UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| (Mark One) | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period
ended | |
| OR | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _______________ to _______________
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| The
(The Nasdaq Capital Market) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If an emerging
growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of May 10, 2023, there were shares of Common Stock, $0.001 par value per share, outstanding.
TWIN VEE POWERCATS CO.
TABLE OF CONTENTS
| 2 |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report on Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control), and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. We believe these factors include, but are not limited to, those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.
As a result of these and other factors, we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
NOTE REGARDING COMPANY REFERENCES
Throughout this Quarterly Report on Form 10-Q, “Twin Vee,” “the Company,” “we” and “our” refer to Twin Vee PowerCats Co.
| 3 |
PART I—FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWIN VEE POWERCATS CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Marketable securities | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Marketable securities - non current | ||||||||
| Property and equipment, net | ||||||||
| Operating leases right of use asset | ||||||||
| Security deposit | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Contract liabilities | ||||||||
| Finance leases liability | ||||||||
| Operating leases right of use liability | ||||||||
| Total current liabilities | ||||||||
| Economic Injury Disaster Loan | ||||||||
| Finance leases liability non-current | ||||||||
| Operating leases liability - noncurrent | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (Note 11) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock: authorized; $ par value; shares issued and outstanding | ||||||||
| Common stock: authorized; $ par value; shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Equity attributed to stockholders of Twin Vee PowerCats Co. | ||||||||
| Equity attributable to noncontrolling interests | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 4 |
TWIN VEE POWERCATS CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| TWIN VEE POWERCATS CO. | ||||||||
| Statements of Operations | ||||||||
| Three months ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net sales | $ | $ | ||||||
| Cost of products sold | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | ||||||||
| Salaries and wages | ||||||||
| Professional fees | ||||||||
| Depreciation | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Dividend income | ||||||||
| Other (expense) income | ( | ) | ||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Loss on disposal of assets | ( | ) | ||||||
| Net change in fair value of marketable securities | ( | ) | ||||||
| Employee retention credit income | ||||||||
| Total other income (expenses) | ( | ) | ||||||
| Net loss before income tax | ( | ) | ( | ) | ||||
| Income tax provision | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Less: Net loss attributable to noncontrolling interests | ( | ) | ||||||
| Net loss attributed to stockholders of Twin Vee PowerCats Co. | $ | ( | ) | $ | ( | ) | ||
| Basic and dilutive loss per share of common stock | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of shares of common stock outstanding | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 5 |
TWIN VEE POWERCATS CO.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the Three months ended March 31, 2022
| Common Stock | Additional Paid-in |
Accumulated | Noncontrolling | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interests | Equity | |||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ) | $ | $ | ||||||||||||||||||
| |
||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Net loss | — | ( |
) | ( |
) | |||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
For the Three months ended March 31, 2023
| Common Stock | Additional Paid-in | Accumulated | Noncontrolling | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interests | Equity | |||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 6 |
TWIN VEE POWERCATS CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Loss on disposal of asset | ||||||||
| Change in right-of-use asset | ||||||||
| Net change in fair value of marketable securities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ||||||||
| Accrued liabilities | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Net sales of investment in trading marketable securities | ||||||||
| Proceeds from sale of property and equipment | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Deferred offering cost | ( | ) | ||||||
| Finance lease liability | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net change in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | ||||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Non-Cash Financing Activities | ||||||||
| Finance lease | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 7 |
TWIN VEE POWERCATS CO.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
1. Organization and Summary of Significant Accounting Policies
Organization
Twin Vee PowerCats Co. (“Twin Vee” or the “Company”) was incorporated as Twin Vee Catamarans, Inc., in the state of Florida, on December 1, 2009. On April 7, 2021, the Company filed a Certificate of Conversion to register and incorporate in the state of Delaware and changed the company name to Twin Vee PowerCats Co. The Certificate of Incorporation for Twin Vee PowerCats Co. was also filed on April 7, 2021.
On September 1, 2021, the Company formed Fix My Boat, Inc., (“Fix My Boat”), a wholly-owned subsidiary. Fix My Boat will utilize a franchise model for marine mechanics across the country. Fix My Boat has been inactive for the majority of 2022 and the three months ended March 31, 2023, however we anticipate focusing resources on this entity by the end of 2023.
Forza X1, Inc. was initially incorporated as Electra Power Sports, Inc. on October 15, 2021, and subsequently changed the name to Forza X1, Inc. (“Forza X1” or “Forza”) on October 29, 2021. Prior to Forza’s incorporation on October 15, 2021, the electric boat business was operated as our Electra Power Sports™ Division. Following our initial public offering that closed on July 23, 2021 (the “IPO”), we determined in October 2021 that for several reasons, that we would market our new independent line of electric boats under a new brand name (and new subsidiary).
On April 20, 2023, the Company formed AquaSport Co., a wholly owned subsidiary in the state of Florida in connection with the Company’s plan to lease the assets of former AQUASPORT™ boat brand and manufacturing facility in White Bluff Tennessee.
Merger
On December 5, 2022, pursuant to the terms of the Agreement and Plan of Merger, dated as of September 8, 2022 (the “Merger Agreement”), by and between Twin Vee PowerCats Co. and Twin Vee PowerCats, Inc., a Florida corporation (“TVPC”), was merged with and into the Company (the “Merger”).
