Nisun(NISN) - 2024 Q4 - Annual Report

General Information & Corporate Structure Nisun International operates as a BVI holding company, conducting primary operations in China through VIEs due to foreign investment restrictions Corporate Structure and VIE Arrangements Nisun International operates in China via VIEs controlled by contractual arrangements, not direct equity, posing risks due to PRC law interpretation - Nisun International is a BVI holding company, not a direct PRC operating company. Its operations are conducted through PRC subsidiaries and Variable Interest Entities (VIEs) due to PRC laws restricting foreign investment in businesses like internet and value-added telecommunication services[32] - The company relies on a series of contractual arrangements (equity interest holder voting rights proxy agreements, exclusive equity purchase option agreements, service agreements, and equity interest pledge agreements) to exercise effective control over its VIEs and consolidate their financial results under U.S. GAAP[34][35] - Investors in Nisun's common shares are acquiring an interest in a BVI holding company and do not hold direct equity in the PRC-based consolidated affiliated entities. This structure carries risks related to the enforceability of the contractual arrangements and potential adverse actions from the PRC government[32][36] Business Overview Nisun International transitioned from equipment manufacturing to integrated financial and supply chain services in China Company History and Development The company rebranded to Nisun International in 2020, shifting from equipment manufacturing to financial services, and executed a reverse stock split in 2023 - The company changed its name from "Hebron Technology Co., Ltd." to "Nisun International Enterprise Development Group Co., Ltd" in November 2020, reflecting its strategic shift to a core financial services business[225] - In November 2020, the company completed the disposition of its legacy equipment and engineering business (Xibolun Group) to streamline operations and focus on its new financial and supply chain services[227][228] - A one-for-ten reverse stock split was effected on May 18, 2023, to regain compliance with NASDAQ's minimum bid price requirement[236] Business Operations and Strategy Nisun International provides technology-driven SME and supply chain financing and trading solutions, focusing on ecosystem expansion and fintech innovation - The company's core business segments are SME Financing Solutions, Supply Chain Financing Solutions, and Supply Chain Trading, aiming to integrate supply chain management with financial services[237][251][255][258] Revenue Breakdown by Activity (FY2024) | Activity | Revenue % | | :--- | :--- | | SME Financing Solutions | 25% | | Supply Chain Solutions | 2% | | Supply Chain Trading | 73% | - Key strategies include expanding the scale of its financing and trading ecosystems, focusing on industry segmentation, deepening relationships with Government-Owned Enterprises (GOEs), driving innovation in financial technologies, and pursuing strategic acquisitions[245] Organizational Structure Nisun International, a BVI holding company, controls PRC operations through offshore and PRC subsidiaries, primarily via VIEs under contractual arrangements - The company is a BVI holding company that controls its PRC operations through a network of subsidiaries and VIEs[376] - The organizational chart illustrates a multi-layered structure where Nisun International controls PRC-based Wholly Foreign-Owned Enterprises (WFOEs) through intermediate holding companies, and these WFOEs in turn control the operating VIEs via contractual agreements[377] Financial Performance and Operating Review The company's FY2024 financial performance saw revenue and net income declines, alongside increased operating expenses and reduced liquidity Selected Financial Data The company's FY2024 consolidated financials show $340.2 million in revenue, $5.9 million net income, and $271.4 million in total assets Consolidated Balance Sheet Highlights (As of Dec 31, 2024) | Metric | Amount (USD) | | :--- | :--- | | Total Current Assets | $251,329,247 | | Total Assets | $271,421,286 | | Total Liabilities | $60,292,176 | | Total Shareholders' Equity | $211,129,110 | Consolidated Operations Highlights (FY 2024) | Metric | Amount (USD) | | :--- | :--- | | Total Revenue | $340,219,546 | | Gross Profit | $30,912,021 | | Net Income | $5,899,791 | | Net Income attributable to Nisun shareholders | $5,787,416 | Management's Discussion and Analysis of Financial Condition and Results of Operations FY2024 revenue decreased 12% to $340.2 million, net income fell 67% to $5.9 million, and operating expenses rose 29% due to non-cash and bad debt expenses FY2024 vs FY2023 Financial Highlights | Metric | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $340.2M | $386.7M | (12)% | | Gross Profit | $30.9M | $39.9M | (23)% | | Income from Operations | $3.6M | $18.8M | (81)% | | Net Income | $5.9M | $17.7M | (67)% | - The 12% revenue decrease in FY2024 was driven by a 17% drop in SME financing solutions and a 10% drop