Erayak(US:RAYA)2023-05-14 16:00PART I Key Information This section presents selected financial data, details on capitalization, and a comprehensive overview of risk factors Selected Financial Data Consolidated Balance Sheet Summary (2020-2022) | Balance Sheet Item | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Current Assets | $28,235,728 | $13,494,057 | $11,948,863 | | Total Assets | $37,605,200 | $23,470,453 | $22,127,296 | | Total Current Liabilities | $18,043,626 | $11,868,476 | $17,218,352 | | Total Liabilities | $18,261,149 | $16,576,131 | $18,750,919 | | Total Shareholders' Equity | $19,344,051 | $6,894,322 | $3,376,377 | Consolidated Cash Flow Summary (2020-2022) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | ($4,151,135) | $4,642,893 | ($7,926,491) | | Net cash from investing activities | ($4,896,167) | ($244,173) | ($186,006) | | Net cash from financing activities | $11,319,867 | ($3,395,530) | $10,931,005 | | Net increase/(decrease) in cash | $1,892,554 | $1,003,190 | $2,818,508 | | Cash at end of period | $7,067,247 | $5,174,693 | $4,062,055 | Risk Factors - The company's operations are substantially located in China, making its business subject to significant political, economic, and social conditions, as well as governmental policies and regulations within the PRC22 - The dual-class share structure concentrates 83.87% of voting power with the Chairman, Lingyi Kong, through Erayak International Limited, limiting the influence of Class A shareholders on corporate matters124 - The company faces risks from potential U.S. and international trade policies, such as tariffs on Chinese goods, which could increase costs and negatively impact demand for its products6364 - The Holding Foreign Companies Accountable Act (HFCAA) and related SEC/PCAOB actions create uncertainty, as the inability of the PCAOB to inspect auditors in China could lead to delisting from U.S. exchanges5456 Information on the Company Erayak Power Solution Group Inc. is a Cayman Islands holding company specializing in R&D, manufacturing, and global sales of power solutions History and Development of the Company - Erayak Power Solution Group Inc. is a Cayman Islands holding company incorporated in June 2019, conducting business through wholly-owned subsidiaries including Erayak BVI, Erayak HK, and primary PRC operating entities Zhejiang Leiya and Wenzhou New Focus144 Business Overview - The company specializes in the manufacturing, R&D, and sale of power solution products, including sine wave and off-grid inverters, generators, and battery chargers, used in applications such as RVs, industrial vehicles, and outdoor living146 Revenue by Product Type (2020-2022) | Product Type | 2022 Revenue | 2022 % of Total | 2021 Revenue | 2021 % of Total | 2020 Revenue | 2020 % of Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Inverters | $14,065,166 | 52% | $15,356,847 | 82% | $12,751,905 | 86% | | Chargers | $582,040 | 2.16% | $1,400,506 | 7.52% | $745,955 | 7.39% | | Gasoline Generators | $11,790,582 | 43.82% | $1,542,670 | 8.28% | $446,292 | 4.91% | | Other Products | $471,237 | 1.75% | $328,863 | 1.76% | $177,686 | 1.26% | - The company holds numerous intellectual property rights, including 21 patents and 3 trademarks registered in China, with additional trademark registrations in the US and UK, covering its power converter and generator designs94182184 Organizational Structure - The company operates as a holding company with a direct holding structure, not a Variable Interest Entity (VIE) structure, where the Cayman Islands parent wholly owns its subsidiaries in the BVI, Hong Kong, and the PRC operating companies231232 Property, Plants and Equipment - The company's primary operating facility is leased under a 20-year agreement from Wenzhou Ailefu Furniture Tech Limited Company, an entity owned by the CEO and Chairman, Lingyi Kong, with the total rent of approximately $10.9 million for the entire term paid upfront234266 Operating and Financial Review and Prospects Revenue grew 44.45% to $26.91 million in 2022, with gross margin declining to 24.60% and negative operating cash flow Results of Operations Consolidated Results of Operations (2020-2022) | Financial Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Sales | $26,909,025 | $18,628,886 | $14,121,838 | | Gross Profit | $6,618,794 | $5,719,424 | $3,798,856 | | Gross Margin | 24.60% | 30.70% | 26.90% | | Operating Income | $4,068,574 | $3,485,608 | $2,308,691 | | Net Income | $3,475,961 | $3,394,649 | $2,213,372 | - 2022 vs. 2021: Revenue increased by 44.45% to $26.91 million, primarily due to a surge in generator demand from Europe; gross profit increased by 15.72%, but the gross margin declined from 30.70% to 24.60% because of a sales mix shift towards lower-margin generators242244 - 2021 vs. 2020: Revenue increased by 31.92% to $18.63 million, driven by expansion in both domestic and international markets; gross profit grew by 50.56% to $5.72 million, with the gross margin improving to 30.70% from 26.90%253255 Liquidity and Capital Resources Cash Flow Summary (2020-2022) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | ($4,151,135) | $4,689,518 | ($7,926,491) | | Net cash from investing activities | ($4,896,167) | ($290,798) | ($186,006) | | Net cash from financing activities | $11,319,867 | ($3,395,530) | $10,931,005 | - In 2022, net cash used in operating activities was approximately $4.15 million, mainly due to an $8.55 million increase in accounts receivable, while net cash from financing activities was $11.32 million, primarily from the net proceeds of its IPO263268 - The company relies on short-term revolving bank loans for liquidity, with approximately $4.78 million in outstanding short-term loans from two banks as of December 31, 2022272 Directors, Senior Management and Employees Details on leadership, compensation, and board structure, including the five-member board, 132 employees, and 83.87% CEO voting control Directors and Management - The key executive officers are Lingyi Kong, CEO and Chairman, and Lanling Gu, CFO, with