As TVPC did not meet the definition of a business under ASC 805, the merger was not accounted for as a business combination. The merger was accounted for as a recapitalization of Twin Vee PowerCats, Co., effected through the exchange of TVPC shares for Twin Vee PowerCats, Co. shares, and the cancellation of Twin Vee PowerCats, Co. shares held by Twin Vee Inc. Upon the effective date of the Merger, December 5, 2022, Twin Vee Co. accounted for the merger by assuming TVPC’s net liabilities. Twin Vee PowerCats, Co.’s financial statements reflect the operations of TVPC. prospectively and will not be restated retroactively to reflect the historical financial position or results of operations of TVPC.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Twin Vee and its wholly owned subsidiary Fix My Boat, Inc., (“Fix My Boat”) and majority owned subsidiary, Forza X1, Inc. (“Forza X1” “Forza”), collectively referred to as the “Company”. The Company’s net loss excludes losses attributable to noncontrolling interests. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All inter-company balances and transactions are eliminated in consolidation.
| 8 |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.
In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2023 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2023 is not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2023.
Revenue Recognition
The Company’s revenue is derived primarily from the sale of boats, motors and trailers to its independent dealers. The Company recognizes revenue when obligations under the terms of a contract are satisfied and control over promised goods is transferred to the dealer. For the majority of sales, this occurs when the product is released to the carrier responsible for transporting it to a dealer. The Company typically receives payment within five business days of shipment. Revenue is measured as the amount of consideration it expects to receive in exchange for a product. The Company offers dealer incentives that include wholesale rebates, retail rebates and promotions, floor plan reimbursement or cash discounts, and other allowances that are recorded as reductions of revenues in net sales in the statements of operations. The consideration recognized represents the amount specified in a contract with a customer, net of estimated incentives the Company reasonably expects to pay. The estimated liability and reduction in revenue for dealer incentives is recorded at the time of sale. Subsequent adjustments to incentive estimates are possible because actual results may differ from these estimates if conditions dictate the need to enhance or reduce sales promotion and incentive programs or if dealer achievement or other items vary from historical trends. Accrued dealer incentives are included in accrued liabilities in the accompanying consolidated balance sheets.
Payment received for the future sale of a boat
to a customer is recognized as a customer deposit. Customer deposits are recognized as revenue when control over promised goods
is transferred to the customer. At March 31, 2023 and December 31, 2022, the Company had customer deposits of $
Rebates and Discounts
Dealers earn wholesale rebates based on purchase volume commitments and achievement of certain performance metrics. The Company estimates the amount of wholesale rebates based on historical achievement, forecasted volume, and assumptions regarding dealer behavior. Rebates that apply to boats already in dealer inventory are referred to as retail rebates. The Company estimates the amount of retail rebates based on historical data for specific boat models adjusted for forecasted sales volume, product mix, dealer and consumer behavior, and assumptions concerning market conditions. The Company also utilizes various programs whereby it offers cash discounts or agrees to reimburse its dealers for certain floor plan interest costs incurred by dealers for limited periods of time, generally ranging up to nine months.
| 9 |
Other Revenue Recognition Matters
Dealers generally have no right to return unsold boats. Occasionally, the Company may accept returns in limited circumstances and at the Company’s discretion under its warranty policy. The Company may be obligated, in the event of default by a dealer, to accept returns of unsold boats under its repurchase commitment to floor financing providers, who are able to obtain such boats through foreclosure. The repurchase commitment is on an individual unit basis with a term from the date it is financed by the lending institution through the payment date by the dealer, generally not exceeding 30 months.
The Company has excluded sales and other taxes assessed by a governmental authority in connection with revenue-producing activities from the determination of the transaction price for all contracts. The Company has not adjusted net sales for the effects of a significant financing component because the period between the transfer of the promised goods and the customer’s payment is expected to be one year or less.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates.
Concentrations of Credit and Business Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk primarily consist of trade receivables. Credit risk on trade receivables is mitigated
as a result of the Company’s use of trade letters of credit, dealer floor plan financing arrangements, and the geographically
diversified nature of the Company’s customer base. The Company minimizes the concentration of credit risk associated with
its cash by maintaining its cash with high quality federally insured financial institutions. However, cash balances in excess of
the Federal Deposit Insurance Corporation (“FDIC”) insured limit of $
Cash, Cash Equivalents and restricted cash
Cash, cash equivalents and restricted cash
include all highly liquid investments with original maturities of three months or less at the time of purchase. On March 31, 2023
and December 31, 2022, the Company had cash, cash equivalents and restricted cash of $
Marketable Securities
Our investments in debt securities are carried at either amortized cost or fair value. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity. Investments in debt securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale. Realized and unrealized gains and losses on trading debt securities as well as realized gains and losses on available-for-sale debt securities are included in net income.
| 10 |
Fair Value of Financial Instruments
The Company follows accounting guidelines on fair value measurements for financial instruments measured on a recurring basis, as well as for certain assets and liabilities that are initially recorded at their estimated fair values. Fair Value is defined as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants as the measurement date. The Company uses the following three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value its financial instruments:
| ● | Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments. | |
| ● | Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the marketplace. | |
| ● | