Hongli Group Inc.(HLP) - 2022 Q4 - Annual Report

Part I Item 3. Key Information This section details the company's VIE structure, PRC regulatory landscape, cash transfer policies, and key operational risks - Hongli Group Inc. (Hongli Cayman) is a holding company that controls its PRC operating entity, Hongli Shandong, through a Variable Interest Entity (VIE) structure[15][317] - The company chose a VIE structure to avoid the substantial costs and uncertain timeline of PRC regulatory approvals for foreign ownership[16][318] - The company believes no PRC approval is currently required for its operations or share issuance, but acknowledges significant uncertainty from evolving regulations[20][21][22] - Cash transfers and dividends from PRC entities to the offshore holding company are permissible but subject to PRC laws, including statutory reserves and withholding taxes[28][30][34] Condensed Consolidating Statement of Operations (FY 2022) | Account | Hongli Cayman | Subsidiary (HK) | Hongli WFOE (PRC) | VIE & Subsidiaries | Eliminations | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $ - | $ - | $ - | $ 20,283,245 | $ - | $ 20,283,245 | | Net Income | $ 2,932,363 | $ 2,932,363 | $ 2,932,363 | $ - | $ (5,864,726) | $ 2,932,363 | Condensed Consolidating Balance Sheet (As of Dec 31, 2022) | Account | Hongli Cayman | Subsidiary (HK) | Hongli WFOE (PRC) | VIE & Subsidiaries | Eliminations | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $ 4,981,757 | $ 4,981,757 | $ 4,981,757 | $ 36,164,139 | $ (14,945,271) | $ 36,164,139 | | Total Liabilities | $ - | $ - | $ - | $ 27,671,203 | $ (4,981,757) | $ 22,689,446 | | Total Shareholders' Equity | $ 4,981,757 | $ 4,981,757 | $ 4,981,757 | $ 8,492,936 | $ (9,963,514) | $ 13,474,693 | Risk Factors Enumerates key business, corporate structure, China-specific, and share-related risks facing the company - Business Risks: The company is exposed to operational hazards, depends on a few major customers, and requires bank loans for capital needs[50][51] - Corporate Structure Risks: The company's VIE structure has enforceability risks under PRC law and potential conflicts of interest[55][141] - China-Related Risks: The company faces risks from the PRC's evolving legal system, government influence, and potential delisting under the HFCA Act[58][60][63] - Share-Related Risks: Investors face stock price volatility, immediate and substantial dilution, and reduced disclosure requirements[66][67] Item 4. Information on the Company This section details the company's history, business operations, products, sales strategies, and expansion plans History and Development of the Company Outlines the corporate timeline, the establishment of the VIE holding structure, and its status as a foreign private issuer - Hongli Group Inc. was incorporated in the Cayman Islands in 2021 and controls its PRC operating entities via a VIE structure[307][317] - The company consummated its IPO on March 31, 2023, selling 2,062,500 Ordinary Shares at $4.00 per share[315][341] - The company qualifies as a "controlled company," an "emerging growth company," and a "foreign private issuer," allowing for certain reporting exemptions[333][334][337] Business Overview Describes the company's business as a leading Chinese manufacturer of custom cold roll formed (CRF) steel profiles - The company's main business is designing and producing custom-made cold roll formed (CRF) steel profiles for various industries[343] - The company has a high customer concentration, with its top 3 customers accounting for 74% of sales in FY2022[82][361][369] - The company is undertaking a significant "Expansion Plan" to purchase an industrial park and new facilities for approximately RMB 151.4 million[380][381] - Competitive strengths include providing one-stop customized solutions, a stable customer base, and rigorous quality control[392][393][394] Revenue by Application (LTM) | Application | Percent of Sales | | :--- | :--- | | Mining/Excavation | 62% | | Agricultural | 35% | | Construction | 2% | | Transportation | 1% | Revenue by Geography (FY2022 vs FY2021) | Region | FY2022 Revenue | % of Total | FY2021 Revenue | % of Total | | :--- | :--- | :--- | :--- | :--- | | PRC | $15,285,549 | 75% | $16,844,113 | 77.6% | | South Korea | $4,997,696 | 25% | $4,808,060 | 22.1% | | Total | $20,283,245 | 100% | $21,652,173 | 99.7% | Regulations Details the PRC regulatory framework governing the company's foreign investment, operations, and financial activities - The company's business is not on the Negative List, but the VIE structure's classification under the Foreign Investment Law is uncertain[439][442] - PRC regulations impose controls on currency conversion, and dividends can only be paid from after-tax profits after allocating to a statutory reserve[448][456] - The company is subject to PRC regulations on overseas listings, including the new CSRC Trial Measures effective March 31, 2023[464][467] - The main operating entity, Hongli Shandong, qualifies as a High and New Technology Enterprise (HNTE) and enjoys a reduced EIT rate of 15%[472][909] Item 5. Operating and Financial Review and Prospects Analyzes the company's financial performance, liquidity, capital resources, and critical accounting policies Operating Results Compares operational results for fiscal years 2022 vs 2021 and 2021 vs 2020, detailing revenue and profit drivers - The 7% revenue decrease in FY2022 was mainly due to a $1.5 million drop in domestic sales from COVID-19 disruptions[517] - The 95% revenue increase in FY2021 was driven by market recovery and increased orders from existing customers[538] - Gross margin decreased from 39.9% in 2020 to 34.6% in 2022, primarily due to increased steel prices and labor costs[519][540] - R&D expenses were approximately $1.41 million in 2022, reflecting significant investment in product prototype development[524][545] Financial Performance Summary (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues, net | $20,283,245 | $21,713,138 | $11,158,820 | | YoY Change | (7)% | 95% | N/A | | Gross Profit | $7,008,493 | $7,654,308 | $4,452,517 | | Gross Margin | 34.6% | 35.3% | 39.9% | | Net Income | $2,932,363 | $3,202,212 | $2,423,941 | | YoY Change | (8)% | 32% | N/A | Liquidity and Capital Resources Details the company's liquidity position, cash flows, capital commitments, and reliance on bank borrowings - The company's IPO raised net proceeds of approximately $8.3 million, a portion of which was used to repay a bank loan[586][587] - As of December 31, 2022, the company had outstanding loans of approximately $16.1 million, substantially all guaranteed by the CEO and his family[599][601] - The company has remaining payment commitments of approximately $6.0 million for its Expansion Plan due by December 31, 2023[940] Cash and Liquidity Summary (As of Dec 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $2,085,033 | $484,389 | | Current Assets | $14,064,401 | $11,398,013 | | Current Liabilities | $12,437,954 | $9,686,221 | | Total Shareholders' Equity | $13,474,693 | $11,488,596 | Summary of Cash Flows (FY 2022) | Cash Flow Activity | Amount | | :--- | :--- | | Net cash provided by operating activities | $2,493,024 | | Net cash used in investing activities | $(11,670,592) | | Net cash provided by financing activities | $10,841,222 | Item 6. Directors, Senior Management and Employees Provides information on the company's leadership team, executive compensation, board structure, and employee base - The board consists of four directors, including CEO Jie Liu and three independent directors[621][651] - The company has established an Audit, a Compensation, and a Nominating and Corporate Governance Committee, each composed of three independent directors[658] - As of the report date, the company employed 207 full-time employees, with the majority in the manufacturing department[666] Executive Compensation (FY 2022) | Name/Position | Salary | | :--- | :--- | | Jie Liu (CEO) | $28,529 | | Yachun (Daisy) Wang (CFO) | $37,459 | Item 7. Major Shareholders and Related Party Transactions Details the company's ownership structure and material transactions with related parties, including loan guarantees - CEO Jie Liu, through Hongli Development Limited, beneficially owns 76.83% of outstanding shares, making the company a controlled entity[316][670] - Substantially all outstanding loans as of December 31, 2022, were guaranteed by the CEO, his family, and their companies[678][679] - The amount due to related parties for business advancements was $607,236 as of December 31, 2022, which has since been fully repaid[676] Major Shareholders | Shareholder | Number of Shares | Percentage Ownership | | :--- | :--- | :--- | | Hongli Development Limited | 9,505,000 | 76.83% | Item 8. Financial Information Covers legal proceedings, dividend policy, and regulatory hurdles for dividend distribution from PRC subsidiaries - The company is not currently party to any material legal proceedings[687] - The company does not anticipate paying cash dividends in the foreseeable future, intending to retain earnings for expansion[688] - Dividend payments from the PRC WFOE are subject to a 10% withholding tax, potentially reducible to 5%[689] Item 10. Additional Information Provides supplementary details on taxation in various jurisdictions and potential U.S. tax implications for shareholders - The company is not subject to corporate income tax in the Cayman Islands or the British Virgin Islands[699][703] - The main PRC operating entity, Hongli Shandong, qualifies as an HNTE and enjoys a reduced 15% EIT rate versus the standard 25%[697][909] - The company does not expect to be a Passive Foreign Investment Company (PFIC) for the current taxable year, but this is subject to annual review[303][718] Item 11. Quantitative and Qualitative Disclosures About Market Risk Addresses the company's exposure to liquidity, inflation, and interest rate risks, including a sensitivity analysis - The company is exposed to liquidity risk, managed through financial monitoring and access to institutional funding[734] - Inflationary factors could adversely affect operating results, although the impact to date has not been material[735] Interest Rate Risk Sensitivity (as of Dec 31, 2022) | Rate Increase | Impact on Annual Interest Expense | | :--- | :--- | | +1% | $161,333 | | +3% | $484,902 | | +5% | $808,170 | Part II Item 14. Use of Proceeds Details the allocation of the approximately $8.3 million in net proceeds from the company's initial public offering - The company's IPO and over-allotment option generated net proceeds of approximately $8.3 million[743] - Use of proceeds is allocated to repaying a $5 million loan, acquiring assets for the Expansion Plan, R&D, and recruitment[744] Item 15. Controls and Procedures Reports on the effectiveness of internal controls, identifying two material weaknesses and outlining remediation plans - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022[745] - Two material weaknesses were identified in internal control over financial reporting related to monitoring and expertise in U.S. GAAP[746][748] - Remediation efforts include hiring an outside consultant, providing ongoing training, and establishing an internal audit function[749] Part III Financial Statements Presents the company's audited consolidated financial statements for fiscal years 2020, 2021, and 2022 Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $36,164,139 | $21,845,746 | | Total Current Assets | $14,064,401 | $11,398,013 | | Property, plant and equipment, net | $12,300,491 | $4,623,153 | | Total Liabilities | $22,689,446 | $10,357,150 | | Total Current Liabilities | $12,437,954 | $9,686,221 | | Long-term loans | $10,147,428 | $ - | | Total Shareholders' Equity | $13,474,693 | $11,488,596 | Consolidated Statement of Operations Highlights (For the Year Ended Dec 31) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Revenues, net | $20,283,245 | $21,713,138 | | Gross Profit | $7,008,493 | $7,654,308 | | Income from operations | $2,921,322 | $3,935,411 | | Net income | $2,932,363 | $3,202,212 | | Earnings per share (Basic and diluted) | $0.29 | $0.32 | Consolidated Statement of Cash Flows Highlights (For the Year Ended Dec 31) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,493,024 | $1,139,648 | | Net cash used in investing activities | $(11,670,592) | $(3,051,348) | | Net cash provided by financing activities | $10,841,222 | $983,364 | | Net change in cash | $1,582,577 | $(902,647) |