Hongli Group Inc.(HLP) - 2023 Q4 - Annual Report

PART I Item 3. Key Information This section details the company's Variable Interest Entity (VIE) structure, associated risks, and condensed consolidating financial statements - Hongli Group operates through a VIE structure with Hongli Shandong to avoid substantial costs and time for regulatory approvals, rather than due to foreign ownership restrictions[18][297] - The company is deemed an "Existing Issuer" under CSRC's Trial Measures, requiring filing for subsequent offerings but not immediate procedures[22][214] - The company does not anticipate paying cash dividends, intending to retain future earnings for business expansion of its PRC operating entities[27][67] Condensed Consolidating Statement of Operations (Year Ended Dec 31, 2023) | | Hongli (Cayman) | Subsidiary (Hong Kong) | Hongli WFOE (Mainland China) | VIE and Its Subsidiaries | Eliminations | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | - | - | - | $15,997,954 | - | $15,997,954 | | Net income | $864,722 | $800,491 | $800,491 | - | $(1,600,982) | $864,722 | | Comprehensive income (loss) | $590,315 | $526,084 | $526,084 | $(384,754) | $(1,052,168) | $205,561 | Condensed Consolidating Balance Sheet (As of Dec 31, 2023) | | Hongli (Cayman) | Subsidiary (Hong Kong) | Hongli WFOE (Mainland China) | VIE and Its Subsidiaries | Eliminations | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $21,107,554 | $22,323,637 | $22,087,619 | $33,013,956 | $(66,404,096) | $32,128,670 | | Total Liabilities | $1 | $13,954,672 | $13,954,797 | $13,890,430 | $(41,799,899) | $11,021,117 | | Total Shareholders' Equity | $21,107,553 | - | - | - | - | $21,107,553 | Risk Factors This sub-section details risks related to customer concentration, VIE structure, PRC regulations, potential delisting under the HFCA Act, and internal control weaknesses - The company has substantial customer concentration, with three major customers accounting for approximately 75% of sales in fiscal year 2023[81][82] - The VIE structure presents inherent risks due to reliance on contractual arrangements, with enforcement uncertainties and potential conflicts of interest with VIE shareholders[55][134][141] - The company faces risks from PRC regulations, including potential government intervention, unpredictable legal changes, and CSRC oversight uncertainties impacting securities offerings[59][178][183] - Despite its U.S.-based auditor, the company's shares face delisting risk under the HFCA Act if the PCAOB is unable to inspect auditors of China-based operations in the future[168][171][238] - Material weaknesses in internal control over financial reporting include a lack of key monitoring mechanisms, inadequate management review controls, and insufficient U.S. GAAP/SEC reporting expertise[158][159] Item 4. Information on the Company This section details the company's corporate history, structure, business operations, competitive strengths, and strategic expansion plans History and Development of the Company This sub-section outlines the company's corporate history, including the establishment of its VIE structure and its IPO on Nasdaq in March 2023 - The operating entity, Shandong Hongli, was founded in 1999, with the current holding structure established in 2021 to facilitate an overseas listing via a VIE[286][287] - The company consummated its IPO on March 31, 2023, listing Ordinary Shares on Nasdaq under 'HLP', with the over-allotment option fully exercised on May 2, 2023[293][319] - The company operates through contractual arrangements (Exclusive Business Cooperation, Exclusive Option, Equity Pledge, and Powers of Attorney) to consolidate VIE financial results without direct equity ownership[295][300][301] Business Overview This sub-section describes the company as a leading CRF steel profile manufacturer, detailing its innovative techniques, key customers, strategic expansion plans, and competitive strengths including its patent portfolio - The company is a leading manufacturer of custom-made cold roll formed (CRF) steel profiles, serving major international and domestic clients across various industries[321][322] - A key strategic focus is the 'Expansion Plan,' involving a new industrial park and facilities for an estimated $24.9 million to meet demand and increase capacity[84][359] - The company holds 49 approved patents (42 utility, 7 invention), critical to its 'custom-made