the board also including three independent director nominees: Jizhou Hou, Jing Chen, and Peiling Cheng290291292 Compensation Executive Compensation (2021-2022) | Name and Principal Position | Year | Salary (US$) | Total (US$) | | :--- | :--- | :--- | :--- | | Lingyi Kong, CEO | 2022 | $29,722 | $29,722 | | | 2021 | $29,303 | $29,303 | | Lanling Gu, CFO | 2022 | $30,317 | $30,317 | | | 2021 | $17,238 | $17,238 | Board Practices - The board of directors consists of five members, three of whom are independent, and the company has established an Audit Committee, a Compensation Committee, and a Nominating Committee, each with charters305307 Employees Employee Headcount by Department (as of Dec 31, 2022) | Department | Number of Employees | | :--- | :--- | | Administration | 18 | | Research and Development | 23 | | Manufacture | 82 | | Business Operations | 9 | | Total | 132 | Share Ownership Beneficial Ownership of Major Shareholders | Name of Beneficial Owner | Class A Shares | Class B Shares | Percentage Ownership | | :--- | :--- | :--- | :--- | | Lingyi Kong (via Erayak International Ltd.) | 6,000,000 | 1,000,000 | 83.87% | | Wang-Ngai Mak (via CEC Science and Innovation Co., Ltd.) | 1,400,000 | - | 4.52% | Major Shareholders and Related Party Transactions Details on major shareholders' differential voting rights and significant related party transactions, including a 20-year factory lease and CEO loans Related Party Transactions - The company leases its factory premises from Wenzhou Ailefu Technology Co. Ltd., an entity 100% owned by CEO Lingyi Kong327 - CEO Lingyi Kong and other related parties periodically provide working capital to the company; as of December 31, 2022, the company had an outstanding payable of $182,528 to Mr. Kong, who provided total working capital of $22.7 million during fiscal 2022327 Financial Information Outlines the company's dividend policy, indicating no foreseeable payouts, and details PRC regulations impacting future distributions - The company does not expect to declare or pay any dividends in the foreseeable future, intending to retain future earnings to finance business operations and expansion331 - As a holding company, its ability to pay dividends depends on receiving funds from its PRC subsidiaries, with distributions subject to PRC regulations, including setting aside statutory reserves and controls on currency conversion331 Additional Information Details corporate history, dual-class share structure, Cayman Islands law differences, PRC exchange controls, and tax implications including PFIC status Memorandum and Articles of Association - The company has a dual-class share structure where each Class A Ordinary Share has one vote, while each Class B Ordinary Share has twenty votes, and Class B shares are convertible into Class A shares at the holder's option343 - As a Cayman Islands company, its corporate law differs significantly from U.S. (Delaware) law regarding mergers, shareholder suits, director indemnification, and shareholder proposals, with shareholder rights to bring derivative actions being more limited under Cayman law369370372 Exchange Controls - The company's PRC operations are subject to China's foreign exchange regulations, where payments for current account items like profit distributions can be made in foreign currencies after meeting procedural requirements, but capital account items require approval from or registration with SAFE391 - PRC residents holding shares in offshore entities like Erayak are required to complete foreign exchange registration with SAFE or qualified banks under SAFE Circular 37, with non-compliance potentially restricting PRC subsidiaries' ability to distribute dividends offshore394 Taxation - The company is an exempted company in the Cayman Islands and is not subject to Cayman taxes; its Hong Kong subsidiary is subject to a 16.5% profits tax, and its PRC subsidiaries are subject to a 25% Enterprise Income Tax (EIT), though one entity qualifies for a reduced 15% rate as a high-tech enterprise395400401 - There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. Holders of its shares, with the determination made annually based on its income and asset composition408 PART II Controls and Procedures Management concluded disclosure controls and procedures were ineffective as of December 31, 2022, due to a material weakness in internal control - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were ineffective419 - A material weakness was identified in internal control over financial reporting: the company does not have sufficient accounting and finance personnel with U.S.-GAAP experience419 Other Items (Corporate Governance, Fees, etc.) Details corporate governance, including audit committee expertise, code of ethics, principal accountant fees, and foreign private issuer status Principal Accountant Fees | Fee Type | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Audit Fees | $180,000 | $180,000 | | Audit-Related Fees | $0 | $0 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | - As a foreign private issuer, the company is permitted to follow its home country (Cayman Islands) corporate governance practices in lieu of certain Nasdaq corporate governance standards, which may afford less protection to investors426 PART III Financial Statements Presents the company's audited consolidated financial statements for 2020-2022, prepared under U.S. GAAP, with an unqualified audit opinion - The independent registered public accounting firm, TPS Thayer, LLC, issued an unqualified audit opinion on the consolidated financial statements for the three years ended December 31, 2022435 - The company completed its Initial Public Offering (IPO) on December 14, 2022, selling 3,000,000 Class A ordinary shares at $4.00 per share, generating gross proceeds of $12 million536 - The company's PRC subsidiaries are required to allocate at least 10% of after-tax profits to a statutory surplus reserve until the reserve equals 50% of registered capital; as of December 31, 2022, this restricted reserve totaled $916,912537