EX-99.1 2 ea188756ex99-1_erayakpower.htm MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

Exhibit 99.1

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.” All amounts included herein with respect to the six months ended June 30, 2023 and 2022 (“Interim Financial Statements”) are derived from our unaudited consolidated financial statements for the six months ended June 30, 2023 and 2022 included elsewhere in this prospectus. All amounts included herein with respect to the fiscal years ended December 31, 2022 and 2021 are derived from our audited consolidated financial statements (“Annual Financial Statements”) included elsewhere in this prospectus. These Interim Financial Statements and Annual Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or US GAAP.

 

Overview

 

Erayak Power Solution Group Inc. was formed in 2019 under the laws of the Cayman Islands. We conduct business primarily through our wholly-owned subsidiary, Zhejiang Leiya Electronics Co. Ltd., in the People’s Republic of China (“PRC”). Our company specializes in the manufacturing, research and development (“R&D”), and wholesale and retail of power solution products. Our product portfolio includes sine wave and off-grid inverters, inverter and gasoline generators, battery and smart chargers, power banks, and custom-designed products. Our products are used principally in agricultural and industrial vehicles, recreational vehicles (“RVs”), electrical appliances, and outdoor living products. Our primary office is located in Zhejiang province, where we serve a large customer base throughout PRC and expand our reach to international clients. Our goal is to be the premier power solutions brand and a solution for mobile life and outdoor living. We seek to leverage our flexibility and passion for quality to provide a personalized mobile living solution for each customer.

 

Since the founding of Zhejiang Leiya Electronics Co. Ltd. in 2009, we have grown to be one of the very few manufacturers in the world to design, develop and mass produce premium power solution products in the retail chain. We also offer our products in Japan, England, Germany, France, Spain, Switzerland, Sweden, the Netherlands, the U.S., Canada, Mexico, Australia, Dubai, and nine other countries. We manufacture all of our products in factories operating under quality management systems accredited by the International Organization for Standardization (ISO 9001:2015). Furthermore, our products have been tested for regulatory compliance and safety. Some of our compliance marks include: TÜV certification from Technischer Überwachungsverein, an internationally recognized service company; GS Mark for safety under the German Equipment and Product Safety Act; C-tick certification by the Australian Communications Media Authority; FCC Mark from the U.S. Federal Communications Commission, PAH certification mark for Polycyclic Aromatic Hydrocarbon concentrations; REACH Certification for substances of very high concern under the European Chemicals Agency; CE Mark certifying compliance with European Union safety, health and environmental protection standards; RoHs Mark for compliance with the Restriction of Hazardous Substances in the European Union; c ETL Certification for compliance with Canadian safety standards; and us ETL Mark for compliance with U.S. safety standards. We generated revenue mostly from four types of products: (1) inverters constituted approximately 43.66% and 62.52% of our total revenue for the six months ended June 30, 2023 and 2022, respectively; (2) chargers, which generated approximately 2.42% and 3.49% of our total revenue for the six months ended June 30, 2023 and 2022, respectively; (3) gasoline generators generated approximately 47.78% and 32.95% of our total revenue for the six months ended June 30, 2023 and 2022, respectively; and (4) power banks, which generated approximately 4.79% and nil of our total revenue for the six months ended June 30, 2023 and 2022, respectively.

 

Due to our substantial investment in research and development, we were awarded High-Tech Enterprise status by the Zhejiang provincial government, which qualified us for China’s National High-Tech Enterprise Program, a national-level program. Specifically, companies in the China’s National High-Tech Enterprise Program are eligible for up to a 10% corporate income tax break and certain deductions related to intangible assets, such as obtaining patents in the R&D process. Additionally, our research and patents in the power solution space have brought us local recognition; we were awarded certificates by the provincial and city government that identifies us as a Zhejiang Science and Technology Enterprise, and a Wenzhou Science and Technology Innovation Enterprise. These certificates entitle us to certain preferential tax treatment and sometimes grants from the government to aid R&D efforts in furtherance of the business. Furthermore, we are a supplier for many international companies, including Einhell Germany AG, Canadian Tire Corporation Limited, ALDI Inc., Steren Electronics International, LLC, etc.

