Exhibit 99.2
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
This Report on Form 6-K furnished by Hongli Group Inc. (together with our subsidiaries, unless the context indicates otherwise, “we,” “us,” “our,” or the “Company”), contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions, uncertainties and other factors may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. The information in this Report on Form 6-K is not intended to project future performance of the Company. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company does not guarantee future results, levels of activity, performance or achievements. The Company’s expectations are as of the date this Form 6-K is furnished, and the Company does not intend to update any of the forward-looking statements after the date this Report on Form 6-K is furnished to confirm these statements to actual results, unless required by law.
Overview
Hongli Group Inc. (“Hongli Cayman” or the “Company”) is an offshore holding company incorporated in the Cayman Islands. As a holding company with no material operations of our own, we consolidate the financial results of Shandong Hongli Special Section Tube Co., Ltd., (“Hongli Shandong”) which is a variable interest entity (the “VIE”), and its subsidiaries (together with the VIE, collectively, “the PRC operating entities”), through the contractual arrangements (the “Contractual Arrangements”). Neither Hongli Cayman nor its subsidiaries own any equity interests in the PRC operating entities.
The PRC operating entities are one of the leading cold roll formed steel profile manufacturers in China with respect to functional innovation, performance improvement, and customized manufacturing of their products, according to China Sub-Association for Cold Formed Steel Industries, a professional industrial association. The PRC operating entities’ main business operation focuses on the design, production, deep processing, and sales of custom-made profile for machinery and equipment in a variety of sectors including but not limited in mining and excavation, construction, agriculture, and transportation industries.
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management and financial resources and other factors.
Results of Operations
The following table summarizes the results of our operations for the six months ended June 30, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
| Six Months Ended June 30, | Changes | Changes | ||||||||||||||
| 2024 | 2023 | Increase (Decrease) | in % | |||||||||||||
| Revenues, net | $ | 6,962,241 | $ | 8,915,111 | $ | (1,952,870 | ) | -21.9 | % | |||||||
| Cost of revenues | 4,659,769 | 5,869,310 | (1,209,541 | ) | -20.6 | % | ||||||||||
| Gross profit | 2,302,472 | 3,045,801 | (743,329 | ) | -24.4 | % | ||||||||||
| Gross margin rate | 33.1 | % | 34.2 | % | -1.09 | % | -3.2 | % | ||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | 3,996,714 | 2,260,806 | 1,735,908 | 76.8 | % | |||||||||||
| Total operating expenses | 3,996,714 | 2,260,806 | 1,735,908 | 76.8 | % | |||||||||||
| (Loss) income from operations | (1,694,242 | ) | 784,995 | (2,479,237 | ) | -315.8 | % | |||||||||
| Other (expenses) income, net | (196,584 | ) | 76,950 | (273,534 | ) | -355.5 | % | |||||||||
| (Loss) income before income taxes | (1,890,826 | ) | 861,945 | (2,752,771 | ) | -319.4 | % | |||||||||
| Income tax expense | 11,522 | 65,591 | (54,069 | ) | -82.4 | % | ||||||||||
| Net (loss) income | $ | (1,902,348 | ) | $ | 796,354 | $ | (2,698,702 | ) | -338.9 | % | ||||||
Revenues
We derive revenues from sales of products in the domestic and overseas markets. The following table presents our revenues by geographical regions.
| Six Months Ended June 30, | Changes | Changes | ||||||||||||||
| 2024 | 2023 | Increase (Decrease) | in % | |||||||||||||
| Revenue from domestic sales | $ | 6,026,009 | $ | 6,724,804 | $ | (698,795 | ) | -10.4 | % | |||||||
| Revenue from export business | 936,232 | 2,190,307 | (1,254,075 | ) | -57.3 | % | ||||||||||
| Revenues, net | $ | 6,962,241 | $ | 8,915,111 | $ | (1,952,870 | ) | -21.9 | % | |||||||
Our total revenues decreased by approximately $1.95 million, or 22%, to $6.96 million for the six months ended June 30, 2024, compared to $8.92 million for the six months ended June 30, 2023. This decline was primarily due to a significant reduction in sales to foreign customers. Specifically, our export revenue dropped by $1.25 million, or 57%, to $0.94 million for the six months ended June 30, 2024, down from $2.19 million for the six months ended June 30, 2023. This decrease in sales volume was largely driven by the ongoing economic downturn in the construction machinery industry, which began in 2023, leading to a reduction in orders from various customers.
Cost of revenues
Our cost of revenues primarily consists of expenses related to manufacturing our products, including the cost of raw materials, direct labor, and depreciation of production machinery and equipment. For the six months ended June 30, 2024, our cost of revenues was $4.66 million, a decrease of $1.21 million, or 21%, compared to $5.87 million for the six months ended June 30, 2023. The reduction in cost of revenue was in line with the decrease in revenue.
Gross profit
Our gross profit decreased by approximately $0.74 million, or 24%, to $2.30 million for the six months ended June 30, 2024, down from $3.05 million for the six months ended June 30, 2023. During this period, our gross margin rate declined to 33%, a decrease of 1% from 34% in the corresponding period of 2023. This reduction was primarily attributed to the increased depreciation and amortization costs allocated to the cost of sales, resulting from the addition of new equipment and land use rights.
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Selling, general and administrative (“SG&A”) expenses
SG&A expenses primarily consisted of sales and marketing expenses, general and administrative expenses and research and development expenses.
| Six Months Ended June 30, | Changes | Changes | ||||||||||||||
| 2024 | 2023 | Increase (Decrease) | in % | |||||||||||||
| Sales and marketing expenses | $ | 258,856 | $ | 310,791 | $ | (51,935 | ) | -16.7 | % | |||||||
| General and administrative expenses | 1,335,171 | 1,306,324 | 28,847 | 2.2 | % | |||||||||||
| Research and development (“R&D”) expenses | 434,687 | 643,691 | (209,004 | ) | -32.5 | % | ||||||||||
| Share-based compensation | 1,968,000 | - | 1,968,000 | N/A | ||||||||||||
| Total | $ | 3,996,714 | $ | 2,260,806 | $ | 1,735,908 | 76.8 | % | ||||||||
SG&A expenses increased by approximately $1.74 million, or 77%, to approximately $4.00 million for the six months ended June 30, 2024, up from approximately $2.26 million for the six months ended June 30, 2023. This increase was primarily driven by an approximately $1.97 million share-based compensation expense. On May 6, 2024, the Company issued 1,200,000 shares to three members of the management team for services rendered during the current period. The shares were valued at $1.64 each, based on the market closing price on May 6, 2024.
Sales and marketing expenses
Our sales and marketing expenses primarily consist of salaries and related employee benefits for sales and marketing personnel, as well as costs associated with shipping and handling, port and customs clearance, storage, promotion, and other sales-related activities. For the six months ended June 30, 2024, our sales and marketing expenses decreased by approximately $0.05 million, or 17%, to $0.26 million, down from approximately $0.31 million for the six months ended June 30, 2023. This decrease was mainly due to reduced freight, storage, and transportation costs. Additionally, other sales and marketing expenses were scaled down in line with the reduction in sales during this period.
General and administrative expenses
Our general and administrative expenses primarily consist of salaries and related employee benefits, repair and maintenance costs, professional service fees, depreciation and amortization, travel and entertainment expenses, office supplies, and other related expenditures. For the six months ended June 30, 2024, general and administrative expenses were approximately $1.34 million, an increase of $0.03 million, or 2.2%, compared to approximately $1.31 million for the six months ended June 30, 2023. This increase was mainly due to: (i) a $0.08 million increase in consulting and professional service expenses, which increased to $0.57 million for the six months ended June 30, 2024 from $0.49 million for the six months ended June 30, 2023, primarily due to costs associated with the Company’s stock being listed on The Nasdaq Stock Market LLC; (ii) a $0.01 million, or 3%, increase in wages and employee benefits, bringing the total to $0.39 million for the six months ended June 30, 2024, up from $0.38 million for the six months ended June 30, 2023; and (iii) a $0.02 million, or 33%, increase in depreciation and amortization expenses, totaling approximately $0.09 million for the six months ended June 30, 2024, up from $0.07 million for the six months ended June 30, 2023, due to the addition of new assets. These increases in general and administrative expenses were partially offset by a $0.06 million decrease in repair and maintenance expenses and a $0.03 million reduction in other general and administrative expenses.
Research and development (“R&D”) expenses
Substantially all research and development (R&D) costs reflect the Company’s investment in product development activities. For the six months ended June 30, 2024, the Company recorded R&D expenses of approximately $0.43 million, representing a decrease of $0.21 million, or 33%, from approximately $0.64 million for the six months ended June 30, 2023. This reduction in R&D expenses was primarily due to a decrease in production output.
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Total other income (expenses)
| Six Months Ended June 30, | Changes | Changes | ||||||||||||||
| 2024 | 2023 | Increase (Decrease) | in % | |||||||||||||
| Other income (expenses) | $ | 127,373 | $ | 445,148 | $ | (317,775 | ) | -71.4 | % | |||||||
| Financing expenses | (216,131 | ) | (327,128 | ) | 110,997 | -33.9 | % | |||||||||
Other gain (loss) and (expenses) | (107,826 | ) | (41,070 | ) | (66,756 | ) | 162.5 | % | ||||||||
| Total other income (expenses) | $ | (196,584 | ) | $ | 76,950 | $ | (273,534 | ) | -355.5 | % | ||||||
Total other income (expenses) primarily consisted of income from the sale of scrapped materials, government subsidies, and other miscellaneous sources. For the six months ended June 30, 2024, total other income (expenses) resulted in an expense of approximately $0.20 million, reflecting a decrease of approximately $0.27 million, or 356%, compared to an income of approximately $0.07 million for the six months ended June 30, 2023.
Financial expenses primarily consist of gains or losses from foreign currency transactions, interest incurred on loans, finance leases, financial liabilities, and interest expenses related to discounting notes receivable prior to their maturity. For the six months ended June 30, 2024, financial expenses decreased by approximately $0.11 million, or 34%, to $0.22 million, down from $0.33 million for the six months ended June 30, 2023. This decrease was mainly attributable to a reduction in interest expenses. For the six months ended June 30, 2024, interest expenses amounted to approximately $0.22 million, reflecting a decrease of $0.16 million, or 42%, from $0.38 million for the six months ended June 30, 2023. The reduction in interest expenses was largely due to lower interest rates in China and the Company’s refinancing of its loans at more favorable rates.
Other gains, losses, and expenses include gains or losses from the disposal of property and equipment, as well as other non-operating expenses. For the six months ended June 30, 2024, the net loss from these activities was approximately $0.11 million, representing an increase of $0.07 million (163%) compared to a net loss of approximately $0.04 million in the same period of 2023. This increase in loss was primarily due to the disposal of outdated equipment.
(Loss) income before income taxes
Our loss before income taxes was approximately $1.89 million for the six months ended June 30, 2024, representing a decrease of approximately $2.75 million, or 319%, from an income of approximately $0.86 million for the six months ended June 30, 2023. This loss was primarily attributable to a $1.97 million charge for share-based compensation and a reduction in gross profit of approximately $0.74 million, as previously discussed.
Income tax expense
Our income tax expense was approximately $12,000 for the six months ended June 30, 2024, a decrease of $54,000, or 82%, compared to approximately $66,000 for the six months ended June 30, 2023.
