{"url_path":"/sec/hlp/10-k/2026/item-5","section_key":"item-5","section_title":"Item 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-05-13","source_url":"https://www.sec.gov/Archives/edgar/data/1855557/0001213900-26-055737-index.html","accession_number":"0001213900-26-055737","cik":"0001855557","ticker":"HLP","issuer_name":"Hongli Group Inc.","edgar_url":"https://www.sec.gov/Archives/edgar/data/1855557/0001213900-26-055737-index.html","primary_entity_key":"0001855557","primary_entity_name":"Hongli Group Inc."},"word_count":10245,"has_tables":true,"body_markdown":"Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS\n\n \n\nYou should read the following discussion and analysis\nof our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes\nincluded elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations\nthat involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements\nas a result of various factors, including those set forth under “Item 3. Key Information-D. Risk Factors” or in other parts\nof this annual report on Form 20-F.\n\n \n\n**A. Operating results**\n\n** **\n\n**Overview** \n\n \n\nHongli Cayman is an offshore holding company incorporated\nand registered in the Cayman Islands. As a holding company with no material operations of our own, we consolidate financial results of\nHongli Shandong, the VIE and its subsidiaries through Contractual Arrangements. Neither we nor our subsidiaries own any equity interests\nin the PRC operating entities.\n\n \n\nNeither we nor our subsidiaries own any equity\ninterest in Hongli Shandong. Instead, we consolidate financial results of Hongli Shandong through a series of Contractual Arrangements\ndated April 12, 2021.\n\n \n\nThe PRC operating entities are a\ncold roll formed steel profile manufacturer in China with respect to function innovation, performance improvement, and customized manufacturing\nof their products. The PRC\noperating entities’ main business operation focuses on the design, production, deep processing, and sales of custom-made profile\nfor machinery and equipment in a variety of sectors, including but not limited in mining and excavation, construction, agriculture, and\ntransportation industries.\n\n \n\nWith more than 25 years of operating history,\nthe PRC operating entities have developed customers in more than 30 cities in China and a global network covering South Korea, Japan,\nand the U.S.. The customers of the PRC operating entities include large corporations and international enterprises such as Weichai LOVOL\nHeavy Industry Co. Ltd. (“LOVOL”), SUNGJIN TECH CO., LTD (“South Korean VOLVO”), XCMG Group, and new customers\nassociated with Katsushiro Machinery Co., Ltd. (“Japan Katsushiro”). Most of the customers of the PRC operating entities\nhave been with us for an average of 10 years. As of December 31, 2025, our key customers have increased their order volumes with the\nPRC operating entities. The Company continues to maintain strong and growing business relationships with our principal customers going forward.\n\n \n\n80\n\n \n\n \n\n**Recent Factors Affecting Our Results of Operations**\n\n \n\nAs Hongli Cayman has consolidated the financial\nresults of PRC operating entities under the Contractual Arrangements, we believe the following key factors affect our financial condition\nand results of operations:\n\n* *\n\n*Fluctuations in Prices\nof Steel - *The main raw material of the PRC operating entities’ products is steel. Fluctuations in steel prices can\nlead to volatility in the pricing of their products, which influences the buying patterns of their customers. Because the cost of\nraw materials represents over half of our total cost of sales, higher or lower cost steel affects our gross margins. Increases in\nthe market price of steel typically enable us to raise our selling prices. It is hard to predict the steel price given the current\nmarket condition, however, we do not think that the regular fluctuation of steel price will have a material impact on our results of\noperations or liquidity due to the operating strategies on the sales-side and cost-side discussed above. Nevertheless, we cannot\nassure you that in the future, the market will be stabilized or drive the steel price up significantly to the extent that our\noperating strategy may not be able to successfully mitigate such impact and we and the PRC operating entities will continue\nmonitoring market trends and adjust the operating strategies as needed. To a lesser extent, our gross margins and selling prices can\nalso be impacted by the prices of equipment, transportation and labor.\n\n* *\n\n*Development of the Customer\nIndustries *- The PRC operating entities produce a comprehensive range of well-designed and customized profile products\napplied to different kinds of machineries and equipment that are widely used in a variety of sectors, including but not limited to,\nmining and excavation, construction, agriculture, and transportation industries. Currently, the PRC operating entities’\ncustomers come from the industries of mining and excavation, construction, agriculture, and transportation. At the same time, the\nPRC operating entities are also actively developing the market expansion of products in other fields. Geographically, the PRC\noperating entities’ main market focus is in PRC with expanding market outreach globally. If the customers of the PRC operating\nentities could not improve their products and compete over their competitors in such sectors, their business operation and financial\ncondition could impact their demands from the PRC operating entities, which impacts our revenues.\n\n* *\n\n*Company Scale* - The future\ndevelopment of the PRC operating entities depends on the Company’s scale. The current manufacturing capacity of the PRC\noperating entities is saturated. If the PRC operating entities expect to increase their sales volume, enhance their R&D ability\nto develop more products, and increase their production volumes, they need to expand our scale, by purchasing more facilities,\nexpanding the factories, hiring more employees, etc. Currently, the PRC operating entities are seeking to expand their manufacturing\nfacility to accommodate increasing orders. Please see “Item 4. Information on the Company – B. Business Overview –\nFacilities and Equipment of the PRC Operating Entities - Yingxuan Assets Purchase.”\n\n \n\n81\n\n \n\n \n\n**Key Financial Performance Indicators**\n\n \n\nWe consider a variety of financial and operating\nmeasures in assessing the performance of the business of the PRC operating entities. The key financial performance measures we use are\nrevenue and gross profit and gross margin. Our review of these indicators facilitates timely evaluation of the performance of the business\nof the PRC operating entities and effective communication of results and key decisions, allowing the business of the PRC operating entities\nto respond promptly to competitive market conditions and different demands and preferences from the PRC operating entities’ customers.\nThe key measures that we use to evaluate the performance of the business of the PRC operating entities are set forth below and are discussed\nin greater details under “Results of Operations”:\n\n* *\n\n*Revenue*\n\n \n\nOur revenue is primarily derived from the sale\nof various cold roll-formed steel profiles, including agricultural machinery cab assemblies, construction machinery cab assemblies, excavator\ncab assemblies, and special-shaped steel pipes. Our revenue primarily depends on the PRC operating entities’ ability to maintain\nrelationships with key customers such as LOVOL, South Korean VOLVO, and XCMG, as well as to develop new customer relationships. Revenue\nis also influenced by market competition, overall economic conditions, pricing strategies, inflationary pressures, and fluctuations in\nforeign exchange rates.\n\n \n\n*Gross Profit and Gross Margin*\n\n \n\nGross profit is the difference between revenue\nand the cost of revenue. Our cost of revenue consists of the cost of raw materials, direct labor and related production overhead. Raw\nmaterials account for the largest portion of our cost of revenue. Supplies and prices of the PRC operating entities’ various raw\nmaterials can be affected by worldwide supply and demand factors, as well as other factors beyond control such as financial market trends.\nThe PRC operating entities purchase, directly and indirectly through third-party suppliers, significant amounts of steels and other raw\nmaterials annually. The prices of the PRC operating entities’ raw materials are highly dependent on the steel price in the market,\nthe fluctuation in steel prices will directly impact our gross margin rate.\n\n \n\nTo protect our operation from such volatility,\nfrom time to time, we purchase and store major raw materials, such as steel and aluminum, in advance to provide economic buffers regarding\nportions of our pricing and supply, for the majority of our raw material purchases we do not typically enter into any fixed-price contracts\nand may not be able to accurately anticipate future raw material prices for those inputs. Over the past years, the PRC operating entities\nhave implemented certain operating strategies to achieve cost reduction and productivity improvement in our supply chain. Some of the\nmajor operating strategies the PRC operating entities have implemented on reducing raw materials costs are volume buying, direct purchasing,\nand price negotiations. In addition, the PRC operating entities achieve manufacturing efficiency by standardizing and optimizing certain\nprocedures across our production cycles such as procurement, engineering and product development, manufacturing, dealer management, and\npricing. On the other hand, labor is a primary component in the cost of operating the business of the PRC operating entities. Increased\nlabor costs due to competition, increased minimum wage or employee benefits costs, or otherwise, would adversely impact our operating\nexpenses. And our success also depends on the PRC operating entities’ ability to attract, motivate, and retain qualified employees,\nincluding senior management and technically competent employees, to keep pace with our growth strategy.\n\n \n\nGross margin is gross profit divided by revenue.\nGross margin is a measure used by management to indicate whether we are selling our products at an appropriate gross profit. Our gross\nmargin is impacted mainly by the price of our raw material and labor, as well as the products of the PRC operating entities. We consider\nmany factors such as cost of revenue increases and competitive pricing strategies. To maintain the current gross margin and to achieve\na higher gross margin, the PRC operating entities seek to maintain continued focus on their R&D efforts that we believe will enhance\ntheir existing market positions and allow them to compete in the steel profile product category.\n\n** **\n\n82\n\n \n\n** **\n\n**Results of Operations**\n\n \n\nWe, a Cayman Islands holding company, do not\nconduct any substantive operations of our own, rather, we consolidate financial results of the VIE through the Contractual Arrangement.\n\n** **\n\n**For the Years Ended December 31, 2025 and\n2024**\n\n \n\nThe following table summarizes the results of\nour operations for the years ended December 31, 2025 and 2024, respectively, and provides information regarding the dollar and percentage\nincrease or (decrease) during such periods.\n\n \n\n  \nFor the year ended\nDecember 31,  \nAmount\nIncrease  \n%\nIncrease \n\n  \n2025  \n2024  \n(Decrease)  \n(Decrease) \n\n  \nUS$  \nUS$  \nUS$  \n  \n\nRevenues, net \n 19,600,691  \n 14,105,620  \n 5,495,071  \n 39.0%\n\nCost of revenues \n 13,221,811  \n 9,585,873  \n 3,635,938  \n 37.9%\n\nGross profit \n 6,378,880  \n 4,519,747  \n 1,859,133  \n 41.1%\n\nOperating expenses \n    \n    \n    \n   \n\nSales and marketing expenses \n 935,432  \n 669,542  \n 265,890  \n 39.7%\n\nResearch and development \n 994,500  \n 818,312  \n 176,188  \n 21.5%\n\nShare-based compensation \n -  \n 1,968,000  \n (1,968,000) \n (100.0)%\n\nGeneral and administrative expenses \n 2,015,663  \n 2,647,189  \n (631,526) \n (23.9)%\n\nTotal operating expenses \n 3,945,595  \n 6,103,043  \n (2,157,448) \n (35.4)%\n\nIncome (loss) from operation \n 2,433,285  \n (1,583,296) \n 4,016,581  \n (253.7)%\n\n  \n    \n    \n    \n   \n\nOther income and (expenses) \n    \n    \n    \n   \n\nInterest and financing expenses, net \n (469,710) \n (466,386) \n (3,324) \n 0.7%\n\nOther income \n 215,881  \n 185,299  \n 30,582  \n 16.5%\n\nOther expenses \n (7,932) \n (8,860) \n 928  \n (10.5)%\n\nTotal other expenses, net \n (261,761) \n (289,947) \n 28,186  \n (9.7)%\n\nIncome (loss) before income taxes \n 2,171,524  \n (1,873,243) \n 4,044,767  \n 215.9%\n\nIncome tax expense \n 228,684  \n 8,392  \n 220,292  \n 2625.0%\n\nNet income (loss) \n 1,942,840  \n (1,881,635) \n 3,824,475  \n 203.3%\n\n  \n    \n    \n    \n   \n\nGross margin rate \n 32.5% \n 32.0% \n 0.5% \n 1.7%\n\n** **\n\n**Revenue**\n\n \n\nWe derive revenues from sales of products in\nthe domestic and overseas markets. The following table presents our revenues by geographical regions.\n\n \n\n  \nFor the year ended December 31,  \n   \n  \n\n  \n2025  \n2024  \nVariance  \n% \n\n  \nUS$  \n%  \nUS$  \n%  \nUS$  \n  \n\nPRC \n 16,581,343  \n 84.6% \n 12,196,548  \n 86.5% \n 4,384,795  \n 36.0%\n\nInternational \n 3,019,348  \n 15.4% \n 1,909,072  \n 13.5% \n 1,110,276  \n 58.2%\n\nTotal \n 19,600,691  \n 100.0% \n 14,105,620  \n 100.0% \n 5,495,071  \n 39.0%\n\n \n\nIn 2025, Chinese manufacturers recovered after\nan economic slowdown triggered by weakening global demand last year. These factors actively affected our revenue performance. For the\nyear ended December 31, 2025, our total revenues increased by approximately $5.5 million, or 39.0%, to $19.6 million, compared to $14.1\nmillion for the year ended December 31, 2024.\n\n \n\n83\n\n \n\n \n\nThe increase was primarily driven by a growth\nin PRC sales, which growth by approximately $4.4 million to $16.6 million in 2025, from $12.2 million in 2024, mainly due to increased\norders from our domestic customers. Moreover, international sales also increased, reaching $3.0 million in 2025, an increase of $1.1\nmillion, or 58.2%, from $1.9 million in the prior year.\n\n \n\n**Cost of revenues**\n\n \n\nOur cost of revenues consists primarily of expenses\nincurred to manufacture our products, including the cost of raw materials, direct labor, and depreciation of production machinery and\nequipment. For the year ended December 31, 2025, the cost of revenues increased by approximately $3.6 million, or 37.9%, compared to\nthe same period in 2024. This increase was generally in line with the growth in total revenues.\n\n \n\n**Gross profit**\n\n \n\nOur gross profit was approximately $6.4 million in 2025, representing\nan increase of $1.9 million, or 41.1%, compared to $4.5 million in 2024. As a percentage of revenues, our gross margin growth to 32.5%\nin 2025 from 32.0% in 2024, an increase of 0.5 percentage points or representing a 1.7% relative increase.\n\n \n\n**Operating expenses**\n\n \n\nOperating expenses primarily consisted of salary\nexpenses and related employee benefits relating to our sales and marketing, finance, legal, human resources and executive office personnel,\nand included research and development expenses, shipping and handling expenses, depreciation and amortization expenses, office overhead,\nprofessional service expenses and travel and transportation costs.\n\n \n\nOperating expenses were approximately $3.9 million\nfor the year ended December 31, 2025, representing a decrease of $2.2 million, or 35.4%, compared to $6.1 million in 2024. The decrease\nwas primarily driven by $2.0 million in share-based compensation recognized in 2024. On May 7, 2024, the Company issued 1,200,000 Ordinary\nShares to three employees as part of their 2024 compensation packages. The Ordinary Shares were valued at $1.64 per share, based on the\nclosing market price on May 6, 2024, resulting in $1,968,000 recognized as share-based compensation expense during the year.\n\n \n\n**Sales and marketing expenses**\n\n \n\nOur sales and marketing expenses primarily consisted\nof salaries and related employee benefits for sales and marketing personnel, as well as shipping and handling costs, port and customs\nclearance fees, storage expenses, promotional and marketing expenditures, and other costs associated with sales and marketing activities.\nFor the year ended December 31, 2025, sales and marketing expenses were approximately $0.9 million, representing an increase of $0.2 million,\nor 39.7%, compared to $0.7 million in 2024. The increase was generally in line with the growth in sales during 2025.\n\n \n\n**Research and development (“R&D”)\nexpenses**\n\n \n\nSubstantially all research and development\n(R&D) costs reflect the Company’s efforts in product development activities. In 2025, R&D expenses were approximately\n$1.0 million, representing an increase of $0.2 million, or 21.5%, compared to $0.8 million in 2024. The increase was primarily\nattributable to the Company’s increased investment in research and development as the agricultural machinery and construction\nmachinery markets continued to develop favorably in 2025. The Company plans to increase R&D investment as needed in the future\nto support the development of new products.\n\n \n\n**General and administrative (“G&A”)\nexpenses**\n\n \n\nOur general and administrative (G&A) expenses\nprimarily consisted of salaries and employee benefits, repair and maintenance, professional services, depreciation and amortization, travel,\nentertainment, and office supplies. In 2025, other G&A expenses were approximately $2.0 million, a decrease of $0.6 million, or 23.9%,\ncompared to $2.6 million in 2024. The decrease was mainly attributable to a decrease of $0.4 million in professional service expenses\nas less professional service was provided in 2025.\n\n \n\n**Interest and financing expenses, net**\n\n \n\nInterest and financing expenses, net primarily\nconsisted of interest expenses on loans, finance leases, and other financial liabilities, as well as expenses related to the discounting\nof notes receivable prior to maturity, net of insignificant interest income. Interest and financing expenses, net were approximately $470,000\nin 2025, a decrease of $3,000, or 0.7%, compared to approximately $466,000 in 2024. The decrease was mainly attributable to lower interest\nexpenses in 2025, as the Company refinanced its short-term loans at more favorable interest rates. The weighted average interest rate\non short-term loans was 3.46% in 2025, compared to 4.35% in 2024.\n\n \n\n84\n\n \n\n \n\n**Other income**\n\n \n\nOther income primarily consists of proceeds from\nthe sale of scrapped materials, government subsidies, foreign currency exchange gains or losses, gains or losses on the disposal of property\nand equipment, and other miscellaneous items. In 2025, the Company recorded other income of approximately $216,000, representing an increase\nof $31,000, or 16.5%, compared to $185,000 in 2024. The increase was mainly due to a gain of approximately $17,000 on the disposal of\nequipment in 2025, compared to a loss of approximately $77,000 recognized in 2024 from similar transactions.\n\n \n\n**Total other income and expenses, net**\n\n \n\nTotal other income and expenses, net, amounted\nto a net expense of approximately $262,000 in 2025, a decrease of $28,000, or 9.7%, compared to $290,000 in 2024. This decrease was primarily\nattributable to the changes in interest and financial expenses, net and other income, as discussed in the respective sections above.\n\n \n\n**Income (loss) before income taxes**\n\n \n\nOur income before income taxes was approximately\n$2.2 million for the year ended December 31, 2025, representing an increase of approximately $4.0 million compared to loss before income\ntaxes of approximately $1.9 million in 2024. This growth was primarily attributable to an increase in sales and other factors discussed\nin the sections above.\n\n \n\n**Income tax expense**\n\n \n\nIncome tax consisted of the following:\n\n \n\n  \nFor the year ended\n\nDecember 31, \n\n  \n2025  \n2024 \n\n  \nUS$  \nUS$ \n\nCurrent tax provision \n 246,804  \n 39,615 \n\nDeferred tax provision (benefit) \n (18,120) \n (31,223)\n\nIncome tax expense \n **228,684**  \n 8,392 \n\n \n\nFor the year ended December 31, 2025, the Company\nrecorded a current tax provision of approximately $246,804 and a deferred tax benefit of $18,120, resulting in a net income tax expense\nof $228,684. In comparison, for the year ended December 31, 2024, the Company recorded a current tax provision of approximately $39,615\nand a deferred tax benefit of $31,223, resulting in a net income tax expense of $8,392.\n\n \n\n**Net income (loss)**\n\n \n\nAs a result of the foregoing, we reported a net\nincome of approximately $1.9 million, or $0.03 per basic and diluted share, for the year ended December 31, 2025, compared to net loss\nof approximately $1.9 million, or $0.11 per basic and diluted share, for the same period in 2024.\n\n \n\n**Foreign currency translation**\n\n \n\nOur principal country of operations is the PRC.\nThe financial position and results of our operations are determined by using RMB, the local currency, as the functional currency. The\nconsolidated financial statements are reported using U.S. Dollars. The results of operations and the statement of cash flows denominated\nin foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in\nforeign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated\nin the functional currency is translated at the historical rate of exchange at the time of capital contribution.\n\n \n\nThe spot exchange rate of the U.S. Dollar against\nthe RMB decreased to 6.9931 as of December 31, 2025, compared to 7.2993 as of December 31, 2024. The average exchange rate for the year\nended December 31, 2025, also decreased to 7.1875, from 7.1957 in 2024. As a result of these foreign currency exchange rate fluctuations,\nwe recorded a foreign currency translation adjustment gain of approximately $2,397,000 in other comprehensive income for the year ended\nDecember 31, 2025, compared to a foreign currency translation adjustment loss of approximately $701,000 in other comprehensive income\nfor the year ended December 31, 2024.\n\n \n\n85\n\n \n\n \n\n**Comprehensive income (loss)**\n\n \n\nOur comprehensive income was approximately $4.3\nmillion for the year ended December 31, 2025, compared to comprehensive loss of approximately $2.6 million for the year ended December\n31, 2024.\n\n \n\n**For the Years Ended December 31, 2024 and\n2023**\n\n \n\nThe following table summarizes the results of\nour operations for the years ended December 31, 2024 and 2023, respectively, and provides information regarding the dollar and percentage\nincrease or (decrease) during such periods.\n\n \n\n  \nFor the year ended\nDecember 31,  \nAmount\nIncrease  \n%\nIncrease \n\n  \n2024  \n2023  \n**(Decrease)**  \n**(Decrease)** \n\n  \nUS$  \nUS$  \nUS$  \n  \n\nRevenues, net \n 14,105,620  \n 15,997,954  \n (1,892,334) \n (11.8)%\n\nCost of revenues \n 9,585,873  \n 10,752,114  \n (1,166,241) \n (10.8)%\n\n**Gross profit**** **\n** ****4,519,747**** **** **\n** ****5,245,840**** **** **\n** ****(726,093****)**** **\n** ****(13.8****)%**\n\nOperating expenses \n    \n    \n    \n   \n\nSales and marketing expenses \n 669,542  \n 631,359  \n 38,183  \n 6.0%\n\nResearch and development \n 818,312  \n 962,961  \n (144,649) \n (15.0)%\n\nShare-based compensation \n 1,968,000  \n -  \n 1,968,000  \n 100.0%\n\nOther G&A expenses \n 2,647,189  \n 2,631,085  \n 16,104  \n 0.6%\n\n**Total operating expenses**** **\n** ****6,103,043**** **** **\n** ****4,225,405**** **** **\n** ****1,877,638**** **** **\n** ****44.4****%**\n\n**(Loss) Income from operation**** **\n** ****(1,583,296****)**** **\n** ****1,020,435**** **** **\n** ****(2,603,731****)**** **\n** ****(255.2****)%**\n\n  \n    \n    \n    \n   \n\nOther income and (expenses) \n    \n    \n    \n   \n\nInterest and financing expenses, net \n (466,386) \n (631,558) \n 165,172  \n (26.2)%\n\nOther income \n 185,299  \n 591,440  \n (406,141) \n (68.7)%\n\nOther expenses \n (8,860) \n (47,855) \n 38,995  \n (81.5)%\n\n**Total other expenses, net**** **\n** ****(289,947****)**** **\n** ****(87,973****)**** **\n** ****(201,974****)**** **\n** ****229.6****%**\n\n(Loss) income before income taxes \n (1,873,243) \n 932,462  \n (2,805,705) \n (300.9)%\n\nIncome tax expense \n 8,392  \n 67,740  \n (59,348) \n (87.6)%\n\n**Net (loss) income**** **\n** ****(1,881,635****)**** **\n** ****864,722**** **** **\n** ****(2,746,357****)**** **\n** ****(317.6****)%**\n\n  \n    \n    \n    \n   \n\nGross margin rate \n 32.0% \n 32.8% \n (0.8)% \n (2.4)%\n\n \n\n**Revenue**\n\n \n\nWe derive revenues from sales of products in\nthe domestic and overseas markets. The following table presents our revenues by geographical regions.\n\n \n\n  \nFor the year ended December 31,  \n   \n  \n\n  \n2024  \n2023  \nVariance  \n% \n\n  \nUS$  \n%  \nUS$  \n%  \nUS$  \n  \n\nPRC \n 12,196,548  \n 86.5% \n 12,117,240  \n 75.7% \n 79,308  \n 0.7%\n\nInternational \n 1,909,072  \n 13.5% \n 3,880,714  \n 24.3% \n (1,971,642) \n (50.8)%\n\n**Total**** **\n** ****14,105,620**** **** **\n** ****100.0****%**** **\n** ****15,997,954**** **** **\n** ****100.0****%**** **\n** ****(1,892,334****)**** **\n** ****(11.8****)%**\n\n \n\nIn 2024, Chinese manufacturers faced a series\nof significant challenges, particularly an economic slowdown triggered by weakening global demand. These factors adversely affected our\nrevenue performance. For the year ended December 31, 2024, our total revenues declined by approximately $1.9 million, or 12%, to $14.1\nmillion, compared to $16.0 million for the year ended December 31, 2023.\n\n \n\n86\n\n \n\n \n\nThe decrease was primarily driven by a reduction\nin international sales, which fell by approximately $2.0 million to $1.9 million in 2024, from $3.9 million in 2023, mainly due to decreased\norders from our overseas customers. In contrast, domestic sales remained stable, reaching $12.2 million in 2024, an increase of $0.1\nmillion, or 0.7%, from $12.1 million in the prior year.\n\n \n\n**Cost of revenues**\n\n \n\nOur cost of revenues consists primarily of expenses\nincurred to manufacture our products, including the cost of raw materials, direct labor, and depreciation of production machinery and\nequipment. For the year ended December 31, 2024, the cost of revenues decreased by approximately $1.2 million, or 11%, compared to the\nsame period in 2023. This decrease was generally in line with the decline in total revenues.\n\n \n\n**Gross profit**\n\n \n\nOur gross profit was approximately $4.5 million\nin 2024, representing a decrease of $0.7 million, or 14%, compared to $5.2 million in 2023. As a percentage of revenues, our gross margin\ndeclined to 32.0% in 2024 from 32.8% in 2023, a decrease of 0.8 percentage points or representing a 2.4% relative decrease.\n\n \n\n**Operating expenses**\n\n \n\nOperating expenses primarily consisted of salary\nexpenses and related employee benefits relating to our sales and marketing, finance, legal, human resources and executive office personnel,\nand included research and development expenses, shipping and handling expenses, depreciation and amortization expenses, office overhead,\nprofessional service expenses and travel and transportation costs.\n\n \n\nOperating expenses were approximately $6.1 million\nfor the year ended December 31, 2024, representing an increase of $1.9 million, or 44%, compared to $4.2 million in 2023. The increase\nwas primarily driven by $2.0 million in share-based compensation recognized in 2024. On May 7, 2024, the Company issued 1,200,000 Ordinary\nShares to three employees as part of their 2024 compensation packages. The Ordinary Shares were valued at $1.64 per share, based on the\nclosing market price on May 6, 2024, resulting in $1,968,000 recognized as share-based compensation expense during the year.\n\n \n\n**Sales and marketing expenses**\n\n \n\nOur sales and marketing expenses primarily consisted\nof salaries and related employee benefits for sales and marketing personnel, as well as shipping and handling costs, port and customs\nclearance fees, storage expenses, promotional and marketing expenditures, and other costs associated with sales and marketing activities.\nFor the year ended December 31, 2024, sales and marketing expenses were approximately $0.67 million, representing a decrease of $0.04\nmillion, or 6%, compared to $0.63 million in 2023. The decrease was generally in line with the decline in sales during 2024.\n\n \n\n**Research and development (“R&D”)\nexpenses**\n\n \n\nSubstantially all research and development\n(R&D) costs reflect the Company’s efforts in product development activities. .In 2024, R&D expenses were approximately\n$0.82 million, representing a decrease of $0.14 million, or 15%, compared to $0.96 million in 2023. retain content as standing The\nCompany plans to increase R&D investment as needed in the future to support the development of new products.\n\n \n\n**Other general and administrative expenses**\n\n \n\nOur other general and administrative (G&A)\nexpenses primarily consisted of salaries and employee benefits, repair and maintenance, professional services, depreciation and amortization,\ntravel, entertainment, and office supplies. In 2024, other G&A expenses were approximately $2.65 million, an increase of $0.02 million,\nor 0.6%, compared to $2.63 million in 2023. The increase was mainly attributable to a $0.06 million rise in depreciation and amortization\nexpenses, driven by new buildings placed into operation and increased allocation of depreciation. Additionally, transportation expenses\nincreased by $0.04 million in 2024, contributing to the overall rise.\n\n \n\n87\n\n \n\n \n\n**Interest and financing expenses, net**\n\n \n\nInterest and financing expenses, net primarily\nconsisted of interest expenses on loans, finance leases, and other financial liabilities, as well as expenses related to the discounting\nof notes receivable prior to maturity, net of insignificant interest income. Interest and financing expenses, net were approximately\n$466,000 in 2024, a decrease of $165,000, or 26%, compared to approximately $632,000 in 2023. The decrease was mainly attributable to\nlower interest expenses in 2024, as the Company refinanced its short-term loans at more favorable interest rates. The weighted average\ninterest rate on short-term loans was 4.35% in 2024, compared to 5.70% in 2023.\n\n \n\n**Other income**\n\n \n\nOther income primarily consists of proceeds from\nthe sale of scrapped materials, government subsidies, foreign currency exchange gains or losses, gains or losses on the disposal of property\nand equipment, and other miscellaneous items. In 2024, the Company recorded other income of approximately $185,000, representing a decrease\nof $406,000, or 69%, compared to $591,000 in 2023. The decrease was mainly due to a loss of approximately $106,000 on the disposal of\nequipment in 2024, compared to a gain of approximately $339,000 recognized in 2023 from similar transactions.\n\n \n\n**Total other income and expenses, Net**\n\n \n\nTotal other income and expenses, net, amounted\nto a net expense of approximately $290,000 in 2024, an increase of $202,000, or 230%, compared to $88,000 in 2023. This increase was\nprimarily attributable to the changes in interest and financial expenses, net and other income, as discussed in the respective sections\nabove.\n\n \n\n**(Loss) income before income taxes**\n\n \n\nOur loss before income taxes was approximately\n$1.9 million for the year ended December 31, 2024, representing a decrease of approximately $2.8 million compared to income before income\ntaxes of approximately $0.9 million in 2023. This decline was primarily attributable to a decrease in sales, the recognition of non-cash\nshare-based compensation, and other factors discussed in the sections above.\n\n \n\n**Income tax expense**\n\n \n\nIncome tax consisted of the following:\n\n \n\n  \nFor the year ended\n\nDecember 31, \n\n  \n2024  \n2023 \n\n  \nUS$  \nUS$ \n\nCurrent tax provision \n 39,615  \n 92,869 \n\nDeferred tax provision (benefit) \n (31,223) \n (25,129)\n\nIncome tax expense \n 8,392  \n 67,740 \n\n \n\nFor the year ended December 31, 2024, the Company\nrecorded a current tax provision of approximately $39,615 and a deferred tax benefit of $31,223, resulting in a net income tax expense\nof $8,392. In comparison, for the year ended December 31, 2023, the Company recorded a current tax provision of approximately $92,869\nand a deferred tax benefit of $25,129, resulting in a total income tax expense of $67,740.\n\n \n\n**Net income (loss)**\n\n \n\nAs a result of the foregoing, we reported a net\nloss of approximately $1.9 million, or $0.11 per basic and diluted share, for the year ended December 31, 2024, compared to net income\nof approximately $0.9 million, or $0.07 per basic and diluted share, for the same period in 2023.\n\n \n\n**Foreign currency translation**\n\n \n\nOur principal country of operations is the PRC.\nThe financial position and results of our operations are determined by using RMB, the local currency, as the functional currency. The\nconsolidated financial statements are reported using U.S. Dollars. The results of operations and the statement of cash flows denominated\nin foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in\nforeign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated\nin the functional currency is translated at the historical rate of exchange at the time of capital contribution.\n\n \n\n88\n\n \n\n \n\nThe spot exchange rate of the U.S. Dollar against\nthe RMB increased to 7.2993 as of December 31, 2024, compared to 7.0999 as of December 31, 2023. The average exchange rate for the year\nended December 31, 2024, also increased to 7.1957, from 7.0809 in 2023. As a result of these foreign currency exchange rate fluctuations,\nwe recorded a foreign currency translation adjustment loss of approximately $701,000 in other comprehensive loss for the year ended December\n31, 2024, compared to a foreign currency translation adjustment loss of approximately $659,000 in other comprehensive income for the\nyear ended December 31, 2023.\n\n \n\n**Comprehensive income**\n\n \n\nOur comprehensive loss was approximately $2.6\nmillion for the year ended December 31, 2024, compared to comprehensive income of approximately $0.2 million for the year ended December\n31, 2023.\n\n \n\n**Critical Accounting Policies**\n\n \n\nThe discussion and analysis of our financial\ncondition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with\naccounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated\nfinancial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and\nexpenses. We evaluate our estimates on an ongoing basis, including those related to revenue recognition and income taxes. We base our\nestimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the\nresults of which form the basis for making the judgments we make about the carrying values of our assets and liabilities that are not\nreadily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the\nestimates.\n\n \n\nWe consider an accounting estimate to be critical if: (i) the accounting\nestimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii)\nchanges in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could\nhave used in the current period, would have a material impact on our financial condition or results of operations. The management determines\nthere are no critical accounting estimates and critical accounting policies.\n\n \n\n89\n\n \n\n \n\nB. Liquidity and capital resources\n\n \n\nPRC implements strict foreign exchange control\npolicies. The main regulation of PRC’s foreign exchange control is the Foreign Exchange Administration Regulations, promulgated\nby the State Council in 1996 and most recently amended in 2008. For the foreign exchange payments under current account items, under\nexisting PRC foreign exchange regulations, such as the Foreign Exchange Administration Regulations; the Guidelines on Foreign Exchange\nBusiness under Current Account (Edition 2020), which was promulgated by SAFE and became effective on August 28, 2020; the Supplementary\nAnnouncement of State Taxation Administration and State Administration of Foreign Exchange on Issues Relating to Tax Filing for Outbound\nPayments under Trade in Services and Other Items, which was promulgated by State Administration of Taxation and SAFE and became effective\non June 29, 2021, it shall be based on true and legitimate transactions. For a single transaction of payments which exceeds $50,000,\ndomestic institutions shall complete the tax record-filing formalities prior to making the first foreign exchange payment, and before\nthe bank making payment, the bank shall review the documentation including the relevant contracts, settlement list and the electronic\ntax record-filing form. The foreign exchange payment under current account times is made legitimately only if the formalities of tax\nfiling are completed by the domestic institutions and the documentation review is completed by the bank.\n\n \n\nThere are no regulatory restrictions with regards\nto cash transfers in RMB between the entities in China, however, cash transfer, if any, between the PRC entities and/or Hongli WFOE,\nis subject to reasonable business purpose, relevant management approval and applicable internal control procedures and booking, and with\nrespect to Hongli WFOE and Hongli Shandong, pursuant to Contractual Arrangements.\n\n \n\nWe intend to keep any future earnings to re-invest\nin and finance the expansion of the business of the PRC operating entities, and we do not anticipate that any cash dividends will be\npaid in the foreseeable future. Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit\nor share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to\npay its debts due in the ordinary course of business.\n\n \n\nCurrent PRC regulations permit our indirect PRC\nsubsidiaries to pay dividends to the Company only out of their accumulated profits, if any, determined in accordance with Chinese accounting\nstandards and regulations. In addition, each of our subsidiaries in mainland China is required to set aside at least 10% of its after-tax\nprofits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Although the statutory\nreserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings\nof the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.\n\n \n\nThe PRC government also imposes controls on the\nconversion of RMB into foreign currencies and the remittance of currencies out of mainland China. Therefore, we may experience difficulties\nin completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits,\nif any. Furthermore, if Hongli WFOE and Hongli Shandong incur debt on their own in the future, the instruments governing the debt may\nrestrict their ability to pay dividends or make other distributions to us. If either Hongli WFOE, Hongli HK or the VIE is unable to distribute\ndividends or make payments directly or indirectly to Hongli Cayman, we may be unable to pay dividends on our Ordinary Shares.\n\n \n\nCash dividends, if any, on our Ordinary Shares\nwill be paid in U.S. dollars. If we are considered a mainland China tax resident enterprise for tax purposes, any dividends we pay to\nour overseas shareholders may be regarded as China-sourced income and as a result may be subject to mainland China withholding tax at\na rate of up to 10.0%.\n\n \n\nIn order for us to pay dividends to our shareholders,\nwe will rely on payments made from Hongli Shandong to Hongli WFOE, pursuant to Contractual Arrangements between them, and the distribution\nof such payments to Hongli HK as dividends from Hongli WFOE. Certain payments from the VIE, Hongli Shandong, to Hongli WFOE are subject\nto PRC taxes, including VAT.\n\n \n\n90\n\n \n\n \n\nPursuant to the Arrangement between Mainland China\nand the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance\nArrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a mainland\nChina project. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including\nwithout limitation that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong project\nmust directly hold no less than 25% share ownership in the mainland China project during the 12 consecutive months preceding its receipt\nof the dividends. In current practice, a Hong Kong project must obtain a tax resident certificate from the Hong Kong tax authority to\napply for the 5% lower mainland China withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate\non a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong\ntax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to\nbe paid by Hongli WFOE to its immediate holding company, Hongli HK. As of the date of this Annual Report, we have not applied for the\ntax resident certificate from the relevant Hong Kong tax authority. Hongli HK intends to apply for the tax resident certificate when Hongli\nWFOE plans to declare and pay dividends to Hongli HK. See “Item 3. Key Information-D. Risk Factors — Risks Related to Doing\nBusiness in China — *There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of\nHongli WFOE, and dividends payable by Hongli WFOE to Hongli HK may not qualify to enjoy certain treaty benefits.*”\n\n \n\nAny transfer of funds by the holding company to\nthe PRC operating entities, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration\nor filing with relevant governmental authorities in mainland China. Any foreign loans procured by the PRC operating entities and Hongli\nWFOE is required to be registered with SAFE or its local branches or satisfy relevant requirements, and Hongli WFOE may not procure foreign\nloans which exceed the difference between their respective total project investment amount and registered capital or 3.5 times (which\nmay be varied due to the change of mainland China’s national macro-control policy) of the net worth of Hongli WFOE, and the VIE\nmay not procure foreign loans which exceed 3.5 times (which may be varied due to the change of mainland China’s national macro-control\npolicy) of the net worth of the VIE. According to the relevant PRC regulations on foreign-invested enterprises in mainland China, capital\ncontributions to the PRC operating entities are subject to the filing with State Administration for Market Regulation in its local branches,\nthe Ministry of Commerce in its local branches and registration with a local bank authorized by SAFE.\n\n \n\nAdditionally, pursuant to the exclusive business\ncooperation and management agreement between Hongli WFOE and Hongli Shandong, Hongli WFOE has the full and exclusive right to manage\nall cash flow and assets of Hongli Shandong and to administrate the financial affairs and daily operation of Hongli Shandong. There are\nno terms in the Contractual Arrangements that may restrict the transfer of funds between Hongli Shandong and Hongli WFOE.\n\n \n\nOn March 31, 2023, we closed our initial public\noffering of 2,062,500 Ordinary Shares at the offering price of $4.00 per share for total gross proceeds of $8.25 million before deducting\nunderwriting discounts and offering expenses. Net proceeds of our offering were approximately $7.2 million. In addition, we granted the\nunderwriters a 45-day option to purchase up to an additional 309,375 Ordinary Shares at the public offering price. On May 2, 2023, the\nunderwriter exercised the over-allotment option in full for total gross proceeds of $1,237,500 before deducting underwriting discounts\nand commissions. Net proceeds of our over-allotment option were approximately $1.1 million. Our Ordinary Shares began trading on the\nNasdaq Capital Market under the symbol “HLP” on March 29, 2023.\n\n \n\nFollowing the completion of the IPO, all net proceeds\nof approximately $8.4 million—including the exercise of over-allotment options—were transferred from Hongli Cayman to Hongli\nHK, and subsequently from Hongli HK to the wholly foreign-owned enterprise (“WFOE”). The WFOE loaned a total of $8.4 million\nto Hongli Shandong through an entrusted loan arrangement with Weifang Bank. Hongli Shandong utilized these proceeds to repay a portion\nof a $10.5 million (RMB70 million, based on the 2023 exchange rate) bank loan. Please refer to the Item 14. MATERIAL MODIFICATIONS TO\nTHE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.\n\n \n\nOn November 13, 2024, the Company entered into\na Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain non-U.S. investors (the “Purchasers”)\nfor a private placement offering, pursuant to which the Company agreed to sell and issue 60,000,000 ordinary shares, par value $0.0001\nper share, at a purchase price of $0.55 per share, for an aggregate purchase price of $33,000,000. The transaction closed on December\n5, 2024. Upon closing, the Company issued 60,000,000 ordinary shares to the Purchasers and received gross proceeds of RMB239,979,300,\nequivalent to $33,000,000. The ordinary shares issued in this transaction were offered and sold in reliance on the exemption from registration\nprovided by Rule 903 of Regulation S under the Securities Act of 1933, as amended. The 60,000,000 new Ordinary Shares were registered\nfor resale under the Company’s registration statement on Form F-3 (File No. 333-284050), initially filed with the U.S. Securities\nand Exchange Commission on December 5, 2024 and declared effective on February 4, 2025.\n\n \n\nOn April 11, 2026, the Company entered into a Securities Purchase Agreement\n(the “Securities Purchase Agreement”) with a U.S. investor (the “Investor”) for a private placement offering,\nproviding the sale and issuance of 1,300,000 ordinary shares of the Company, par value $0.0001 per share (the “Shares”), at\na purchase price of $0.25 per Share, for aggregate gross proceeds of $325,000. The Securities Purchase Agreement contains customary representations\nand warranties of the Company and the Investor and customary indemnification and obligations of the parties. On April 24, 2026, the transaction\ncontemplated by the Securities Purchase Agreement was closed. Upon closing, the Company issued a total of 1,300,000 ordinary shares to\nthe Investor following receipt of gross proceeds of $325,000.\n\n \n\n91\n\n \n\n \n\nAs of December 31, 2025, we had cash and cash\nequivalents of approximately $1.9 million, and our current assets were approximately $16.1 million, and our current liabilities were\napproximately $14.4 million. Total shareholders’ equity as of December 31, 2025 was approximately $57.8 million. Substantially\nall of our current operations are conducted in the PRC and most of our revenue, expenses, cash and cash equivalents are denominated\nin RMB. Substantially all of our cash and cash equivalents were held by the Company in the PRC.\n\n \n\nIn assessing our liquidity, we monitor and analyze\nour cash on hand and held in the bank, our ability to generate sufficient revenue sources in the future and our operating and capital\nexpenditure commitments. The Company plans to fund working capital through its operations, bank borrowings, additional capital contributions\nfrom shareholders, as well as the proceeds we received from the IPO. For the years ended December 31, 2025, we generated positive cash\nflow of approximately $0.7 million. For the years ended December 31, 2024, we used $0.4 million in operating activities. For years ended\nDecember 31, 2023, we generated positive cash flow of approximately $0.9 million. Our working capital requirements are affected by the\nefficiency of the PRC operating entities’ operations, the numerical volume and dollar value of their sales contracts, the progress\nor execution on their customer contracts, and the timing of accounts receivable collections. The PRC operating entities had been using\ntheir historical funds to optimize our sales and production and the PRC operating entities generated positive cash flows from their business\nfor their ordinary course of operations in 2025. In order to further grow and expand the business, the PRC operating entities are seeking\nbank loans and equity financing to fund and execute their Expansion Plan, and there can be no assurance that the PRC operating entities\nwill possess or be able to secure the bank loans to meet these payment obligations under the Expansion Plan when they become due. See\n“Item 3. Key Information-D. Risk Factors — Risks Related to the Business and Industry — *Our indebtedness\nto lenders and other creditors is significant and if we encounter demands for payment that we cannot meet, it could have adverse consequences\nfor our business and future prospects*.”\n\n \n\nThe following table sets forth summary of our\ncash flows for the periods indicated: \n\n \n\n  \nFor the year ended December 31, \n\n  \n2025  \n2024  \n2023 \n\n  \nUS$  \nUS$  \nUS$ \n\nNet cash provided by (used in) operating activities \n 878,267  \n (414,034) \n 884,917 \n\nNet cash used in investing activities \n (1,261,573) \n (33,311,809) \n (2,253,634)\n\nNet cash provided by financing activities \n 1,255,752  \n 33,508,577  \n 382,094 \n\nEffect of exchange rates on cash \n 87,935  \n 326,383  \n (311,747)\n\nNet increase (decrease) in cash and cash equivalents \n 960,381  \n 109,117  \n (1,298,370)\n\nCash, cash equivalents and restricted cash at beginning of the year \n 924,786  \n 815,669  \n 2,114,039 \n\nCash, cash equivalents and restricted cash at end of the year \n 1,885,167  \n 924,786  \n 815,669 \n\n \n\n**Operating Activities**\n\n \n\nFor the year ended December 31, 2025, net cash\nprovided by operating activities was approximately $0.9 million, including a net income of approximately $1.9 million, adjusted for non-cash\nitems totaling approximately $1.0 million, and negative changes in operating assets and liabilities of approximately $2.1 million. The\nunfavorable changes in working capital were primarily due to an increase in accounts receivable of $3.2 million, and an increase in notes\nreceivable of $0.7 million. These negative impacts were partially offset by a decrease in prepayments of $1.0 million, a decrease in accounts\npayable and accrued expenses of $0.4 million, and a decrease in inventory of $0.2 million, along with other minor changes.\n\n \n\nFor the year ended December 31, 2024, net cash\nused in operating activities was approximately $0.4 million, including a net loss of approximately $1.9 million, adjusted for non-cash\nitems totaling approximately $3.0 million, and negative changes in operating assets and liabilities of approximately $1.5 million. The\nunfavorable changes in working capital were primarily due to an increase in prepayments of $1.1 million, an increase in inventory of $0.4\nmillion, and an increase in notes receivable of $0.4 million. These negative impacts were partially offset by a decrease in accounts payable\nand accrued expenses of $0.3 million, along with other minor changes.\n\n \n\n92\n\n \n\n \n\nFor the year ended December 31, 2023, net cash\nprovided by operating activities was approximately $0.9 million, including a net income of approximately $0.9 million, adjusted for non-cash\nitems of approximately $0.7 million and negative changes in operating assets and liabilities of approximately $2.2 million and positive\nchanges of $1.5 million. The negative changes in operating assets and liabilities mainly included an increase in prepayments of $0.1 million,\nan increase in accounts payable, accrued expenses and income tax payable of $2.0 million. The positive changes in operating assets and\nliabilities mainly included a decrease of accounts receivable of approximately $1.2 million, a decrease in notes receivable of approximately\n$0.06 million, a decrease in inventory of $0.2 million, and a decrease in due from related parties of $0.1 million.\n\n \n\n**Investing Activities**\n\n \n\nFor the year ended December 31, 2025, net cash\nused in investing activities was approximately $1.3 million. During the year, the Company prepaid approximately $1.1 million for the acquisition\nof the Yingxuan Assets, paid $0.4 million loan advance to related parties, and spent approximately $0.2 million on purchase of property\nand equipment. These investment expenditures were partially offset by approximately $0.4 million repayment of loan from related parties\nand $0.04 million cash proceeds from the sale of equipment.\n\n \n\nFor the year ended December 31, 2024, net cash\nused in investing activities was approximately $33.3 million. During the year, the Company paid $33.4 million as a deposit for investment\nin joint venture, prepaid approximately $0.3 million for the acquisition of the Yingxuan Assets, and spent approximately $0.03 million\non purchase of property and equipment. These investment expenditures were partially offset by approximately $0.35 million loan repayment\nreceived from a related party, along with minor cash proceeds from the sale of equipment.\n\n \n\nFor the year ended December 31, 2023, net cash\nused in investing activities was approximately $2.3 million, which were primarily the result of payment made to acquire property and\nequipment of approximately $0.3 million, payment made to acquire intangible assets of approximately $0.6 million and prepayments made\nfor purchase of Yingxuan Assets of approximately $1.8 million, which was partially offset by the proceeds received for sales of properties\nof approximately $0.7 million, and a loan made to a related party of approximately $0.4 million.\n\n \n\n**Financing Activities** \n\n \n\nFor the year ended December 31, 2025, net cash provided by financing\nactivities was approximately $1.3 million. This was primarily driven by net proceeds from short-term loans of approximately $1.5 million\n(borrowings of approximately $8.9 million offset by repayments of approximately $7.4 million). These inflows were partially offset by\nrepayments totaling of approximately $0.3 million related to long-term loans.\n\n \n\nFor the year ended December 31, 2024, net cash\nprovided by financing activities was approximately $33.5 million. This was primarily driven by proceeds from a private placement of $33.0\nmillion; net proceeds from long-term loans of approximately $0.3 million (borrowings of approximately $0.4 million offset by repayments\nof approximately $0.1 million); net proceeds from short-term loans of approximately $0.3 million (borrowings of approximately $7.2 million\noffset by repayments of approximately $6.9 million); and net proceeds of approximately $0.02 million from related parties (advances of\napproximately $1.06 million offset by repayments of approximately $1.04 million). These inflows were partially offset by payments totaling\nof approximately $0.09 million related to finance leases and other financing liabilities.\n\n \n\nFor the year ended December 31, 2023, net cash\nprovided by financing activities was approximately $0.4 million. This amount includes: (i) net proceeds from the initial public offering\nof $8.4 million, (ii) proceeds from long and short-term loans totaling $6.4 million, (iii) repayments of long and short-term loans totaling\n$13.1 million, (iv) repayments of financing liabilities and finance leases amounting to $0.5 million, and (v) net repayments to related\nparties of $0.6 million.\n\n \n\n93\n\n \n\n* *\n\n**Loans, Guarantees and Pledges**\n\n \n\nLoans represent amounts due to various banks\nand financial institutions on scheduled payment dates set out in the loan agreements. These loans are secured by pledge or guarantees\nand are classified as short term or long term based on their maturities. Substantially all of the loans are used for the purchase of\nraw materials. Substantially all outstanding loans as of December 31, 2025 and 2024 were guaranteed by the CEO, the family members of\nthe CEO, companies owned by those family members.\n\n \n\nAs of December 31, 2025 and 2024, short-term loans\nand long-term loans, and third party and related party companies, personal guarantees and pledges provided for the outstanding loans were\nas follows:\n\n \n\n  \n  \n   \nAs of December 31, \n\nFinancial Institutions \nLoan period \nInterest rate  \n2025  \n2024 \n\n  \n  \n   \nUS$  \nUS$ \n\nChina Minsheng Bank(2)(3) \nFebruary 11, 2025 to February 11, 2026 \n 3.30% \n 285,996  \n - \n\nChina Minsheng Bank(2)(3) \nJune 30, 2025 to June 30, 2026 \n 3.30% \n 428,994  \n - \n\nChina Minsheng Bank(2)(3) \nSeptember 3, 2025 to September 3, 2026 \n 3.30% \n 571,992  \n - \n\nBank of Rizhao(2) \nApril 10, 2025 to April 10, 2026 \n 3.50% \n 714,990  \n - \n\nRural Commercial Bank of Shandong(2) \nSeptember 29, 2025 to September 29, 2026 \n 3.20% \n 3,574,952  \n - \n\nRural Commercial Bank of Shandong(2) \nNovember 21, 2025 to November 18, 2026 \n 3.50% \n 714,990  \n - \n\nXCMG Commercial Factoring (Xuzhou) Co., Ltd(2)(3) \nNovember 28, 2025 to November 25, 2026 \n 3.50% \n 500,493  \n - \n\nXCMG Commercial Factoring (Xuzhou) Co., Ltd(2)(3) \nDecember 12, 2025 to March 25, 2026 \n 3.50% \n 171,598  \n - \n\nBank of Beijing(2) \nDecember 29, 2025 to December 29, 2026 \n 3.10% \n 714,990  \n - \n\nIndustrial and Commercial Bank of China \nMarch 21, 2025 to March 20, 2026 \n 3.65% \n 142,998  \n - \n\nIndustrial and Commercial Bank of China \nMarch 21, 2025 to March 18, 2026 \n 3.65% \n 285,999  \n - \n\nBank of Beijing(1) \nDecember 25, 2024 to December 25, 2025 \n 3.10% \n -  \n 958,996 \n\nRural Commercial Bank of Shandong(1)(2) \nDecember 2, 2024 to November 26, 2025 \n 4.35% \n -  \n 684,997 \n\nBank of Rizhao(1)(2) \nApril 17, 2024 to April 10, 2025 \n 3.70% \n -  \n 1,095,996 \n\nChina Minsheng Bank(2) \nAugust 30, 2024 to August 30, 2025 \n 4.00% \n -  \n 684,997 \n\nWeihai City Commercial Bank(1) \nFebruary 29, 2024 to February 25, 2025 \n 3.75% \n -  \n 1,095,995 \n\nAgricultural Bank of China(2) \nSeptember 29, 2024 to September 28, 2025 \n 3.90% \n -  \n 1,315,195 \n\nShort-term loans \n  \n    \n 8,107,992  \n 5,836,176 \n\n  \n  \n    \n    \n   \n\nShenzhen Qianhai WeBank Co., Ltd.(1) \nJanuary 30, 2024 to February 1, 2026 \n 6.28% \n 40,857  \n 234,856 \n\nBank of Weifang(1)(2) \nApril 25, 2023 to April 22, 2026 \n 2.80% \n 100,099  \n - \n\nBank of Weifang(1)(2) \nMay 10, 2023 to April 22, 2026 \n 2.80% \n 1,272,683  \n 5,480 \n\nRural Commercial Bank of Shandong(1)(2) \nApril 28, 2023 to April 27, 2026 \n 3.50% \n 1,993,393  \n 2,740 \n\nCurrent portion of long-term loans \n  \n    \n 3,407,032  \n 243,076 \n\nTotal short-term loans \n  \n    \n 11,515,024  \n 6,079,252 \n\n  \n  \n    \n    \n   \n\nShenzhen Qianhai WeBank Co., Ltd.(1) \nJanuary 30, 2024 to February 1, 2026 \n 6.28% \n -  \n 39,143 \n\nBank of Weifang(1)(2) \nApril 25, 2023 to April 22, 2026 \n 2.80%-3.30% \n -  \n 136,999 \n\nBank of Weifang(1)(2) \nMay 10, 2023 to April 22, 2026 \n 2.80%-3.30% \n -  \n 1,219,295 \n\nRural Commercial Bank of Shandong(1)(2) \nApril 28, 2023 to April 27, 2026 \n 3.50%-4.10% \n -  \n 1,909,772 \n\nNon-current portion of long-term loans \n  \n    \n -  \n 3,305,209 \n\n \n\n(1)The loans were guaranteed by the CEO, by the CEO, Jie Liu, and the\nfamily members of the CEO, Yuanqing Liu, Ronglan Sun and Hongyu Hao.\n\n \n\n(2)The loans were secured by various patents, land use rights and construction\nin progress, real estate.\n\n \n\n(3)\nThe loans were secured by accounts receivable.\n\n \n\n94\n\n \n\n \n\n**Existing Commitment under Expansion Plan**\n\n \n\nThe Company’s existing commitment under\nExpansion Plan was as follows as of various dates set forth below: \n\n \n\nProjects \nTotal \nInstallments \nPayment\nSchedule \nSource of\nFunds \nStatus \nNotes\n\nYingxuan Assets(1) \n$21.6 million \n$2.1 million \n2020 \nWorking capital \nPaid \nUpon completion of the legal title transfer for the remaining real estate and land use rights\n\n  \n  \n$0.7 million \n2021 \nWorking capital and bank loan \nPaid \n \n\n  \n  \n$12.9 million \n2022 \nWorking capital and bank loan \nPaid \n \n\n  \n  \n$1.8 million \n2023 \nWorking capital and bank loan \nPaid \n \n\n  \n  \n$0.3 million \n2024 \nWorking capital and bank loan \nPaid \n \n\n  \n  \n$1.1 million \n2025 \nWorking capital and bank loan \nPaid \n \n\n  \n  \n$2.7 million \n  \nWorking capital and bank loan \nPending \n \n\n  \n  \n  \n  \n  \n  \n \n\nNew facilities(2) \n$3.20 million \n$3.19 million \n  \nWorking capital \nPaid \nAs of December 31, 2025\n\n  \n  \n$0.01 million \n  \nWorking capital \nPaid \n \n\n  \n  \n  \n  \n  \n  \n \n\nFacility finance leasing(3) \n$1.55 million \n$1.17 million \n  \nWorking capital \nPaid \nAs of December 31, 2025\n\n  \n  \n$0.33 million \n  \nWorking capital \nPaid \n \n\n  \n  \n$0.05 million \n  \nWorking capital \nPaid \n \n\n \n\n(1)The total consideration was adjusted to approximately\n$21.6 million (RMB 151.4 million). As of December 31, 2025, the Company had made cumulative\npayments of approximately $18.9 million (RMB132.1 million) to Yingxuan in connection with\nthe acquisition of real estate and land use rights. Of the assets covered by these payments,\napproximately $13.9 million (RMB 97.5 million) had been legally transferred to the Company\nwhile the remaining assets, valued at approximately $7.7 million (RMB53.9 million), had not\nyet been transferred as of the filing date of this report. A remaining balance of approximately\n$2.8 million (RMB19.3 million) is contractually payable only upon completion of the legal\ntitle transfer for the remaining real estate and land use rights.