 

 

 

 

Our products are customized and built to order, or BOT. Our BOT business model maximizes our flexibility in production scheduling, material procurement, and delivery to meet our customers’ unique demands. We adopted a multi-step, full-service system to ensure quality and client satisfaction. Customers can choose from within our product portfolio and communicate specified requirements to the sales department. Our technical department will evaluate the request’s feasibility and coordinate with the customer to make adjustments. The production department will create samples that will undergo inspection by the quality inspection department for quality and material warranty. The sales department will submit the prototype, inspection report, quality assurance, and quote to the customer for verification. After confirmation by the customers, our procurement department will purchase the raw materials, and the production department will fulfill the order. Finally, our inspection department will inspect and issue a report affirming the quality before the production department pack and deliver the final product to the customer. 

 

Key Factors Affecting Our Results

 

Our results are primarily derived from the sale of power generators and inverters to various wholesalers and retailers in China and some other foreign countries. Our business is therefore dependent upon construction activity in these sectors of the economy. The historical performance and outlook for our business is influenced by numerous factors, including the following:

 

  ● Economic Cycles - In addition to fluctuations in steel prices, demand for the products we manufacture is dependent on general economic cycles and infrastructure and non-residential construction end markets.

 

  ● General Competition - Several of our products have historically faced significant competition both in China and some foreign markets, and we have successfully competed against our competitors with excellent customer service, high quality products and rapid fulfillment of customer orders. However, our business could be adversely affected by competitors who reduce prices, improve on-time delivery and take other competitive actions, which may reduce our customers’ purchases of products from us.

 

  ● Fluctuations in Foreign Currency Exchange - We sell a significant portion of our products in countries outside of China (approximately 46.68% for the six months ended June 30, 2023). Historically, we have relied on lower wages and favorable exchange rates in China to make our products sold abroad competitive in price. If in any circumstances China’s currency appreciates against the U.S. dollar, our advantage in price competitiveness might be impacted. To the extent the Chinese RMB start to appreciate, our products could become more expensive and, as a result, less attractive to potential customers in other countries.

 

Results of Operations

 

For the Six Months Ended June 30, 2023 and 2022

 

The following table summarizes the results of our operations for the six months ended June 30, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

(All amounts, other than percentages, are in U.S. dollars)

 

  

For the Six Months Ended

June 30,

   Variance 
   2023   2022   Amount   Percentage 
Sales  $9,449,817   $11,478,147   $(2,028,330)   -17.67%
Cost of sales   (6,619,695)   (7,603,901)   984,206    -12.94%
Gross profit   2,830,122    3,874,246    (1,044,124)   -26.95%
                     
Operating expenses:                    
General and administrative expenses   (1,168,174)   (357,521)   (810,653)   226.74%
Selling and marketing expenses   (436,619)   (332,218)   (104,401)   31.43%
Research and development costs   (481,702)   (560,017)   78,315    -13.98%
Inventory reserve provision   (83,419)   -    (83,419)   -%
Total operating expenses   (2,169,914)   (1,249,756)   (920,158)   73.63%
                     
Operating income  $660,208   $2,624,490   $(1,964,282)   -74.84%
                     
Other income (expenses):                    
Rental income, net   102,712    83,925    18,787    22.39%
Interest expenses, net   (199,712)   (240,904)   41,192    -17.10%
Other income, net   4,671    15,031    (10,360)   -68.93%
Total other (expenses) income, net   (92,329)   (141,948)   49,619    -34.96%
                     
Income before income taxes  $567,879   $2,482,542   $(1,914,663)   -77.13%
Income tax provision   (92,707)   (291,881)   199,174    -68.24%
                     
Net income  $475,172   $2,190,661   $(1,715,489)   -78.31%

  

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Revenues

 

Revenues decreased by approximately $2.03 million, or 17.67%, to approximately $9.45 million for the six months ended June 30, 2023 from approximately $11.48 million for the six months ended June 30, 2022. The decrease in revenues was primarily driven by the decreased demand for inverters due to the sluggish market during the post-pandemic era. For the six months ended June 30, 2023, our sales on inverters decreased by approximately $3.05 million, which represents 42.51% decrease compared to the previous period.

 

The following tables present our top five markets by net revenues for the six months ended June 30, 2023 and 2022, respectively.