profile shop' business model and competitive advantage[325][391] Revenue by Top Customers (FY 2021-2023) | Customer | 2023 Sales ($) | 2023 % | 2022 Sales ($) | 2022 % | 2021 Sales ($) | 2021 % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Weichai LOVOL Heavy Industry Co. Ltd | 7,707,045 | 48% | 9,716,430 | 48% | 9,942,527 | 46% | | SUNGJIN TECH CO., LTD (South Korean VOLVO) | 3,441,899 | 22% | 4,586,277 | 23% | 4,157,991 | 19% | | Shandong Lingong Construction Machinery Co., Ltd. | 839,058 | 5% | 696,516 | 3% | 1,491,644 | 7% | | Total Top 3 | 11,988,002 | 75% | 14,999,223 | 74% | 15,592,162 | 72% | Revenue by Geography (FY 2022 vs 2023) | Region | 2023 Revenue ($) | % of Total | 2022 Revenue ($) | % of Total | Variance ($) | Variance % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | PRC | 12,117,240 | 75.74% | 15,285,549 | 75.4% | (3,168,309) | (20.7)% | | International | 3,880,714 | 24.26% | 4,997,696 | 24.6% | (1,116,982) | (22.4)% | | Total | 15,997,954 | 100% | 20,283,245 | 100% | (4,285,291) | (21.1)% | Item 5. Operating and Financial Review and Prospects This section provides management's discussion and analysis of the company's financial performance, including revenue trends, gross margin, liquidity, capital resources, and critical accounting policies Operating Results This sub-section analyzes the company's operational performance, highlighting a 21.1% revenue decrease and a 70.5% net income drop in 2023 due to market slowdowns and increased IPO-related expenses Financial Performance Comparison (FY 2023 vs. FY 2022) | Metric | FY 2023 | FY 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues, net | $15,997,954 | $20,283,245 | $(4,285,291) | (21.13)% | | Gross profit | $5,245,840 | $7,008,493 | $(1,762,653) | (25.15)% | | Income from operations | $1,020,435 | $2,921,322 | $(1,900,887) | (65.07)% | | Net income | $864,722 | $2,932,363 | $(2,067,641) | (70.51)% | - The 21% decrease in 2023 revenue was driven by a $3.2 million drop in domestic sales and a $1.1 million decrease in overseas sales[497] - Gross margin decreased from 34.6% in 2022 to 32.8% in 2023, primarily due to a decrease in product selling prices[499] - SG&A expenses increased by 3% in 2023, mainly due to a $575,000 surge in professional fees related to the IPO[500][503] Liquidity and Capital Resources This sub-section details the company's liquidity, capital resources, and cash flow management, highlighting IPO proceeds utilization, outstanding loans, and significant commitments related to its Expansion Plan - The company raised approximately $8.3 million net proceeds from its IPO in 2023, with $8.1 million loaned to Hongli Shandong to repay an expansion-related bank loan[586][587] Cash Flow Summary (FY 2021-2023) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $884,917 | $2,493,024 | $1,139,648 | | Net cash used in investing activities | $(2,253,634) | $(11,670,592) | $(3,051,348) | | Net cash provided by financing activities | $382,094 | $10,841,222 | $983,364 | - As of December 31, 2023, outstanding loans totaled $5.7 million in short-term and $3.3 million in long-term, substantially guaranteed by the CEO and his family[600][601][602] - The company has significant commitments for its 'Expansion Plan,' including a remaining payable balance of approximately $3.8 million for Yingxuan Assets[603][932] Item 6. Directors, Senior Management and Employees This section provides information on the company's leadership, including directors, senior management, executive compensation, board committee structure, and employee demographics - The Board of Directors consists of four members, with three determined to be independent under NASDAQ rules[624][648] - The company has established Audit, Compensation, and Nominating and Corporate Governance committees, each composed of the three independent directors[651] - As of April 10, 2024, the company employed 163 full-time staff, with 87 in manufacturing, 31 in R&D, and 45 in administration[659] Executive Compensation (FY 2023) | Name and Principal Position | Year | Salary (US$) | Total (US$) | | :--- | :--- | :--- | :--- | | Jie Liu, CEO and Chairman | 2023 | 27,115 | 27,115 | | Xiangmei Zeng, CFO | 2023 | 12,498 | 12,498 | | Yachun (Daisy) Wang, Former CFO | 2023 | 37,622 | 37,622 | Item 7. Major Shareholders and Related Party Transactions This section details the company's ownership structure, including the controlling