Erayak(RAYA) - 2024 Q4 - Annual Report

Part I ITEM 3. KEY INFORMATION This section outlines the company's corporate structure, regulatory environment in China, key financial data, and significant risk factors Corporate Structure and Regulatory Environment Erayak operates as a Cayman Islands holding company through PRC subsidiaries, navigating Chinese regulatory compliance including auditor oversight and cybersecurity laws - Erayak is a Cayman Islands holding company operating in China through its subsidiaries: Ruike Electronics, Zhejiang Leiya, and Wenzhou New Focus[18][20][22] - The company's current and former auditors, Fortune CPA and TPS Thayer, are U.S.-based and subject to PCAOB inspection, thus not currently identified under the HFCAA as non-inspectable[27] - Management asserts that the company has obtained all necessary PRC business licenses and is not subject to cybersecurity review by the CAC as it does not process personal information of over one million users' data or handle data bearing on national security[30][31][36] - Under the CSRC's Trial Measures effective March 31, 2023, the company is considered an "existing enterprise" and is not required to file immediately for its current listing but must do so for future refinancing or other specified events[39][40] Summary of Risk Factors The company faces significant risks related to its Chinese operations, business and industry factors, and its dual-class share structure - Risks of doing business in China include potential CSRC filing/approval requirements, evolving data security and cybersecurity laws, and PRC government restrictions on transferring cash out of China[54] - Business risks include being a holding company reliant on subsidiary dividends, significant customer concentration, intense industry competition, and reliance on short-term borrowings for liquidity[56][59] - Share-related risks stem from a dual-class structure concentrating 40.61% of voting power with Erayak International Limited, reduced reporting requirements as an "emerging growth company," and status as a "foreign private issuer"[63] Selected Financial Data This section provides selected consolidated financial data, highlighting key balance sheet and income statement figures for recent fiscal years Consolidated Financial Position Summary (As of Dec 31) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Total Assets | $46,033,203 | $35,285,266 | $37,605,200 | | Total Liabilities | $19,447,468 | $15,083,178 | $18,261,149 | | Total Shareholders' Equity | $26,585,735 | $20,202,087 | $19,344,051 | Consolidated Operations & Cash Flow Summary (For the Year Ended Dec 31) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net (Loss) Income | $(1,115,977) | $1,218,714 | $3,475,961 | | Net Cash from Operating Activities | $(15,876,639) | $6,729,733 | $(4,151,135) | | Net Cash from Investing Activities | $(971,811) | $(1,378,110) | $(4,896,167) | | Net Cash from Financing Activities | $12,381,107 | $(6,437,393) | $11,319,867 | - The company's financial statements are presented in U.S. dollars, but its functional currency is the Renminbi (RMB). Translation adjustments from RMB to USD are recorded in accumulated other comprehensive income (loss), which amounted to $(500,376) as of December 31, 2024[68][69] ITEM 4. INFORMATION ON THE COMPANY This section details Erayak's corporate history, business operations, product lines, strategic advantages, and the complex PRC regulatory environment History and Business Overview Erayak, a Cayman Islands holding company, specializes in power solution products, with inverters and generators as primary revenue drivers - The company specializes in manufacturing, R&D, and sales of power solution products, including inverters, generators, and chargers, with a focus on mobile and outdoor living applications[342] Revenue Breakdown by Product Type (FY 2022-2024) | Product Type | 2024 Revenue % | 2023 Revenue % | 2022 Revenue % | | :--- | :--- | :--- | :--- | | Inverters | 46% | 59% | 52% | | Gasoline Generators | 32.94% | 32.36% | 43.82% | | Power Bank | 16.39% | 3.96% | 0% | | Chargers | 1.82% | 2.68% | 2.16% | - The company completed its Initial Public Offering on December 19, 2022, issuing 3,000,000 Ordinary Shares at $4.00 per share, raising gross proceeds of $12 million[349] - On November 15, 2023, the company received a non-compliance notice from Nasdaq for failing to meet the $1.00 minimum bid price requirement, but regained compliance on November 4, 2024[352][354] Intellectual Property The company protects its brand and technology through 61 Chinese patents, 12 registered trademarks, and 4 software copyrights - The company holds 61 Chinese patents for its products, with expiration dates ranging from June 2026 to April 2033[396] - Erayak has 12 registered trademarks in China, the United States, and the United Kingdom to protect its brand identity[401][402] - The company also possesses 4 software copyrights in China, further securing its technological assets[405][406] Regulation The company's operations are subject to extensive PRC regulations covering product liability, intellectual property, foreign exchange, and dividend distribution - The company is subject to PRC laws on product liability, which hold manufacturers and