Erayak(RAYA) - 2023 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section presents key financial data and outlines significant risks related to operations, regulations, and share structure Selected Financial Data The company's financial data shows total assets of $35.3 million, a net income of $1.2 million, and operating cash flow of $6.7 million for 2023 Consolidated Financial Position (USD) | Financial Metric | As of Dec 31, 2023 | As of Dec 31, 2022 | As of Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Total Assets | $35,285,266 | $37,605,200 | $23,470,453 | | Total Liabilities | $15,083,178 | $18,261,149 | $16,576,131 | | Total Shareholders' Equity | $20,202,087 | $19,344,051 | $6,894,322 | Consolidated Cash Flow Summary (USD) | Cash Flow Activity | For the Year Ended Dec 31, 2023 | For the Year Ended Dec 31, 2022 | For the Year Ended Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $6,729,733 | $(4,151,135) | $4,642,893 | | Net cash from investing activities | $(1,378,110) | $(4,896,167) | $(244,173) | | Net cash from financing activities | $(6,437,393) | $11,319,867 | $(3,395,530) | | Net (decrease) increase in cash | $(1,085,770) | $1,892,554 | $1,003,190 | Consolidated Income Statement Highlights (USD) | Income Statement Item | For the Year Ended Dec 31, 2023 | For the Year Ended Dec 31, 2022 | For the Year Ended Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Net Income | $1,218,714 | $3,475,961 | $3,394,649 | Risk Factors The company faces significant risks from its China operations, customer concentration, and dual-class share structure - The company is subject to PRC regulations, including the M&A Rules and recent measures from the CSRC regarding overseas listings, which could require filings or approvals for future offerings and subject the company to penalties if non-compliant[12][13] - The company's 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 matters[112] - The company has significant customer concentration; in fiscal year 2023, one customer accounted for 11.99% of total revenues, and the loss of key customers could significantly impact revenues and profitability[68][70] - As a foreign private issuer and an emerging growth company, the company is exempt from certain U.S. reporting and corporate governance requirements, which may result in less information available to investors and fewer protections compared to U.S. domestic companies[114][116] ITEM 4. INFORMATION ON THE COMPANY This section details the company's history, corporate structure, and business operations in power solution products History and Development of the Company Erayak is a Cayman Islands holding company operating through its PRC subsidiaries since its 2019 incorporation - Erayak is a Cayman Islands holding company incorporated in 2019, conducting its business through subsidiaries in the PRC[132] - The company's main operating subsidiaries are Zhejiang Leiya (incorporated in 2009), Wenzhou New Focus (incorporated in 2012), and Ruike Electronics (incorporated in 2023)[132] Business Overview The company specializes in R&D, manufacturing, and sales of power solution products for global markets Revenue Breakdown by Product Type | Product Type | FY 2023 Revenue % | FY 2022 Revenue % | FY 2021 Revenue % | | :--- | :--- | :--- | :--- | | Inverters | 59% | 52% | 82% | | Gasoline Generators | 32.36% | 43.82% | 8.28% | | Chargers | 2.68% | 2.16% | 7.52% | | Power Bank | 3.96% | 0% | 0% | - The company's products are sold internationally in countries including Japan, England, Germany, the U.S., Canada, and Australia, and hold numerous safety and compliance certifications such as TÜV, GS Mark, FCC Mark, and CE Mark[136] - Key business strategies include optimizing the product portfolio, focusing on efficient manufacturing and cost management, enhancing brand recognition, and expanding cooperation with e-commerce platforms like Amazon[163][167][168] - The company holds 21 patents and 3 trademarks in China, with one trademark also registered in the US and UK, protecting its intellectual property[87] Organizational Structure Erayak operates through a direct holding structure, not a VIE, with PRC subsidiaries held via BVI and HK entities - The company utilizes a direct holding structure without any Variable Interest Entities (VIEs)[220] - The corporate hierarchy flows from the Cayman parent (Erayak) through BVI (Erayak BVI) and Hong Kong (Erayak HK) entities to the PRC operating subsidiaries (Ruike, Zhejiang Leiya, etc)[221] Property, Plants and Equipment The company's primary assets include production equipment and a long-term factory lease in Wenzhou, China - The total value of the company's equipment was approximately $1.46 million at the end of 2023, with 66.1% dedicated to manufacturing machinery[222] - The company has a 20-year factory lease (2018-2037) with a related party, for which the total rent of RMB 70.49 million (approx. $10.9 million) has been paid upfront[223] OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes financial performance, discussing revenue, profit, expenses, liquidity, and capital resources Results of Operations Revenues and net income declined in 2023 due to reduced European demand and increased G&A expenses Financial Performance Comparison (USD) | Metric | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Revenues | $20,322,498 | $26,909,025 | $18,628,886 | | Gross Profit | $5,022,649 | $6,618,794 | $5,719,424 | | Operating Income | $746,766 | $4,068,574 | $3,485,608 | | Net Income | $1,218,714 | $3,475,961 | $3,394,649 | - The 24.48% decrease in 2023 revenue was mainly due to reduced demand for inverters and gasoline generators in Europe after excess orders in the prior year[230] - General and administrative expenses increased by 117.09% in 2023 to $2.02 million, primarily due to higher consulting fees for accounting and legal services that were previously deducted from IPO proceeds[233] Liquidity and Capital Resources The company maintains liquidity through cash from operations and credit, with sufficient capital for near-term needs Cash and Borrowings (USD) | Metric | As of Dec 31, 2023 | As of Dec 31, 2022 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $5,878,434 | $7,067,247 | | Short-term Borrowings | $70,424 | $6,227,165 | | Long-term Loans (net of current portion) | $1,871,591 | $217,523 | - Capital expenditures were approximately $0.70 million, $0.93 million, and $0.29 million for the years 2023, 2022, and 2021, respectively, mainly for purchasing fixed and intangible assets[260] DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the board composition, executive compensation, employee base, and concentrated share ownership - The board of directors consists of five members, with three determined to be independent: Jizhou Hou, Jing Chen, and Tsang Sheung[288] Executive Compensation (FY 2023) | Name | Position | Salary (USD) | | :--- | :--- | :--- | | Lingyi Kong | CEO | $29,303 | | Lanling Gu | CFO | $17,238 | Employee Distribution (as of Dec 31, 2023) | Department | Number of Employees | | :--- | :--- | | Administration | 40 | | Research and Development | 50 | | Manufacture | 179 | | Business Operations | 21 | | Total | 290 | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section outlines the controlling shareholder structure and significant related party transactions, including leases and loans - Lingyi Kong, CEO and Chairman, beneficially owns 6,000,000 Class A shares and 1,000,000 Class B shares through Erayak International Limited, representing 83.87% of the combined voting power[305] - The company has a 20-year factory lease with Wenzhou Ailefu Technology Co Ltd, an entity 100% owned by the CEO, Lingyi Kong[306][491] - Lingyi Kong provided working capital of $16.56 million in 2023 and $22.70 million in 2022; as of December 31, 2023, the outstanding payable to him was $1.88 million[493] FINANCIAL INFORMATION The company intends to retain all future earnings for expansion and does not anticipate paying dividends - The company does not expect to declare or pay any dividends in the foreseeable future, intending to retain earnings for business operations and expansion[310] - Dividend payments from PRC subsidiaries are subject to PRC laws, which require setting aside at least 10% of after-tax profits for a statutory reserve fund until it reaches 50% of registered capital[310] ADDITIONAL INFORMATION This section covers corporate actions, shareholder rights, material contracts, exchange controls, and taxation policies - The company completed its Initial Public Offering on December 16, 2022, selling 3,000,000 Class A ordinary shares at $4.00 per share, raising net proceeds of approximately $10 million[315] - Shareholder voting rights are structured with one vote per Class A share and twenty votes per Class B share; Class B shares are convertible into Class A shares on a one-for-one basis[320] - The company is subject to PRC foreign exchange controls, which regulate the conversion of RMB and remittance of funds out of China for capital account items, potentially affecting dividend payments[364] - The company does not expect to be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, but this status is determined annually and is subject to change[379] PART II CONTROLS AND PROCEDURES Management identified a material weakness in internal controls due to insufficient U.S. GAAP expertise - Management identified a material weakness in internal control over financial reporting as of December 31, 2023[388] - The identified weakness is the lack of sufficient accounting and finance personnel with experience in U.S. GAAP[388] - The company plans to remediate this by hiring additional personnel with the requisite experience in US GAAP financial reporting and control procedures[388] CORPORATE GOVERNANCE AND OTHER DISCLOSURES This section covers governance practices, including audit expertise, ethics codes, and cybersecurity risk oversight - The Board of Directors has determined that Jing Chen qualifies as an "audit committee financial expert"[389] - As a foreign private issuer, the company relies on home country exemptions from certain Nasdaq corporate governance standards; for example, it did not hold an annual shareholder meeting in 2023[395] - The company has adopted an insider trading policy that establishes guidelines for trading by insiders, including defined trading windows and pre-approval requirements[397] - The Board of Directors is responsible for overseeing cybersecurity risk, which is managed through an IT Committee and integrated into the company's overall risk management system[398] PART III FINANCIAL STATEMENTS This section presents the company's audited consolidated financial statements prepared under U.S. GAAP - The financial statements were audited by Fortune CPA, Inc. for the year ended December 31, 2023[409][411] - The financial statements for the years ended December 31, 2022 and 2021 were audited by TPS Thayer, LLC[406][407] - The financial statements are prepared in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP)[406][409]