 

   June 30, 2023 
Top Five Markets:  Sales
Amount
(In USD)		   As %
of Sales		 
China  $5,038,977    53.32%
Poland   975,149    10.32%
Germany   814,979    8.62%
U.K.   517,598    5.48%
Mexico   394,632    4.18%

 

   June 30, 2022 
Top Five Markets:  Sales
Amount
(In USD)		   As %
of Sales		 
China  $6,524,707    56.84%
Germany   821,350    7.16%
Poland   762,129    6.64%
Canada   605,241    5.27%
France   513,700    4.48%

 

Gross profit

 

Our gross profit decreased by approximately $1.04 million, or 26.95%, to approximately $2.83 million for the six months ended June 30, 2023 from approximately $3.87 million for the six months ended June 30, 2022. Gross profit margin was 29.95% for the six months ended June 30, 2023, as compared to 33.75% for the six months ended June 30, 2022. The decrease in gross margin was primarily due to the increased initial cost in raw materials for producing newly developed products.

  

3

 

 

General and administrative (“G&A”) expenses

 

General and administrative expenses increased by approximately $0.81 million, or 226.74% to approximately $1.17 million for the six months ended June 30, 2023 as compared to approximately $0.36 million for the six months ended June 30, 2022. The increase in G&A expenses was mainly due to increased expenses in accounting and legal related consulting services, which were previously deducted from the IPO proceeds.

 

General and administrative expenses for the six months ended June 30, 2023 and 2022 consisted of following:

 

   2023   2022 
Employee compensation and benefits  $207,833    142,900 
Travel and communication expenses   31,916    18,146 
Rent and utilities   30,454    22,071 
Consulting fees   682,558    65,874 
Insurance   13,680    12,971 
Depreciation and amortization expenses   51,636    31,131 
Sales tax   36,158    38,840 
Entertainment   18,383    2,278 
Office and miscellaneous   95,556    23,310 
Total  $1,168,174    357,521 

 

Selling and marketing expenses

 

Selling and marketing expenses increased by approximately $0.11 million, or 31.43% to approximately $0.44 million for the six months ended June 30, 2023 as compared to approximately $0.33 million for the six months ended June 30, 2022. The increase in selling and marketing expenses was mainly due to the increase in entertainment expenses. After China lifted travel restrictions, the Company hosted more business visitors from both domestic and international markets.

 

Selling and marketing expenses as of June 30, 2023 and 2022 consisted of the following:

 

   2023   2022 
Employee compensation and benefits  $54,981   $55,943 
Travel and promotion   47,633    19,638 
Transportation   105,514    90,388 
Insurance   8,228    - 
Consulting fee   6,053    1,349 
Inspection and certification fees   67,265    106,195 
Entertainment   110,453    49,247 
Office and miscellaneous   36,492    9,458 
Total  $436,619   $332,218 

 

Research and development (“R&D”) expenses

 

Research and development expenses decreased by approximately $0.08 million, or 13.98% to approximately $0.48 million for the six months ended June 30, 20223 as compared to approximately $0.56 million for the six months ended June 30, 2022. The decrease in R&D expenses was mainly due to the decreased contract services and supplies, and design cost related to R&D activities. The Company’s R&D input accounts for about 5% of its total revenue. The decrease in R&D expenses is in line with the decreased revenue during the period.

 

4

 

 

Research and development expenses as of June 30, 2023 and 2022 consisted of the following:

 

   2023   2022 
Salaries  $210,995   $231,691 
Contract services and supplies   238,637    276,015 
Utility   1,215    1,122 
Design cost   14,047    40,901 
Depreciation   12,883    10,091 
Other   3,925    197 
Total  $481,702   $560,017 

 

Interest expenses, net

 

Our interest expense (net) decreased by approximately $0.04 million, to approximately $0.20 million for the six months ended June 30, 2023, from approximately $0.24 million for the six months ended June 30, 2022.  The decrease of interest expense was mainly due to decreased short-term borrowings during the first half of fiscal 2023 as compared to the first half of fiscal 2022.

  

Provision for income taxes

 

Our provision for income taxes was approximately $0.09 million for the six months ended June 30, 2023, a decrease of approximately $0.20 million from approximately $0.29 million for the six months ended June 30, 2022. The decrease is in line with the decrease in operating income.

 

Results of Operations

 

Year ended December 31, 2022 compared to year ended December 31, 2021

 

The following table summarizes the results of our operations for the years ended December 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

(All amounts, other than percentages, are in U.S. dollars)

 

  

For the Fiscal Years Ended

December 31,

   Variance 
   2022   2021   Amount   Percentage 
Sales  $26,909,025   $18,628,886   $8,280,139    44.45%
Cost of sales   (20,290,231)   (12,909,462)   (7,380,769)   57.17%
Gross profit   6,618,794    5,719,424    899,370    15.72%
                     
Operating expenses:                    
General and administrative   (929,500)   (690,619)   (238,881)   34.59%
Selling and marketing   (720,120)   (506,305)   (213,815)   42.23%
Research and development   (932,268)   (986,885)   54,617    -5.53%
Bad debt expense   -    (2,649)   2,649    -%
Inventory impairment reversal (provision)   31,668    (47,358)   79,026    -166.87%
Total operating expenses   (2,550,220)   (2,233,816)   (316,404)   14.16%
                     
Operating income  $4,068,574   $3,485,608   $582,966    16.72%
                     
Other income (expenses):                    
Interest expenses, net   (473,088)   (417,648)   (55,440)   13.27%
Rental income, net   98,716    116,193    (17,477)   -15.04%
Other income, net   219,530    512,412    (292,882)   -57.16%
Total other income (expenses), net   (154,842)   210,957    (365,799)   -173.40%
                     
Income before income taxes  $3,913,732   $3,696,565   $217,167    5.87%
                     
Income tax provision   (437,771)   (301,916)   (135,855)   45.00%
                     
Net income  $3,475,961   $3,394,649   $81,312    2.40%

 

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Revenues

 

Revenues increased by approximately $8.28 million, or 44.45%, to approximately $26.91 million for the year ended December 31, 2022 from approximately $18.63 million for the year ended December 31, 2021. The increase in revenues was primarily driven by the continuous impact of the energy crisis that has significantly increased demand for our generators, especially in Europe. Our domestic customers also sell our products to international end users. For the year ended December 31, 2022, our sales to domestic customers increased by approximately $7.39 million, which represents 9.91% growth compared to the previous fiscal year.

 

The following tables present our top 5 international markets by net revenues for the years ended December 31, 2022 and 2021, respectively.

 

   December 31, 2022 
Top Five International Markets:  Sales
Amount
(In USD)		   As %
of Sales		 
China  $18,033,220    67.02%
Poland   1,607,394    5.97%
Germany   1,217,732    4.53%
Canada   971,909    3.61%
U.K.   879,733    3.27%

 

   December 31, 2021 
Top Five International Markets:  Sales
Amount
(In USD)		   As %
of Sales		 
China  $10,638,503    57.11%
France   1,202,988    6.46%
Poland   1,129,165    6.06%
Mexico   1,071,869    5.75%
U.K.   790,326    4.24%

 

Gross profit

 

Our gross profit increased by approximately $0.90 million, or 15.72%, to approximately $6.62 million for the year ended December 31, 2022 from approximately $5.72 million for the year ended December 31, 2021. Gross profit margin was 24.60% for the year ended December 31, 2022, as compared to 30.70% for the year ended December 31, 2021. The decrease in gross margin was primarily due to our small profit but quick turnover sales policy on generators, which accounted for about 43.82% of our total sales.

  

General and administrative (“G&A”) expenses

 

General and administrative expenses increased by approximately $0.24 million, or 34.59% to approximately $0.93 million for the year ended December 31, 2022 as compared to approximately $0.69 million for the year ended December 31, 2021. The increase in G&A expenses was mainly due to increased expenses in consulting services for lean manufacturing and management improvement in factory operation.

 

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General and administrative expenses as of December 31, 2022 and 2021 consisted of following:

 

   2022   2021 
Employee compensation and benefits  $312,479    323,325 
Travel and communication expenses   34,267    33,068 
Rent and utilities   58,466    70,178 
Consulting fees   310,039    53,169 
Insurance   13,165    16,699 
Depreciation and amortization expenses   60,698    55,042 
Sales tax   80,595    82,052 
Entertainment   17,193    5,193 
Office and miscellaneous   42,598    51,893 
Total  $929,500    690,619 

 

Selling and marketing expenses

 

Selling and marketing expenses increased by approximately $0.21 million, or 42.23% to approximately $0.72 million for the year ended December 31, 2022 as compared to approximately $0.51 million for the year ended December 31, 2021. The increase in selling and marketing expenses was mainly due to the increase in cost of testing and certification on our exported products.