retailers civilly liable for damages caused by defective products[409][410] - PRC regulations require the company to contribute to employee benefit plans, including social insurance and housing funds. The company currently contributes based on minimum standards, which may pose a risk of penalties[438][439] - Dividend distributions from PRC subsidiaries are subject to a 10% withholding tax (potentially reducible to 5% for its Hong Kong subsidiary) and can only be paid from after-tax profits after setting aside at least 10% for a statutory reserve fund until it reaches 50% of registered capital[414][428] - Foreign currency exchange is regulated by SAFE, which governs the conversion of RMB and the remittance of funds for both current account (e.g., dividends) and capital account items[419] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section reviews Erayak's financial performance, highlighting revenue growth, declining profitability, and negative operating cash flow in FY2024 Results of Operations FY2024 saw revenue growth driven by gasoline generators, but gross profit and net income declined due to product mix and higher expenses Financial Performance Summary (FY 2024 vs. FY 2023) | Metric | FY 2024 | FY 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Sales | $30,300,360 | $20,322,498 | +49.10% | | Gross Profit | $3,992,362 | $5,022,649 | -20.51% | | Gross Margin | 13.18% | 24.71% | -11.53 pts | | Operating (Loss) Income | $(1,565,048) | $746,766 | N/A | | Net (Loss) Income | $(1,115,977) | $1,218,714 | N/A | - The increase in 2024 revenue was primarily driven by higher demand for gasoline generators in Europe[502] - The decrease in gross profit and margin in 2024 was mainly due to an increased sales proportion of low-margin gasoline generators[505] - General and administrative expenses increased by 14.39% in 2024 to $2.31 million, mainly due to higher employee compensation[506] - Research and development expenses rose by 41.95% to $1.67 million in 2024, reflecting increased investment in new product development[509] Liquidity and Capital Resources The company's liquidity weakened in FY2024 due to negative operating cash flow, offset by financing activities including share issuance and borrowings Cash Flow Summary (Year Ended Dec 31) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net cash from operating activities | $(15,876,639) | $6,729,734 | | Net cash used in investing activities | $(971,811) | $(1,378,110) | | Net cash provided by (used in) financing activities | $12,381,107 | $(6,437,393) | | Net (decrease) in cash | $(4,553,625) | $(1,188,813) | | Cash at end of period | $1,324,809 | $5,878,434 | - The significant cash outflow from operations in 2024 was mainly due to a $6.26 million increase in accounts receivable, a $2.30 million increase in inventory, and a $6.95 million increase in advances to suppliers[525][526] - Financing activities in 2024 provided $12.38 million, largely from an $8 million share issuance and net proceeds from borrowings[532] - As of December 31, 2024, the company had approximately $1.06 million in short-term borrowings and $4.07 million in long-term loans[540] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section outlines the company's board structure, executive compensation, employee count, and concentrated share ownership - The board of directors consists of five members, with three independent directors: Jizhou Hou, Jing Chen, and Tsang Sheung, who chair the Nominating, Audit, and Compensation committees, respectively[569][583] Executive Compensation (2023-2024) | Name and Principal Position | Year | Salary (US$) | Total (US$) | | :--- | :--- | :--- | :--- | | Lingyi Kong, CEO | 2024 | $34,743 | $34,743 | | | 2023 | $29,303 | $29,303 | | Lanling Gu, CFO | 2024 | $21,680 | $21,680 | | | 2023 | $17,238 | $17,238 | - As of December 31, 2024, the company employed 360 people, with the majority (281) in manufacturing[600] - CEO Lingyi Kong, through Erayak International Limited, holds 100% of Class B shares, giving him control of 40.61% of the company's combined voting power due to the 20-to-1 voting rights of Class B shares[604] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details major shareholders, including CEO Lingyi Kong's control, and significant related party transactions, primarily with the CEO - The company leases its factory and offices from Wenzhou Ailefu Technology Co. Ltd., an entity 100% owned by the CEO, Lingyi Kong[608] - Lingyi Kong provided significant working capital to the company, with an outstanding payable balance of $3.51 million due to him as of December 31, 2024. These borrowings are unsecured, on-demand, and interest-free[612] Net Due to Related Parties | Name of related parties | 2024 | 2023 | | :--- | :--- | :--- | | Lingyi Kong | $3,176,325 | $1,877,489 | | Shengling Xiang | $333,840 | - | | Wenzhou Ailefu Technology Co. Ltd. | - | $405,640 | | Net due to related parties | $3,510,165 | $2,283,129 | ITEM 8. FINANCIAL INFORMATION This section references detailed financial statements, confirms no significant legal proceedings, and outlines the company's dividend policy - The company does not anticipate paying any cash dividends in the foreseeable future, intending to retain earnings to finance business