in supply chain trading, attributed to a broader economic slowdown in China and a more cautious approach from investors and SMEs[388][389][391] - Operating expenses rose 29% in FY2024, mainly due to a $9.2 million non-cash expense for employee equity incentive plan grants. Bad debt expenses also increased 127% to $5.0 million, primarily from provisions for long-outstanding advances for goods[400][402][405] Liquidity and Capital Resources Cash and equivalents decreased to $45.0 million by year-end 2024 due to operating cash outflow, with dividend payments restricted by PRC regulations - Cash and equivalents decreased from $114.7 million at year-end 2023 to $45.0 million at year-end 2024. The decline was primarily due to a $75.7 million net cash outflow from operating activities[412][418][419] - The company's ability to pay dividends is limited by PRC laws requiring subsidiaries to set aside at least 10% of after-tax profits for a statutory reserve until it reaches 50% of registered capital. As of Dec 31, 2024, these restricted net assets totaled $78.4 million[432][827][828] - The company has not declared or paid any cash dividends and intends to retain future earnings for business expansion[416][504] Risk Factors The company faces significant risks from its limited operating history, customer concentration, capital-intensive operations, and complex PRC regulatory environment Business and Industry Risks The company faces risks from its limited operating history in evolving industries, intense competition, customer concentration, and capital-intensive operations - The company has a limited operating history in the rapidly evolving supply chain and financial services industries, facing uncertainties from changing financial technologies and industry practices[77][81] - Customer concentration is a key risk. In FY2024, four customers accounted for a combined 70% of the financial services business revenue, and two customers accounted for a combined 36% of the supply chain trading business revenue[109][265] - The supply chain financing solutions services are capital-intensive. An inability to maintain the necessary level of capital and funding sources to support these services would harm the business[111] Risks of Doing Business in China Operations in China expose the company to evolving legal frameworks, government intervention, data security scrutiny, and potential delisting risks under HFCAA - The PRC government has significant oversight and may intervene in the company's operations or exert more control over overseas offerings, which could result in a material adverse change in operations and cause the value of its securities to decline or become worthless[140] - The Holding Foreign Companies Accountable Act (HFCAA) could lead to trading prohibitions on U.S. exchanges if the PCAOB is unable to inspect the company's auditors for two consecutive years. The company's current auditor, Enrome LLP, is based in Singapore and is not currently subject to this restriction[48][157][158] - PRC regulations on foreign exchange control may limit the ability of the company's PRC subsidiaries to make dividend payments and other distributions to the offshore parent company, potentially affecting its ability to fund operations and meet financing requirements[160][183] Corporate Structure Risks (VIE) Reliance on VIE contractual arrangements poses risks due to uncertain PRC law interpretation, potential non-compliance penalties, and conflicts of interest with VIE shareholders - The company's VIE structure is subject to uncertainties regarding the interpretation and implementation of the PRC Foreign Investment Law, which could potentially classify the contractual arrangements as a form of foreign investment and lead to non-compliance issues[195] - If the PRC government finds that the contractual arrangements do not comply with PRC laws, the company could face severe penalties, including fines, revocation of business licenses, or being forced to restructure or relinquish its interests in the VIEs[196][199] - The company's control over its VIEs depends on the performance of contractual obligations by the VIEs and their shareholders, who may have potential conflicts of interest that could adversely affect the business[200][202] Governance and Management The company's governance structure includes a board with independent directors and staggered terms, with executive compensation tied to equity awards Directors and Senior Management The company's board comprises seven members, including four independent directors, with staggered terms designed to promote stability - Key executives include Jinbao Li (Chairman of the Board), Xin Liu (Chief Executive Officer and Director), and Changjuan Liang (Chief Financial Officer)[439] - The Board of Directors consists of seven members, with a majority of four independent directors: Christian DeAngelis, Jing Li, Sheng Tang, and Haiying Xiang[450] - The board is divided into three staggered classes with terms expiring in 2025, 2026, and 2027, which may reduce the possibility of a tender offer or an attempt at a change in control[216][451] Compensation