shareholder, and significant related party transactions such as loan guarantees and intercompany advancements - CEO Jie Liu is the controlling shareholder, beneficially owning 61.42% of the company's Ordinary Shares through Hongli Development Limited[663] - Substantially all outstanding short-term and long-term loans as of December 31, 2023, were guaranteed by the CEO, his family, and related companies[672][673] - As of December 31, 2023, a net amount of $342,053 was due from related parties, primarily an advance to the CEO, which has since been repaid[669][670][921] Item 8. Financial Information This section confirms the inclusion of audited financial statements, details a settled share dispute lawsuit, and outlines the company's dividend policy and challenges in cash distribution from PRC entities - The company filed a lawsuit in November 2023 regarding a share dispute with a former financial advisor's entities, which was settled and dismissed in December 2023[675] - The company's dividend policy is to retain all future earnings for business expansion, with no cash dividends expected in the foreseeable future[677] Item 11. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, including liquidity, inflation, and interest rate risks, providing a sensitivity analysis for its outstanding variable-rate borrowings - The company is exposed to interest rate risk on its outstanding loans, totaling approximately $9.1 million as of December 31, 2023[724][725] Interest Rate Risk Sensitivity (as of Dec 31, 2023) | Loan Type | Outstanding Balance ($) | Impact of +1% Rate | Impact of +3% Rate | Impact of +5% Rate | | :--- | :--- | :--- | :--- | :--- | | Short term loans | 5,690,221 | $56,902 | $170,706 | $284,513 | | Long term loans | 3,374,695 | $33,746 | $101,240 | $168,734 | | Total | 9,064,916 | $90,648 | $271,946 | $453,247 | PART II Item 15. Controls and Procedures This section reports on the company's internal controls, noting ineffective disclosure controls and material weaknesses, along with ongoing remediation efforts - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were not effective[732] - Material weaknesses in internal control over financial reporting include a lack of key monitoring mechanisms, inadequately designed management review controls, and insufficient U.S. GAAP/SEC reporting expertise[735][736] - The company has initiated remediation efforts, including hiring an experienced consultant, providing U.S. GAAP training, and establishing an internal audit department[737] Item 16: Corporate Governance and Other Disclosures This section covers corporate governance, including the audit committee financial expert, code of conduct, accountant fees, insider trading policies, and cybersecurity risk management - The Board of Directors has determined that Yizhao Zhang qualifies as an audit committee financial expert[740] Principal Accountant Fees (RBSM LLP) | Fee Type | 2023 (USD '000) | 2022 (USD '000) | | :--- | :--- | :--- | | Audit Fees | 355 | 275 | | Audit Related Fees | - | - | | Tax Fees | - | - | | All Other Fees | - | - | | Total Fees | 355 | 275 | - The company has adopted insider trading policies and processes for cybersecurity risk oversight, with no material incidents identified[747][748][749] PART III Item 18. Financial Statements This section presents the company's audited consolidated financial statements for fiscal years 2021-2023, prepared under U.S. GAAP, along with detailed notes and an unqualified audit opinion from RBSM LLP - The independent registered public accounting firm, RBSM LLP, issued an unqualified audit opinion on the consolidated financial statements for the three years ended December 31, 2023[762] Consolidated Balance Sheet Highlights | Metric | As of Dec 31, 2023 | As of Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $32,128,670 | $36,164,139 | | Total Liabilities | $11,021,117 | $22,689,446 | | Total Shareholders' Equity | $21,107,553 | $13,474,693 | Consolidated Statement of Operations Highlights | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Revenues, net | $15,997,954 | $20,283,245 | $21,713,138 | | Net income | $864,722 | $2,932,363 | $3,202,212 | | Earnings per share (Basic and diluted) | $0.07 | $0.29 | $0.32 | - The financial statement notes confirm the company consolidates its VIE, Hongli Shandong, as the primary beneficiary with power to direct activities and absorb benefits or losses[782][789]