expansion[617] - As a holding company, its ability to pay dividends depends on receiving funds from its PRC subsidiaries, which is subject to PRC regulations on profit distribution and currency controls[619][621] - PRC subsidiaries are required to set aside at least 10% of after-tax profits into a statutory reserve until the reserve reaches 50% of registered capital; these funds are not distributable as cash dividends[620] ITEM 10. ADDITIONAL INFORMATION This section details corporate actions, governance structure, and tax implications across various jurisdictions, including the dual-class share structure - On May 20, 2024, the company entered into a private placement agreement to sell 16,000,000 Class A ordinary shares and warrants to purchase 32,000,000 Class A shares for aggregate proceeds of $8,000,000[635] - The company has a dual-class share structure where each Class A share has one vote and each Class B share has twenty votes. Class B shares are convertible into Class A shares[632][642] - As a Cayman Islands company, it is not subject to income or capital gains taxes in the Cayman Islands. Its PRC subsidiaries are subject to PRC Enterprise Income Tax, generally at a 25% rate, with preferential rates for certain entities[742][751] - For U.S. Holders, the company notes that based on its current operations, it does not expect to be treated as a Passive Foreign Investment Company (PFIC), but this status is subject to annual review and market conditions[763] Part II ITEM 15. CONTROLS AND PROCEDURES Management concluded that disclosure controls were ineffective as of December 31, 2024, due to a material weakness in financial reporting - Management concluded that as of December 31, 2024, the company's disclosure controls and procedures were ineffective[788] - A material weakness was identified in internal control over financial reporting due to insufficient accounting and finance personnel with U.S. GAAP experience[789] - The company plans to remediate the weakness by hiring additional personnel with U.S. GAAP experience and strengthening its financial reporting and control procedures[789] ITEM 16. CORPORATE GOVERNANCE AND OTHER MATTERS This section details corporate governance, auditor fees, foreign private issuer exemptions, and cybersecurity risk management - The Board of Directors has determined that Jing Chen qualifies as an "audit committee financial expert"[790] Principal Accountant Fees | Year | Auditor | Audit Fees | | :--- | :--- | :--- | | 2024 | Fortune CPA | $164,800 | | 2023 | Fortune CPA | $160,000 | | 2022 | TPS Thayer | $180,000 | - As a foreign private issuer, the company utilizes home country practice exemptions from certain Nasdaq corporate governance standards, and did not hold an annual shareholder meeting in 2023[802][804] - The company has adopted an insider trading policy and has a process for managing cybersecurity risks, which is overseen by the Board of Directors and managed by an IT Committee[807][814] Part III ITEM 18. FINANCIAL STATEMENTS This section presents the audited consolidated financial statements for Erayak Power Solution Group Inc. and its subsidiaries for recent fiscal years Consolidated Financial Statements The consolidated financial statements for FY2024 show total assets of $46.0 million, a net loss of $1.12 million, and negative operating cash flow Consolidated Balance Sheet Highlights (As of Dec 31) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Total Current Assets | $33,090,337 | $22,098,190 | | Total Assets | $46,033,203 | $35,285,266 | | Total Current Liabilities | $15,534,264 | $13,211,587 | | Total Liabilities | $19,447,468 | $15,083,178 | | Total Shareholders' Equity | $26,585,735 | $20,202,087 | Consolidated Statement of Income Highlights (Year Ended Dec 31) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Sales | $30,300,360 | $20,322,498 | $26,909,025 | | Gross Profit | $3,992,362 | $5,022,649 | $6,618,794 | | Operating (Loss) Income | $(1,565,048) | $746,766 | $4,068,574 | | Net (Loss) Income | $(1,115,977) | $1,218,714 | $3,475,961 | | (Loss) Earnings Per Share | $(0.04) | $0.10 | $0.38 | Notes to Consolidated Financial Statements The notes detail accounting policies, revenue recognition, customer concentrations, related party transactions, debt, and PRC tax rates - Revenue is recognized when control of the product is transferred to the customer, which for international sales is typically at the FOB shipping point[896][900] - In FY2024, one customer accounted for 21.50% of total revenues. In FY2023, one customer accounted for 11.99% of revenues[957][958] - As of December 31, 2024, the company had $1.06 million in short-term borrowings and $4.07 million in long-term loans[941][942] - The company's PRC subsidiaries are subject to Enterprise Income Tax (EIT) rates ranging from 5% to 25%, with Zhejiang Leiya Electronics qualifying for a preferential high-tech enterprise rate of 15%[979][980] ITEM 19. EXHIBITS This section lists all exhibits filed with the annual report, including corporate documents, agreements, and certifications - The report includes a list of all exhibits filed, such as the company's articles of association, material contracts like employment and loan agreements, and required CEO/CFO certifications[820]