Net (Loss) Income
As a result of the factors discussed above, our net loss for the six months ended June 30, 2024, was approximately $1.90 million, representing a negative swing of approximately $2.70 million, or 339%, compared to a net income of approximately $0.80 million for the six months ended June 30, 2023. Loss per basic and diluted share was $0.15 for the six months ended June 30, 2024, a decrease of $0.22, compared to earnings per basic and diluted share of $0.07 for the six months ended June 30, 2023.
Foreign Currency Translation
Our principal operation is located in the PRC. RMB is the functional currency. The financial position and results of our operations are determined using RMB, the local currency. The unaudited condensed consolidated financial statements are reported using U.S. Dollars. The results of operations and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Foreign exchange rates published by the Federal Reserve Board were used in our unaudited condensed consolidated financial statements for the six months ended June 30, 2024.
| June 30, 2024 | June 30, 2023 | December 31, 2023 | December 31, 2022 | |||||||||||||
| 1 US$ = RMB | ||||||||||||||||
| Period-end Spot Rate | 7.2672 | 7.2513 | 7.0999 | 6.8983 | ||||||||||||
| Period Average Rate | 7.2151 | 6.9256 | 7.0809 | 6.7299 | ||||||||||||
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Liquidity and Capital Resources
Our principal sources of liquidity have been cash and cash equivalents generated from our operations, external financing, advances from related parties and the recent initial public offering closed on March 31, 2023. As of June 30, 2024, our liquidity position remains sturdy, supported by a combination of cash on hand, cash and cash equivalents, and available credit facilities. We continue to manage our liquidity to meet both our short-term and long-term obligations while maintaining sufficient flexibility to take advantage of growth opportunities.
As of June 30, 2024 and December 31, 2023, the Company had cash, cash equivalents, and restricted cash totaling approximately $930,000 and $816,000, respectively. Our total debt as of June 30, 2024, was $10.3 million, representing an increase of $1.2 million, or 13%, compared to $9.1 million as of December 31, 2023. This increase was primarily due to the refinancing of short-term loans, driven by the favorable lower interest rates in the Chinese market, which allowed us to secure additional financing. Our debt-to-equity ratio remains at a manageable level, standing at 0.50 as of June 30, 2024, compared to 0.43 as of December 31, 2023. This reflects our disciplined approach to managing our capital structure.
Our working capital on June 30, 2024 was $3.7 million, an increase of $0.5 million, or 17%, compared to $3.1 million as of December 31, 2023. This change was driven primarily by the increase in bank notes receivable. As of June 30, 2024, we had $1.9 million in bank notes receivable, an increase of $1.6 million, compared to $0.2 million on December 31 of 2023.
We expect cash and cash equivalents from our operations to continue to be our primary sources of liquidity, with our credit facilities serving as a supplement. We believe that our current cash, cash equivalents, and cash and cash equivalents to be generated from our operations and our ability to access the capital markets will be sufficient to meet our working capital needs for at least the next twelve months. While we anticipate meeting all foreseeable financial obligations, including debt service requirements and planned capital expenditures, we will continue to monitor market conditions closely. In the event of a significant economic downturn or unexpected cash outflows, we are confident in our ability to access additional liquidity through our existing facilities or the capital markets.
Cash Flow Summary
The following table summarizes our cash flows for the six months ended June 30, 2024, and 2023.
