Hongli Group Inc.(HLP) - 2024 Q4 - Annual Report

Introduction This annual report on Form 20-F presents audited consolidated financial statements for fiscal years ended December 31, 2024, and 2023 - The company's reporting currency is the U.S. dollar, with Renminbi as its functional currency, and translations are based on specified year-end and average rates[24] - Key terms are defined, including "Hongli" for Hongli Group Inc. and its subsidiaries, and "PRC operating entities" for the VIE and its subsidiaries[22][26] PART I Key Information This section details the company's VIE structure, regulatory compliance, financial consolidation, and comprehensive risk factors VIE Structure and Regulatory Disclosures The company consolidates its PRC operating entity through a VIE structure, navigating regulatory filings, cybersecurity assessments, and restrictions on fund transfers - Hongli Group Inc. consolidates its PRC operating entity, Hongli Shandong, via a Variable Interest Entity (VIE) structure established through contractual arrangements in April 2021, without direct equity ownership[30][31] - A formal filing was submitted to the China Securities Regulatory Commission (CSRC) on January 2, 2025, following a private placement on December 5, 2024, and remains under review[37][190] - The company believes it is not subject to cybersecurity review by the Cyberspace Administration of China (CAC) as its operations do not involve collecting personal data of at least 1,000,000 users or other sensitive data[40][220] - Hongli Cayman relies on subsidiary dividends, with fund transfers from PRC entities subject to foreign exchange controls and a 10% statutory reserve requirement until it reaches 50% of registered capital[42][44][47] Financial Information Related to the VIE This section presents condensed consolidating financial statements for 2022-2024, detailing operations, balance sheets, and cash flows across the parent, subsidiaries, and VIE Condensed Consolidating Statement of Operations (2024) | | Hongli Cayman | Subsidiary (Hong Kong) | Hongli WFOE (Mainland China) | VIE and Its Subsidiaries | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues (USD) | - | - | - | $(14,105,620) | $(14,105,620) | | Net Income (Loss) (USD) | $(1,761,351) | $146,528 | $26,244 | - | $(1,881,635) | | Comprehensive Income (Loss) (USD) | $(1,761,351) | $146,528 | $299,572 | $(381,527) | $(2,582,258) | Condensed Consolidating Balance Sheet (As of Dec 31, 2024) | | Hongli Cayman | Subsidiary (Hong Kong) | Hongli WFOE (Mainland China) | VIE and Its Subsidiaries | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets (USD) | $53,493,295 | $22,027,418 | $54,473,563 | $32,947,379 | $65,010,421 | | Total Liabilities (USD) | $1 | $22,027,418 | $54,473,563 | $32,947,379 | $11,517,126 | | Total Shareholders' Equity (USD) | $53,493,294 | - | - | - | $53,493,295 | Condensed Consolidating Statement of Cash Flows (2024) | | Hongli Cayman | Subsidiary (Hong Kong) | Hongli WFOE (Mainland China) | VIE and Its Subsidiaries | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities (USD) | $(33,000,022) | $1 | $33,317,754 | $(381,391) | $(414,034) | | Net Cash Used in Investing Activities (USD) | - | - | $(33,350,376) | $38,567 | $(33,311,809) | | Net Cash Provided by Financing Activities (USD) | $33,000,000 | - | $5,559 | $503,018 | $33,508,577 | Risk Factors The company faces diverse risks, including geopolitical tensions, customer concentration, VIE enforceability, China's regulatory environment, and share price volatility - Business Risks: The company faces risks from geopolitical tensions, potential tariffs, substantial customer concentration, with 3 major customers accounting for 67% of sales in FY2024, and reliance on key raw material suppliers[63][81] - Corporate Structure Risks: Reliance on contractual arrangements with its VIE may be less effective than direct ownership and costly to enforce under PRC law, with potential conflicts of interest with VIE shareholders[65][123][128] - China-Related Risks: The company is subject to uncertainties in the PRC legal system, substantial government influence, currency exchange controls, and potential delisting risks under the Holding Foreign Companies Accountable Act (HFCA Act)[65][149][159] - Share-Related Risks: As a foreign private issuer, the company has different and potentially less frequent disclosure obligations, and investors may face difficulties enforcing legal judgments against the company due to its Cayman Islands incorporation and PRC operations[67][231][232] - The company identified material weaknesses in internal control over financial reporting, including a lack of key monitoring mechanisms and insufficient accounting personnel with U.S. GAAP and SEC reporting knowledge[139][142] Information on the Company This section provides a comprehensive overview of Hongli Group, detailing its history, VIE structure, core business operations, and strategic expansion plans History and Development of the Company Hongli Cayman, incorporated in February 2021, operates through a VIE structure with Hongli Shandong, completed its Nasdaq IPO in March 2023, and a $33 million private placement in December 2024 - The company operates through a VIE structure, consolidating the financial results of Shandong Hongli Special Section Tube Co., Ltd. (Hongli Shandong), incorporated in 1999[254][270] - The company consummated its Initial Public Offering (IPO) on March 31, 2023, selling 2,062,500 Ordinary Shares at $4.00 per share[264] - On December 5, 2024, the company closed a private placement, issuing 60,000,000 Ordinary Shares at $0.55 per share for aggregate gross proceeds of $33,000,000[266] - As of May 5, 2025, the company had 73,438,750 Ordinary Shares issued and outstanding[267] Business Overview The company's PRC operating entities specialize in custom cold roll formed (CRF) steel profiles, holding 62 patents, and are executing an Expansion Plan, with 86.5% of 2024 sales concentrated in the PRC market - The company's main business is the design and production of custom-made cold roll formed (CRF) steel profiles for machinery in sectors like mining, construction, and agriculture[295] Revenue by Geography (FY 2024 vs. FY 2023) | Region | 2024 Revenue (USD) | % of Total | 2023 Revenue (USD) | % of Total | | :--- | :--- | :--- | :--- | :--- | | PRC | $12,196,548 | 86.5% | $12,117,240 | 75.7% | | International | $1,909,072 | 13.5% | $3,880,714 | 24.3% | | Total | $14,105,620 | 100% | $15,997,954 | 100% | Top Customer Sales Concentration | Customer | 2024 Sales (USD) | % of Total | 2023 Sales (USD) | % of Total | | :--- | :--- | :--- | :--- | :--- | | LOVOL | $6,056,622 | 43% | $7,707,045 | 48% | | South Korean VOLVO | $1,654,578 | 12% | $3,441,899 | 22% | | XCMG Group | $1,750,970 | 12% | N/A | N/A | | Total (Top 3) | $9,462,170 | 67% | $11,148,944 | 70% | - The company is executing an Expansion Plan, including purchasing an industrial park and new production facilities for approximately $21.9 million (RMB 151.4 million)[339][340] - As of the report date, the company owns 62 patents, including 55 utility patents and 7 invention patents, critical to its operations[367] Regulations This section outlines key PRC regulations impacting the company, including foreign investment, intellectual property, foreign exchange controls, dividend distribution, CSRC overseas listing rules, and taxation - The company's operations are subject to China's Foreign Investment Law, utilizing a pre-entry national treatment and negative list management system, with its business not in a restricted or prohibited industry[393][394][397] - New CSRC regulations effective March 31, 2023, require domestic companies seeking overseas listings to file with the CSRC, which Hongli did after its December 2024 offering[420][422] - Foreign exchange is strictly regulated in China, with current account payments permissible with compliance, while capital account transactions require SAFE approval or registration[402] - Dividend distributions from PRC subsidiaries are restricted, payable only from after-tax profits, with at least 10% allocated to a statutory reserve fund until it reaches 50% of registered capital[410] Operating and Financial Review and Prospects This section analyzes the company's financial performance, detailing revenue and profitability declines in FY2024, liquidity management, and key accounting policies Operating Results Total revenues decreased by 11.8% to $14.1 million in FY2024, resulting in a $1.9 million net loss, primarily due to a 50.8% decline in international sales and a $2.0 million share-based compensation expense Key Financial Results (FY 2024 vs. FY 2023) | Metric | FY 2024 | FY 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues, Net (USD) | $14,105,620 | $15,997,954 | $(1,892,334) | -11.8% | | Gross Profit (USD) | $4,519,747 | $5,245,840 | $(726,093) | -13.8% | | (Loss) Income from Operation (USD) | $(1,583,296) | $1,020,435 | $(2,603,731) | -255.2% | | Net (Loss) Income (USD) | $(1,881,635) | $864,722 | $(2,746,357) | -317.6% | | Gross Margin | 32.0% | 32.8% | -0.8pp | -2.4% | - The revenue decline in FY2024 was primarily due to a $2.0 million (50.8%) decrease in international sales, while domestic sales remained stable[473][474] - SG&A expenses increased by 44% in FY2024, mainly due to a $2.0 million share-based compensation expense from issuing 1,200,000 Ordinary Shares to employees[478] Key Financial Results (FY 2023 vs. FY 2022) | Metric | FY 2023 | FY 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues, Net (USD) | $15,997,954 | $20,283,245 | $(4,285,291) | -21.1% | | Gross Profit (USD) | $5,245,840 | $7,008,493 | $(1,762,653) | -25.2% | | Net Income (USD) | $864,722 | $2,932,363 | $(2,067,641) | -70.5% | Liquidity and Capital Resources As of December 31, 2024, the company had $0.9 million in cash, with liquidity supported by its $8.3 million IPO proceeds and $33.0 million private placement, primarily for expansion and debt repayment Summary of Cash Flows | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities (USD) | $(414,034) | $884,917 | $2,493,024 | | Net Cash Used in Investing Activities (USD) | $(33,311,809) | $(2,253,634) | $(11,670,592) | | Net Cash Provided by Financing Activities (USD) | $33,508,577 | $382,094 | $10,841,222 | - Net cash used in investing activities in 2024 was $33.3 million, primarily due to a $33.4 million deposit for a joint venture investment[550] - Net cash provided by financing activities in 2024 was $33.5 million, mainly from $33.0 million in proceeds from a private placement[553] - As of December 31, 2024, total short-term and long-term loans were approximately $9.4 million, with substantially all guaranteed by the CEO and his family members[556][557] Critical Accounting Policies The company's financial statements adhere to U.S. GAAP, with key policies including VIE consolidation, ASC 606 revenue recognition, and ASC 842 lease accounting - The company consolidates its VIE, Hongli Shandong, as it is deemed the primary beneficiary under U.S. GAAP[514] - Revenue is recognized when control of products is transferred to customers, typically upon shipment for overseas sales and acceptance for domestic sales[515][516] - The company adopted ASC 842 for leases and accounts for failed sale and leaseback transactions as financing when a bargain purchase option is reasonably certain to be exercised[521][523] Directors, Senior Management and Employees This section details the company's leadership, including CEO Jie Liu and CFO Xiangmei Zeng, executive compensation, board structure with three independent directors, and its 167 full-time employees as of May 2025 - The company's leadership includes Jie Liu as CEO and Chairman, and Xiangmei Zeng as CFO[572][573][574] Executive Compensation Summary | Name and Principal Position | Year | Salary (USD) | Total (USD) | | :--- | :--- | :--- | :--- | | Jie Liu | 2024 | $50,030 | $50,030 | | CEO and Chairman | 2023 | $27,115 | $27,115 | | Xiangmei Zeng | 2024 | $16,677 | $16,677 | | CFO | 2023 | $12,498 | $12,498 | - The Board of Directors consists of four members, with three independent directors (Chenlong Yang, Qian (Hebe) Xu, Yizhao Zhang), and Yizhao Zhang serving as the audit committee financial expert[597][600][603] - As of May 5, 2025, the company had 167 full-time employees, with 99 in manufacturing, 29 in R&D, and 39 in administration[612] Major Shareholders and Related Party Transactions This section details the company's ownership structure, with CEO Jie Liu holding 9.242%, and outlines related party transactions including monetary advances and personal guarantees for loans Major Shareholders (as of May 5, 2025) | Shareholder | Ordinary Shares Beneficially Owned | Percentage | | :--- | :--- | :--- | | Hongli Development Limited (Jie Liu) | 6,787,517 | 9.242% | | BETTY CHEN LIMITED | 7,200,000 | 9.804% | | WELL FANCY DEVELOPMENT LTD. | 6,050,000 | 8.238% | - Balances with related parties primarily consist of monetary advances and repayments; in 2023, the company advanced $351,924 to CEO Jie Liu, fully repaid in 2024[625][880] - Substantially all outstanding short-term and long-term loans as of December 31, 2024, were guaranteed by the CEO, his family members, and their owned companies[556][626] Financial Information This section confirms the inclusion of audited consolidated financial statements, details a settled lawsuit from November 2023, and states the company's policy to retain earnings for expansion without anticipating future dividends - In November 2023, the company filed a lawsuit regarding a share ownership dispute with entities controlled by a former financial