 

Selling and marketing expenses as of December 31, 2022 and 2021 consisted of the following:

 

   2022   2021 
Employee compensation and benefits  $141,600   $99,797 
Travel and promotion   36,768    45,083 
Transportation   181,556    78,281 
Insurance   -    2,813 
Consulting fee   6,917    6,203 
Inspection and certification fees   196,732    77,352 
Entertainment   140,292    166,295 
Office and miscellaneous   16,255    30,481 
Total  $720,120   $506,305 

  

Research and development (“R&D”) expenses

 

Research and development expenses decreased by approximately $0.06 million, or 5.53% to approximately $0.93 million for the year ended December 31, 2022 as compared to approximately $0.99 million for the year ended December 31, 2021. The decrease in R&D expenses was mainly due to decreased contract services and supplies, depreciation and other expenses related to R&D activities.

 

Research and development expenses as of December 31, 2022 and 2021 consisted of the following:

 

   2022   2021 
Salaries  $427,525   $347,434 
Contract services and supplies   409,149    541,055 
Utility   2,025    1,777 
Design cost   46,651    - 
Depreciation   22,499    39,365 
Other   24,419    57,254 
Total  $932,268   $986,885 

 

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Interest expenses, net

 

Our interest expense (net) increased by approximately $0.05 million, to approximately $0.47 million for the year ended December 31, 2022, from approximately $0.42 million for the year ended December 31, 2021.  The increase of interest expense was mainly due to increased short-term borrowings in the fiscal 2022 as compared to the fiscal 2021.

  

Provision for income taxes

 

Our provision for income taxes was approximately $0.44 million for the year ended December 31, 2022, an increase of approximately $0.14 million from approximately $0.30 million for the year ended December 31, 2021. The increase is in line with the increase in revenues.

 

Cash Flow Summary

 

   Six Months Ended
June 30,
2023		   Year Ended
December 31,
2022		   Year Ended
December 31,
2021		 
Net cash provided by (used in) operating activities  $5,454,714   $(4,151,135)  $4,689,518 
Net cash (used in) investing activities   (4,344,326)   (4,896,167)   (290,798)
Net cash (used in) provided by financing activities   (619,025)   11,319,867    (3,395,530)
Effect of exchange rate changes on cash and cash equivalents   (284,958)   (380,011)   109,448 
Net increase in cash and cash equivalents  $206,405   $1,892,554   $1,112,638 
Cash, cash equivalents and restricted cash, beginning of period   7,067,247    5,174,693    4,062,055 
Cash, cash equivalents and restricted cash, end of period   7,273,652    7,067,247    5,174,693 

 

Operating Activities:

 

Net cash provided by operating activities for the six months ended June 30, 2023 was approximately $5.45 million, which was primarily attributable to a net profit approximately $0.48 million, adjusted for non-cash items for approximately $0.54 million and adjustments for changes in working capital approximately $0.44 million. The adjustments for changes in working capital mainly included:

 

  (i) decrease in accounts receivable of approximately $3.73 million – our accounts receivable decreased due to the decrease in sales revenue, and the slower payback cycle on domestic sales during the first half of fiscal 2023;

  

  (ii) decrease in advance to suppliers of approximately $2.76 million was primarily due to collection of payments on potential purchase of oversea land and warehouse in the amount of $4 million, and advance payment on a potential long-term lease of a custom-built factory for the purpose of expanding business in the energy storage industry in the amount of $1 million;

 

  (iii) increase in inventory of approximately $1.05 million due to our increased raw material inventory to respond to the higher demand from international market during the second half of the year;

 

  (iv) decrease in accounts payable of approximately $0.58 million due to decreased payment cycle in purchase of integrated circuit related raw materials during the first half of fiscal 2023;

 

  (v) decrease in advance from customers of approximately $0.33 million primarily due to decreased sales during the first half of fiscal 2023;

 

8

 

 

Net cash used in operating activities for the fiscal year ended December 31, 2022 was approximately $4.15 million, which was primarily attributable to a net profit approximately $3.48 million, adjusted for non-cash items for approximately $0.79 million and adjustments for changes in working capital approximately $8.42 million. The adjustments for changes in working capital mainly included:

