE Agreements allow the company to consolidate the financial results of the VIEs in its financial statements under U.S. GAAP[53]. - The Exclusive Service Agreement allows Xinjiang United Family to collect a service fee equal to the net profit after tax of each UFG Entity[40]. - The term of the Exclusive Service Agreement is 10 years, with automatic renewal unless terminated by Xinjiang United Family[41]. - Under the Call Option Agreement, Xinjiang United Family has the exclusive option to require the UFG Operator to transfer all or part of its assets in the UFG Entity at any time[46]. - The company’s ability to pay dividends in the future will depend on receiving funds from its PRC subsidiary and VIEs in accordance with the VIE Agreements[61]. Risks and Regulatory Environment - The company is subject to risks related to the VIE structure, including potential changes in PRC laws that could affect the validity and enforcement of the VIE Agreements[54]. - The PRC government has implemented measures that could affect the company's operations, including potential changes in tax regulations and capital investment controls[91]. - The amended PRC Company Law, effective July 1, 2024, introduces stricter capital contribution requirements, which may impact the company's financial obligations[93]. - The company's reliance on transfer pricing arrangements with UFG may lead to adverse tax consequences if deemed non-compliant by PRC tax authorities[81]. - The Chinese government has significant oversight and discretion over the operations of the company's PRC subsidiary and VIEs, which may lead to material changes in operations or the value of Class A Ordinary Shares[97]. - Future government actions could limit the company's ability to offer securities to investors, potentially leading to a significant decline in the value of such securities[101]. Operational Challenges - The company has expanded its store network significantly, with multiple locations under the UFG brand[31]. - The operating entities compete in a highly competitive market, with pressure from both existing and new competitors affecting pricing and market share[152]. - The COVID-19 pandemic has adversely impacted the company's financial condition and operations due to government-imposed restrictions and store closures[154]. - The PRC Stores and the U.S. Stores experienced significant operational disruptions due to COVID-19, with all PRC Stores and the central factory closed from October 5, 2022, to November 30, 2022[155]. - The operating entities rely on a limited number of third-party producers, and disruptions in their operations could delay product delivery and harm financial results[166]. Financial Position and Cash Flow - Total assets as of December 31, 2024, were 23,603,182 in 2023, showing a substantial increase of about 76.8%[68]. - Total liabilities for 2024 were 25,669,681 in 2023, indicating a reduction of approximately 9.0%[68]. - Cash and cash equivalents as of December 31, 2024, totaled 17,653,086 in 2023, reflecting a decrease of about 31.4%[68]. - The company reported a net cash used in operating activities of $(1,345,862) for the year ended December 31, 2022, highlighting a trend of cash outflows[70]. - The company relies on dividend payments from its PRC subsidiary to meet cash and financing requirements, with current regulations allowing dividends only from accumulated profits[142]. Corporate Governance and Shareholder Structure - Mr. Gang Li, the Chairman, holds approximately 93.80% of the voting rights due to the dual-class structure, owning 2,700,000 Class A Ordinary Shares (12.48%) and 5,670,000 Class B Ordinary Shares (100%)[218]. - The company is classified as a "controlled company" under Nasdaq rules, which may allow it to follow exemptions from certain corporate governance requirements[220]. - The dual-class structure may lead to negative commentary from shareholder advisory firms, potentially affecting the value of Class A Ordinary Shares[219]. - Future issuances of Class B Ordinary Shares may dilute the holdings of Class A Ordinary Shareholders, adversely affecting their market price[218]. Compliance and Legal Risks - The company has identified a material weakness in internal control over financial reporting, which could affect the accuracy of financial statements and investor confidence[216]. - The company may face securities litigation due to market volatility, which could divert resources and adversely affect its business[226]. - The company faces uncertainties regarding indirect transfers of equity interests in PRC resident enterprises by non-PRC holding companies, which may lead to tax obligations[137]. - The company cannot assure timely completion of necessary registrations or government approvals for future loans or capital contributions to its PRC subsidiary, potentially affecting liquidity and business expansion[130].
Chanson International (CHSN) - 2024 Q4 - Annual Report