\n\n \n\n(2)As of December 31, 2025, Hongli Shandong\nhad purchased a total of 407 pieces of facilities for these workshops, for a total amount\nof approximately $3.2 million (RMB23.3 million). Hongli Shandong has made total payments\nof these facilities for $3.2 million (RMB23.3 million).\n\n \n\n(3)Hongli Shandong entered into several finance\nleasing agreements to lease various facilities for a total amount of $1.55 million (RMB10.7\nmillion), with lease terms ranging from 13 to 36 months. For the year ended December 31,\n2023, the Company paid a total of approximately $308,000 towards these finance leases. As\nof December 31, 2023, two facility finance leases remained unpaid, with a total lease liability\nof $45,300, which is scheduled to be paid off in 2024. The Company fully repaid all finance\nlease liabilities as scheduled in 2024. Upon completion of these payments, the Company obtained\nfull ownership of the related facilities.\n\n \n\n(i) Yingxuan Assets\n\n \n\nIn November 2020, Hongli Shandong signed a letter\nof intent with Yingxuan Heavy Industry Co., Ltd. (“Yingxuan”) regarding a planned purchase of all of Yingxuan’s assets\nlocated in an industrial area, including its use rights of three parcels of industrial land, building, facilities and infrastructure (collectively,\nthe “Yingxuan Assets”) for a total consideration of approximately RMB125.0 million (approximately $17.1 million, the “Purchase\nPrice for Yingxuan Assets”).\n\n \n\nOn January 1, 2021, Hongli Shandong and Yingxuan entered into three\nasset transfer agreements (the “YX Asset Transfer Agreements”), pursuant to which Hongli Shandong has made various payments\ntowards the Purchase Price for Yingxuan Assets according to the payment schedule and Yingxuan has transferred the titles to part of the\nYingxuan Assets to Hongli Shandong, pending the full payment for the Purchase Price for Yingxuan Assets. During the year ended December\n31, 2021, Hongli Shandong paid the deposit of RMB15.4 million (approximately $2.4 million) to Yingxuan from its working capital, which\nwas used towards the Purchase Price for Yingxuan Assets.\n\n \n\n95\n\n \n\n \n\nPursuant to the YX Asset Transfer Agreements,\nHongli Shandong had agreed to pay Purchase Price for Yingxuan Assets in installments, including RMB52.0 million (approximately $7.5 million)\npayable by end of 2021, RMB47.0 million (approximately $6.8 million) payable by end of 2022 and RMB11.0 million (approximately $1.6 million)\npayable by end of 2023. The installments had borne an annual interest of 7%. However, as mutually agreed by Yingxuan and Hongli Shandong,\nHongli Shandong did not pay the agreed installment in fiscal year 2021 due to the delay of the acquisition of Yingxuan Assets, and Hongli\nShandong made a prepayment of RMB7.8 million (approximately $1.1 million) for the year ended December 31, 2021. The title of use rights\nof two parcels of industrial land, buildings, facilities and infrastructure for consideration of approximately RMB85.2 million (approximately\n$12.4 million) were transferred to Hongli Shandong on June 13, 2022.\n\n \n\nOn May 5, 2023, Hongli Shandong entered into a\nsupplementary agreement (the “YX Supplementary Agreement”) to the YX Asset Transfer Agreements with Yingxuan, pursuant to\nwhich Hongli Shandong, on one hand, agreed to increase the Purchase Price for Yingxuan Assets to RMB151.4 (approximately US$21.9 million)\n(the “Amended Purchase Price for Yingxuan Assets”) taking into account of the anticipated demolition reimbursement to be assigned\nto and received by Hongli Shandong from the local government, and on the other hand, Yingxuan agreed to waive all interest payments accrued\nand to be accrued based on the annual interest rate of 7% for the Purchase Price as set forth in the YX Asset Transfer Agreements.\n\n \n\nAs of December 31, 2025, the Company had made\ncumulative payments of approximately $18.9 million (RMB 132.1 million) to Yingxuan in connection with the acquisition\nof real estate and land use rights. Of this amount, assets totaling approximately $13.9 million (RMB 97.5 million) had\nbeen legally transferred to the Company. The remaining assets, valued at approximately $7.7 million (RMB 53.9 million),\nhad not yet been transferred as of the filing date of this report. A remaining balance of approximately $2.8 million (RMB 19.3 million)\nis contractually payable only upon completion of the legal title transfer for the remaining real estate and land use rights. As this\npayment obligation is contingent on the occurrence of a future event, no liability has been recognized as of December 31, 2025.\n\n \n\nOff-balance Sheet Arrangements\n\n \n\nThere were no off-balance sheet arrangements\nfor the years ended December 31, 2025 and 2024, that have or that in the opinion of management are likely to have, a current or future\nmaterial effect on our financial condition or results of operations. \n\n \n\nTabular Disclosure of Contractual Obligations\n\n \n\nLease\n\n \n\n*Finance Lease*\n\n \n\nThe Company acquired certain machineries on finance\nlease. The amortization of the finance lease asset was nil, $37,335 and $73,422 for the years ended December 31, 2025, 2024 and\n2023, respectively. The amortization of finance lease asset is included in depreciation and amortization expense. The interest expense\non finance lease was nil, $539 and $10,036 for the years ended December 31, 2025, 2024 and 2023, respectively.\n\n \n\n*Failed sale and leaseback*\n\n \n\nFor the years ended December 31, 2023 and 2022,\nthe Company entered into three sale and leaseback agreements for a 2-year lease of four machineries. The lease agreement offers the Company\na bargain purchase option to purchase the machineries at the end of lease term for RMB100. The management evaluated the carrying amount\nof the underlying assets at the end of lease term and their difference between the bargain purchase consideration, and concluded that\nthe Company is reasonably certain to exercise the bargain purchase option. This qualifies the leases as failed sale and leaseback transactions\nand the Company accounts for leases as financing transactions. One machinery leased pursuant to such sale and leaseback agreement entered\nin November 2021 is associated with the new production facilities for the workshops under the Expansion Plan. See “Item 4. Information\non the Company – B. Business Overview – Facilities and Equipment of the PRC Operating Entities - Yingxuan Assets Purchase.”\n\n \n\nFor the years ended December\n31, 2025, 2024 and 2023, the interest related to the failed sale and leaseback was nil, nil and $9,371, respectively. There were no financing\nliabilities as of December 31, 2025 and 2024, respectively. All financing liabilities were fully paid off as of December 31, 2024.\n\n \n\n96\n\n \n\n \n\nC. Research and development, Patents and License, etc.\n\n \n\nSee “Item 4. Information on the Company-B.\nBusiness Overview-Research and Development” and “Item 4. Information on the Company-B. Business Overview-Intellectual Property.”\n\n \n\nD. Trend information\n\n \n\nOther than as disclosed elsewhere in this annual\nreport on Form 20-F, we are not aware of any trends, uncertainties, demands, commitments, or events for the period from January 1, 2025\nto December 31, 2025 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity,\nor capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results\nor financial condition.\n\n \n\nE. Critical Accounting Estimates\n\n \n\nWe prepare our consolidated financial statements\nin accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments,\nestimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported\namounts of revenue and expenses during the reporting period. We continually evaluate these judgments and estimates based on our own experience,\nknowledge and assessment of current business and other conditions, and our expectations regarding the future based on available information\nand assumptions that we believe to be reasonable. Since the use of estimates is an integral component of the financial reporting process,\nour actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others\nin their application.\n\n \n\nFor the year ended December 31, 2025 and 2024, we identified no critical\naccounting estimates in the preparation of our financial statements."}