| June 30, 2024 | June 30, 2023 | Change | Change in % | |||||||||||||
| Net cash used in operating activities | $ | (1,218,353 | ) | $ | (1,042,104 | ) | $ | (176,249 | ) | 17 | % | |||||
| Net cash (used in) / provided by investing activities | (383,749 | ) | 303,312 | (687,061 | ) | -227 | % | |||||||||
| Net cash provided by / (used in) financing activities | 1,736,444 | (365,338 | ) | 2,101,782 | -575 | % | ||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (19,592 | ) | (143,163 | ) | 123,572 | -86 | % | |||||||||
| Net increase / (decrease) in cash, cash equivalents and restricted cash | 114,750 | (1,247,293 | ) | 1,362,043 | -109 | % | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of the period | 815,669 | 2,114,039 | (1,298,370 | ) | -61 | % | ||||||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | 930,419 | $ | 866,746 | $ | 63,673 | 7 | % | ||||||||
Operating Activities
Net cash used in operating activities was approximately $1.2 million for the six months ended June 30, 2024. This includes a net loss of approximately $1.9 million, adjusted for non-cash items of approximately $2.6 million, and net negative changes in operating assets and liabilities of approximately $1.9 million. The negative changes in operating assets and liabilities mainly included an increase in notes receivable of $1.7 million, an increase in accounts receivable of $0.6 million, an increase in inventory of $0.02 million, a $0.03 million primarily decrease in due from related parties, and a $0.1 million decrease in accounts payable, accrued expenses, and income tax payable. These negative changes were partially offset by positive changes of $0.5 million, mainly included a decrease in prepaid expenses.
Net cash used in operating activities was approximately $1.0 million for the six months ended June 30, 2023. This includes net income of approximately $0.8 million, adjusted for non-cash items of approximately $0.3 million, and net negative changes in operating assets and liabilities of approximately $2.1 million. The negative changes primarily consisted of an increase in notes receivable of approximately $0.4 million, an increase in inventory of $0.3 million, an increase in prepaid expenses of $0.2 million, and a decrease in accounts payable, accrued expenses, and income tax payable totaling approximately $1.7 million. These negative changes were partially offset by a positive change of $0.6 million, mainly included a decrease in accounts receivable.
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Investing Activities
Net cash used in investing activities was approximately $0.4 million for the six months ended June 30, 2024, which was the result of payments made for the acquisition of property and equipment totaling approximately $0.1 million and prepayments of approximately $0.3 million for the purchase of Yingxuan Assets.
Net cash provided by investing activities was approximately $0.3 million for the six months ended June 30, 2023, which was the result of a proceeds of $0.8 million from the sale of property and equipment. This was offset by a payment of approximately $0.2 million for the acquisition of property and equipment and a $0.3 million payment for a short-term investment.
Financing Activities
Net cash provided by financing activities was approximately $1.7 million for the six months ended June 30, 2024. This was to the result of a total borrowings of approximately $2.8 million from short-term loans and $0.4 million from long-term loans. These inflows were partially offset by repayments of short-term and long term loans totaling approximately $1.7 million and payments of approximately $0.1 million for financing liabilities and finance lease liabilities. Additionally, the Company received approximately $1.4 million advances from related parties and repaid approximately $1.0 million during the six months ended June 30, 2024.
For the six months ended June 30, 2023, net cash used in financing activities was approximately $0.4 million. This amount includes: (i) net proceeds of $8.1 million from the initial public offering, (ii) proceeds of $6.6 million from long-term and short-term loans, (iii) repayments of $15 million for long-term and short-term loans, (iv) repayments of $0.4 million for financing liabilities and finance leases, and (v) net advances of $0.4 million from related parties.