 

  (i) increase in accounts receivable of approximately $8.55 million – our accounts receivable increased due to the increase in sales revenue and the corresponding increased payback cycle on domestic sales during the 2022 fiscal year;

  

  (ii) decrease in advance to suppliers of approximately $1.23 million was primarily due to increased cash payments for purchase of raw materials;
     
  (iii) decrease in prepaid expenses of approximately $0.47 million primarily due to the deferred IPO expenses were fully amortized during the year;

 

  (iv) increase in inventory of approximately $2.66 million due to our increased raw material inventory for the corresponding increased sales in generators;

 

  (v) increase in accounts payable of approximately $0.66 million due to increased purchase of raw materials because of the increased sales during the fiscal year of 2022;

 

  (vi) increase in advance from customers of approximately $0.22 million primarily due to increased sales during the fiscal year of 2022;

 

Net cash provided by operating activities for the fiscal year ended December 31, 2021 was approximately $4.69 million, which was primarily attributable to a net profit approximately $3.39 million, adjusted for non-cash items for approximately $0.85 million and adjustments for changes in working capital approximately $0.44 million. The adjustments for changes in working capital mainly included:

 

  (i) decrease in accounts receivable of approximately $3.38 million – our accounts receivable decreased due to collection of substantial amount of outstanding accounts receivable of 2020 fiscal year, and increase of cash sales;

  

  (ii) increase in advance to suppliers of approximately $1.11 million primarily due to the increased purchase of raw materials to support our growing orders generated from both domestic and international markets;
     
  (iii) increase in prepaid expenses of approximately $0.50 million primarily due to increased deferred IPO expenses;

 

  (iv) increase in inventory of approximately $2.20 million due to expanded business and increased production to reduce delivery cycle; 

 

  (v) increase in accounts payable of approximately $0.85 million due to increased purchase of raw materials because of the increased sales during the fiscal year of 2021;

 

  (vi) decrease in advance from customers of approximately $0.28 million primarily due to the order delivery which offsets the advance balance;
     
  (vii) increase in other payables and accruals of approximately $0.36 million primarily due to the increased accrued payroll and welfare.

 

Zhejiang Leiya entered into a factory workshop leasing agreement with Wenzhou Ailefu Furniture Tech Limited Company (“Ailefu”), an entity indirectly 100% owned by Lingyi Kong, our Chief Executive Officer and Chairman, effective January 1, 2018. The factory is located at Wenzhou Economic Technological Development Zone, Binghai Fourth Blvd. No. 528. The lease is for 20 years, effective from January 1, 2018 to December 31, 2037. The property is 36,134.78 square meters and total rent is RMB 70,489,500, or approximately $10,900,720, which has been paid upfront, through the lease term ending December 31, 2037. Majority of the net cash provided by operating activities are used for the lease payment. Ailefu provided the leased assets as guarantee for the Company to apply for a bank loan for the lease payment.

 

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Investing Activities:

 

Net cash used in investing activities was approximately $4.34 million for the six months ended June 30, 2023. It was primarily attributable to the addition of fixed assets for production needs during the period, and a fixed deposit, which is presented as other non-current assets on the Interim Consolidated Balance Sheet.

 

Net cash used in investing activities was approximately $4.90 million for the year ended December 31, 2022. It was primarily attributable to addition of fixed assets for production needs during the fiscal year, and an advance payment on potential oversea land purchase for the purpose of business expansion in North America.

 

Net cash used in investing activities was approximately $0.29 million for the year ended December 31, 2021. It was primarily attributable to the addition of fixed and intangible assets for production needs during the fiscal year.

 

Financing Activities:

 

Net cash used in financing activities was approximately $0.62 million for the six months ended June 30, 2023. It was primarily attributable to the repayment of short-term loans with an approximate amount of $1 million and repayment of related party loans with an approximate amount of $0.17 million, offset by the proceeds from long-term bank loans with approximate amount of $0.55 million.

 

Net cash provided by financing activities was approximately $11.32 million for the year ended December 31, 2022. It was primarily attributable to the net proceeds received from share issuance in the amount of approximately $10.08 million.

 

Net cash used in financing activities was approximately $3.40 million for the year ended December 31, 2021. It was primarily attributable to the repayment of bank note payable with an approximate amount of $7.29 million and repayment of related party loans with an approximate amount of $0.86 million, offset by the proceeds from long-term bank loans with approximate amount of $4.65 million and net proceeds from short-term loans with an approximate amount of $0.10 million.

 

Liquidity and Capital Resources

 

Primary Sources and Uses of Liquidity

 

Our primary sources of liquidity consist of existing cash balances, cash flows from our operating activities and availability under our Revolving Credit Facility. Our ability to generate sufficient cash flows from our operating activities is primarily dependent on our sales of converters and power generating products to our customers at margins sufficient to cover fixed and variable expenses. 

 

As of June 30, 2023 and December 31, 2022, we had cash and cash equivalents of $7,273,652 and $7,067,247, respectively. We believe that our current cash, cash to be generated from our operations and access to help from our related parties will be sufficient to meet our working capital needs for at least the next twelve months. Although we do not have any amounts committed to be provided by our related parties, due to their relatively small amounts, we do not believe our working capital needs will be negatively impacted without such funds provided by related parties.

 

Substantially all of our operations are conducted in China and a majority portion of our revenues, expense, cash and cash equivalents are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into U.S. Dollars.  

  

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Accounts Receivable

 

Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. Based on management of customers’ credit and ongoing relationship, management makes conclusions whether any balances outstanding at the end of the period will be deemed uncollectible on an individual basis and on aging analysis basis. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

 

The Company does not believe it has a material collection risk under its business model, nor does it believe that macroeconomic issues will have a negative impact on its collectability. The Company expects the business will continue to grow due to innovation and the urbanization process in China. Thus, the Company does not believe the collection issues will impact its liquidity adversely.

 

Credit Facility 

 

We mainly finance our operations through short-term revolving loans provided by a syndicate of banks, as listed in Note 10 under our Consolidated Financial Statements. As of June 30, 2023, we had four outstanding short-term loans provided by one bank, totaling RMB 30,000,000 in the aggregate, or approximately $4.14 million. Each of these borrowings has a term of one year and, as per our agreement with the bank, all of the loans can be renewed. These loans have a fixed interest rate. We plan to repay outstanding principal and interest of each loan either by our working capital or the funds from the renewal of a loan from the same bank or loans from other banks.

 

Capital Expenditures

 

Our capital expenditures consist primarily of expenditures for the purchase of fixed assets to support our business growth. Our capital expenditures amounted to approximately $0.40 million and $0.93 million for the six months ended June 30, 2023 and for the year ended December 31, 2022, respectively.

 

Contractual Obligations 

 

There were no significant contractual obligations and commercial commitments, other than our bank borrowings as disclosed in Credit Facility section, as of June 30, 2023 and December 31, 2022.

 

Critical Accounting Policies and Estimates

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles in the United Stated of America (“US GAAP”) and have been consistently applied. The accompanying consolidated financial statements include the financial statements of the Company and its majority-owned and controlled subsidiaries. All significant inter-company transactions and balances have been eliminated upon consolidation.

  

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Such estimates include, but are not limited to, allowances for doubtful accounts, inventory valuation, useful lives of property, plant and equipment, intangible assets, impairment in equity investment, and income taxes related to realization of deferred tax assets and uncertain tax position. Actual results could differ from those estimates.

 

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Cash and Cash Equivalents

 

Cash and cash equivalents primarily consist of cash and deposits with financial institutions which are unrestricted as to withdrawal and use. Cash equivalents consist of highly liquid investments that are readily convertible to cash generally with original maturities of three months or less when purchased.

 

Restricted Cash

 

The Company had bank acceptance notes outstanding with the bank and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. Those notes are generally short term in nature due to their short maturity period of six to nine months; thus, restricted cash is classified as a current asset.

 

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts presented in the statement of cash flows. The Company adopted the new standard effective January 1, 2018, using the retrospective transition method.

 

As of June 30, 2023 and December 31, 2022, restricted cash was $1,500,224 and $34,728, respectively. No cash is restricted to assure future credit availability.

 

Revenue Recognition  

 

The Company generates its revenues mainly from sales of electrical products, such as electrical converter and inverter, to third-party customers, who are mainly distributors and retailers. The Company follows Financial Accounting Standards Board (FASB) ASC 606 and accounting standards updates (“ASU”) 2014-09 for revenue recognition. On January 1, 2018, the Company has early adopted ASU 2014-09, which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company considers revenue realized or realizable and earned when all the five following criteria are met: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. As part of its consideration of the contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In the principal versus agent consideration, since no another party is involved in transactions, the Company is a principal.