Executive compensation includes base salary and equity awards, with a clawback policy implemented for financial restatements 2024 Executive Compensation | Name and Principal Position | Fiscal Year | Salary ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Xin Liu, Chief Executive Officer | 2024 | 83,383 | 2,734,200 | 2,817,583 | | Jinbao Li, Chairman of the Board | 2024 | 83,383 | 1,822,800 | 1,906,183 | | Changjuan Liang, Chief Financial Officer | 2024 | 72,087 | - | 72,087 | - On September 12, 2024, the company granted stock awards totaling 700,000 Class A common shares to six officers and employees under its 2022 Equity Incentive Plan[480] - The company adopted a compensation clawback policy in November 2023, allowing it to recoup erroneously awarded incentive-based compensation from executives in the event of an accounting restatement[481] Major Shareholders and Related Party Transactions NiSun International Enterprise Management Group is the largest shareholder, with significant related party transactions subject to Audit Committee approval - The largest shareholder is NiSun International Enterprise Management Group Co., Ltd (a Cayman company indirectly owned by Mr. Bodang Liu), holding 777,840 shares, which constitutes 16.21% of the company's outstanding shares[488][491] - Chairman of the Board, Jinbao Li, beneficially owns 296,272 shares, representing a 6.17% ownership stake[488][491] - The company engages in related party transactions, including renting an office to Nisun Agricultural, an affiliate. This arrangement generated $229,494 in rental income for the company in FY2024[493][494][817] Regulatory and Compliance The company navigates complex PRC regulations on foreign investment, data security, and overseas listings, impacting its operational and financial flexibility PRC Regulations PRC regulations on foreign investment, telecommunications, data security, and overseas listings significantly impact the company's VIE structure and operations - Foreign investment is regulated by the "Special Administrative Measures for Foreign Investment Access (Negative List)", which restricts foreign ownership in value-added telecommunications services (with some exceptions) to 50%, a key reason for the company's use of a VIE structure[293][301] - The company is subject to China's data security legal framework, including the Cybersecurity Law, the Data Security Law, and the Personal Information Protection Law. These laws impose strict obligations on data collection, storage, and cross-border transfer, and may require a cybersecurity review for overseas listings[313][322][324][335] - The CSRC's Trial Measures for overseas listings, effective March 31, 2023, require PRC-based companies to complete a filing procedure with the CSRC for both initial and subsequent overseas securities offerings[44][354] Internal Controls and Procedures Management identified material weaknesses in internal controls due to inadequate accounting personnel and delayed SEC filings, with remediation efforts underway - Management identified two material weaknesses as of December 31, 2024: (1) inadequate internal accounting personnel with sufficient knowledge of U.S. GAAP and SEC reporting standards, and (2) the failure to file the annual report on Form 20-F for the year ended December 31, 2023, on time[582] - Due to these material weaknesses, the CEO and CFO concluded that the company's disclosure controls and procedures were ineffective as of the end of the fiscal year[580] - Remediation plans are underway and include establishing a dedicated financial reporting team and implementing a formal training program for accounting personnel on U.S. GAAP and SEC requirements[581][591] Auditor Information The company has undergone recent auditor changes, appointing Enrome LLP in June 2024, with audit fees detailed for fiscal years 2023 and 2024 - The company has changed its independent registered public accounting firm twice in a short period, dismissing Wei, Wei & Co., LLP on October 12, 2023, and then dismissing its successor, Yu Certified Public Accountant PC, on June 1, 2024, appointing Enrome LLP on the same day[601][603] Audit Fees | Firm | Fiscal Year | Fees ($) | | :--- | :--- | :--- | | Enrome LLP | 2024 | 470,000 | | Enrome LLP | 2023 | 330,000 | | Yu CPA PC | 2023 | 480,000 | Cybersecurity The company maintains a board-overseen cybersecurity framework with internal management and no material incidents reported to date - The Board of Directors has ultimate oversight responsibility for cybersecurity risks, while the management team, led by the CEO and CFO, is responsible for assessing, identifying, and managing these risks[614] - The company has developed a cybersecurity threat defense system and has not engaged third parties for its risk assessment processes. It relies on internal monitoring, procedural protocols, and employee training[612][613] - As of the date of the report, the company has not experienced any material cybersecurity incidents or identified any threats that are reasonably likely to materially affect its business, operations, or financial condition[613][615]