Loans, Guarantees and Pledges
| Financial Institutions | As of June 30, 2024 |
Collateral, and personal guarantee | ||||||
| 1 | Rural Commercial Bank of Shandong | $ | 688,023 | The loan is secured through guarantees provided by the CEO, his family members, and the pledging of the company’s buildings and patents as collateral | ||||
| 2 | Postal Savings Bank of China | 688,023 | The loan is secured through guarantees provided by the CEO family members, and the pledging of the company’s patents as collateral | |||||
| 4 | Bank of Beijing | 412,814 | The loan is secured by guarantees from the CEO’s family members and by the pledge of the company’s land use rights and buildings under construction | |||||
| 6 | Industrial Bank | 743,065 | The loan is secured through guarantees provided by the CEO family members, and the pledging of the company’s accounts receivable | |||||
| 7 | Agricultural Bank of China | 1,321,004 | The loan is secured through guarantees provided by the CEO family members, and the pledging of the company’s buildings as collateral | |||||
| 8 | Bank of Beijing | 550,418 | The loan is guaranteed by the CEO and a family member. Additionally, land use rights and construction in progress, valued at $1.94 million (RMB 14,000,000), have been pledged as collateral to secure the loan. | |||||
| 9 | Weihai City Commercial Bank | 1,100,837 | The CEO and three family members of the CEO have provided personal guarantees for this loan. | |||||
| 10 | Bank of Rizhao | 1,100,836 | To secure the loan, the Company pledged real estate valued at $665,429 (RMB 4,835,808). Additionally, the CEO and three family members of the CEO have provided personal guarantees for this loan | |||||
| Current portion of long-term loans | 8,256 | |||||||
| Short-term loan total | $ | 6,613,276 | ||||||
| Long-term loans | The loan is secured through guarantees provided by the | |||||||
| Bank of Weifang | 137,604 | CEO family members, and the pledging of the company’s buildings as collateral | ||||||
| Bank of Weifang | 1,227,433 | The loan is secured through guarantees provided by the CEO family members, and the pledging of the company’s buildings as collateral | ||||||
| Rural Commercial Bank of Shandong | 1,919,584 | The loan is secured through guarantees provided by the CEO family members, and the pledging of the company’s buildings as collateral | ||||||
| WeBank | 393,156 | The CEO has provided personal guarantees for these loans | ||||||
| Long-term loans total | $ | 3,677,777 | ||||||
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Existing Commitment under Expansion Plan
In November 2020, Hongli Shandong signed a letter of intent with Yingxuan Heavy Industry Co., Ltd. (“Yingxuan”) regarding a planned purchase of all of Yingxuan’s assets located in an industrial area, including its use rights of three parcels of industrial land, buildings, facilities and infrastructure (collectively, the “Yingxuan Assets”) for a total consideration of approximately $18.1 million (RMB 125.0 million). During the year ended December 31, 2021, Hongli Shandong paid the deposit of approximately $2.2 million (RMB 15.0 million) from its working capital.
Following the signing of the letter of intent, in January 2021, Hongli Shandong signed asset transfer agreements with Yingxuan regarding the acquisition of the Yingxuan Assets. Pursuant to the asset transfer agreements, Hongli Shandong agreed to pay for the acquisition price in installments for approximately $7.5 million (RMB 52.0 million), $6.8 million (RMB 47.0 million) and $1.6 million (RMB 11.0 million), respectively, by the end of December 31, 2021, 2022 and 2023. The installments bear an annual interest of 7%. However, as mutually agreed, Hongli Shandong did not pay the agreed installment in fiscal year 2021 due to the delay of the acquisition of Yingxuan Assets, and Hongli Shandong made a prepayment of approximately $1.1 million (RMB 7.8 million) in 2021. The title of use rights of two parcels of industrial land, buildings, facilities and infrastructure for consideration of approximately $12.4 million (RMB 85.2 million) were transferred to Hongli Shandong on June 13, 2022.
On May 5, 2023, Hongli Shandong entered into a supplementary agreement with Yingxuan. Based on the mutual agreement between the Hongli Shandong and Yingxuan, the annual interest of 7% was waived as the transfer of Yingxuan Assets was delayed due to the impact of the COVID-19 pandemic and the total consideration was adjusted to approximately $21.9 million (RMB 151.4 million) given effect of the demolition compensation to be assigned to Hongli Shandong. Meanwhile, both parties also agreed that the demolition compensation to be reimbursed by the local government in relation to Yingxuan Assets will belong to the Hongli Shandong.