 

In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. The Company analyzed historical refund claims for defective products and concluded that they have been immaterial.

 

Revenues are reported net of all value added taxes. As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on their relative standalone selling price.

 

Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied at a point in time), which typically occurs at delivery. For international sales, the Company sells its products primarily under the free onboard (“FOB”) shipping point term. For sales under the FOB shipping point term, the Company recognizes revenues when products are delivered from Company to the designated shipping point. Prices are determined based on negotiations with the Company’s customers and are not subject to adjustment.

  

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Recent Accounting Pronouncements

 

The Company considers the applicability and impact of all accounting standards updates (“ASU”). Management periodically reviews new accounting standards that are issued.

 

Recently Issued Accounting Standards

 

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326). The amendments in this update are related to the following two issues:

 

  – Issue 1: Troubled Debt Restructurings (“TDRs”) by Creditors

 

The amendments in this Update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40,

 

Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan.

 

  – Issue 2: Vintage Disclosures—Gross Writeoffs

 

For public business entities, the amendments in this Update require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost.

 

For entities that have adopted the amendments in Update 2016-13, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted the amendments in Update 2016-13, the effective dates for the amendments in this Update are the same as the effective dates in Update 2016-13.

 

The Company does not expect the adoption to have a material impact on its consolidated financial statements.

 

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

 

Off-balance Sheet Commitments and Arrangements 

 

There were no off-balance sheet arrangements for the periods ended June 30, 2023 and December 31, 2022, that have or that in the opinion of management are likely to have, a current or future material effect on our consolidated financial condition or results of operations.

 

Future Related Party Transactions

 

The Corporate Governance Committee of our Board of Directors will be required to approve all related party transactions. All related party transactions will be made or entered into on terms that are no less favorable to use than can be obtained from unaffiliated third parties. 

 

Impact of Inflation

 

We do not believe the impact of inflation on our Company is material. Our operations are in China and China’s inflation rates have been relatively stable in the last three years: 3.7% for 2022, 0.85% for 2021, and 2.5% for 2020.

 

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Holding Company Structure

 

We are a holding company with no material operations of our own. We conduct our operations through our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. Our PRC subsidiaries may purchase foreign exchange from relevant banks and make distributions to offshore companies after completing relevant foreign exchange registration with the SAFE. Our offshore companies may inject capital into or provide loans to our PRC subsidiaries through capital contributions or foreign debts, subject to applicable PRC regulations. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.

 

Under PRC law, each of our affiliates in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reached 50% of its registered capital, after which any mandatory appropriation stops. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation of the companies. The reserved amounts as determined pursuant to PRC statutory laws totaled $916,912 as of June 30, 2023.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Foreign Exchange Risk

 

All of our revenues and substantially all of our expenses are denominated in RMB. Our financial information uses RMB as the functional currency has been translated into U.S. dollars in our consolidated financial statements. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk.

 

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. The PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, the RMB and the U.S. dollar exchange rate had been stable and traded within a narrow band. Since June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar, though there have been periods when the RMB has depreciated against the U.S. dollar. In particular, on August 11, 2015, the PBOC allowed the RMB to depreciate by approximately 2% against the U.S. dollar. It is difficult to predict how long the current situation may last and when and how the RMB and the U.S. dollar relationship may change again.

 

To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amounts available to us.

 

Market Risk

 

Market risk is the risk of loss arising from adverse changes in market rates and prices. Our market risk exposure is generally limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes.

 

Commodity Price Risk

 

Our revenue is exposed to the market risk of price fluctuations related to the sale of our generators. Prices for the generators that we sell are generally determined by market forces. These prices may be influenced by factors such as supply and demand, production costs (including the costs of our raw materials) and global and domestic economic growth. Adverse changes in any of these factors may reduce the revenue that we receive from the sale of our generators. Our costs are also exposed to fluctuations in prices for the purchase, processing and production of microchips and other raw material inputs. Historically, we have generally been able to pass along price increases to our customers; however, we may be unable to do so in the future. We do not engage in commodity price hedging activities.

 

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