advisor, which was settled and dismissed with prejudice in December 2023[631] - The company does not anticipate paying any cash dividends in the foreseeable future, intending to retain earnings for business expansion[634] Additional Information This section provides supplementary details on governance, material contracts, Cayman Islands exchange controls, and a comprehensive taxation summary, including the significant risk of PFIC classification for U.S. holders - The company's PRC subsidiaries are subject to a standard Enterprise Income Tax (EIT) rate of 25%, though Hongli Shandong, as an HNTE, is eligible for a reduced rate of 15%[650][651][865] - The Cayman Islands and the British Virgin Islands do not levy taxes on profits, income, or gains, and there are no withholding taxes on dividend payments[653][656][657] - There is a significant risk that the company could be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, potentially resulting in adverse tax consequences for U.S. shareholders[672][673] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to liquidity, inflation, and primarily interest rate risk, with a sensitivity analysis illustrating the potential impact of rate hikes on annual interest expense - The company is exposed to liquidity risk, inflation risk, and interest rate risk[691][692][693] Interest Rate Risk Sensitivity (as of Dec 31, 2024) | Total Loans Outstanding | Impact of 1% Rate Increase (USD) | Impact of 3% Rate Increase (USD) | Impact of 5% Rate Increase (USD) | | :--- | :--- | :--- | :--- | | $9,384,461 | $93,845 | $281,534 | $469,225 | PART II Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2024, due to material weaknesses in internal control over financial reporting, with remediation efforts underway - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2024[701] - Material weaknesses in internal control over financial reporting were identified, including a lack of key monitoring mechanisms, inadequately designed management review controls, and insufficient accounting personnel with U.S. GAAP and SEC reporting knowledge[703][705] - Remediation efforts include hiring an experienced outside consultant, providing ongoing U.S. GAAP training to personnel, and establishing an internal audit department[705] Corporate Governance and Other Disclosures This section details corporate governance, including the audit committee financial expert, principal accountant fees totaling $488,000 in 2024, foreign private issuer practices, insider trading policies, and cybersecurity risk management - The Board of Directors has determined that Yizhao Zhang qualifies as an audit committee financial expert[709] Principal Accountant Fees (RBSM LLP) | | 2024 | 2023 | | :--- | :--- | :--- | | Audit Fees (USD) | $488,000 | $355,000 | | Total Fees (USD) | $488,000 | $355,000 | - As a foreign private issuer, the company follows certain Cayman Islands corporate governance practices instead of Nasdaq rules, such as not being required to hold annual shareholder meetings or obtain shareholder approval for certain security issuances[719][721] - The company has adopted insider trading policies and processes for managing cybersecurity risks, with oversight from executive officers and the Board of Directors, and no material cybersecurity incidents have been reported[723][724][725] PART III Financial Statements This section presents the company's audited consolidated financial statements for FY2022-2024, prepared under U.S. GAAP, including balance sheets, income statements, cash flows, and detailed notes on accounting policies and commitments Consolidated Balance Sheet Highlights | | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets (USD) | $65,010,421 | $32,128,670 | | Total Liabilities (USD) | $11,517,126 | $11,021,117 | | Total Shareholders' Equity (USD) | $53,493,295 | $21,107,553 | Consolidated Statement of Operations Highlights | | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Revenues, Net (USD) | $14,105,620 | $15,997,954 | $20,283,245 | | Net Income (Loss) (USD) | $(1,881,635) | $864,722 | $2,932,363 | | Comprehensive Income (Loss) (USD) | $(2,582,258) | $205,561 | $1,986,097 | - The notes to the financial statements confirm the company operates as a single reportable segment and provide detailed breakdowns of revenue by geographic region (PRC vs Overseas)[804][819] - Subsequent events include the execution of a joint venture agreement with Zhongke Hongyuan on March 10, 2025, for which the company deposited its $32.9 million capital contribution in December 2024[905]