As of December 31, 2022, Hongli Shandong paid a total of approximately $15.9 million (RMB 109.6 million), among which approximately $3.5 million (RMB 24.4 million) was recorded as prepayment for the purchase of Yingxuan Assets on the consolidated balance sheets. The remaining payments of approximately $6.0 million (RMB 41.8 million) will be paid by up to 30% of the proceeds from the offering and working capital of Hongli Shandong, and it is expected to be paid by December 31, 2023. Pursuant to the supplement agreement, the legal title of the remaining Yingxuan Assets will be transferred to Hongli Shandong within 30 days upon the payment of the remaining $6.0 million (RMB 41.8 million) to Yingxuan.
As of December 31, 2023, Hongli has cumulatively paid Yingxuan approximately $17.2 million (RMB 122.2 million), of which, the real estate and land use rights transferred from Yingxuan to Hongli is approximately $12.0 million (RMB 85.2 million). Hongli has prepaid approximately $5.2 million (RMB 37.0 million). The total amount of assets not yet transferred to Hongli is $9.3 million (RMB 66.2 million). As of December 31, 2023, the remaining balance payable is approximately $4.1 million (RMB 29.2 million). The Company made a payment of approximately $0.3 (RMB 2.0 million) to Yingxuan in January 2024, and the remaining balance payable is approximately $3.7 million (RMB 27.2 million) as of the date of this report.
As of June 30, 2024, acquisition of Yingxuan Assets was summarized as follows:
US $ to RMB exchange rate on June 30, 2024, is 7.2672. |
| RMB | US $ | |||||||
| Total purchase price | ¥ | 151,372,197 | $ | 20,829,508 | ||||
| Payments made as of December 31, 2023 | 122,178,968 | 16,812,386 | ||||||
| Payments made in the six months of 2024 | 2,000,000 | 275,209 | ||||||
| Total payments made | 124,178,968 | 17,087,595 | ||||||
| Remaining payment due | ¥ | 27,193,229 | $ | 3,741,913 | ||||
| Assets title passed to the Company | ¥ | 85,207,329 | $ | 11,724,919 | ||||
| Assets title not transferred | ¥ | 66,164,868 | $ | 9,104,589 | ||||
Inflation
Not applicable
Seasonality
Not applicable
Critical Accounting Estimates
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities. We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts, and other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
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We consider the following accounting estimates to be critical, as they involve significant judgments and assumptions that could materially affect our financial results and financial position:
1. Current Estimated Credit Loss (“CECL”): The CECL model requires measurement of the expected credit loss even if that risk of loss is remote. Management believes that historical collection information is a reasonable base on which to determine expected credit losses because the composition of the accounts receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages. That is, the similar risk characteristics of the customers and its payment practices have not changed significantly over time. However, the foreseeable economic conditions will have a significant impact on our collectability of the accounts receivable. The Management believes that the treasury bill rate of the US Treasury is a useful indicator to reflect the future cost of the credit and the trend of economic at the time of reporting. The Company combined treasury bill rate and our historical loss rate to determine the rates of expected estimated credit losses. The accounts receivable sharing similar risk characteristics be pooled when the CECL is calculated.
2. Valuation of Inventory: Inventories are stated at the lower of cost or net realizable value. Cost is determined on the weighted average basis. The Company periodically assesses the recoverability of all inventories to determine whether adjustments are required to record inventories at the lower of cost or net realizable value. Inventories that the Company determines to be obsolete or in excess of forecasted usage are reduced to its estimated realizable value based on assumptions about future demand and market conditions. A write down of potentially obsolete or slow-moving inventory is recorded based on management’s analysis of inventory levels.
3. Estimated Useful of Long-lived Assets: Plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets with a 5% residual value. The Company reviews the estimated useful lives of property and equipment periodically to ensure that they continue to be appropriate, considering factors such as technological advancements, physical wear and tear, and changes in market conditions. If the Company determines that the useful life of an asset should be revised, the remaining net book value of the asset is depreciated prospectively over its revised remaining useful life.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2024.
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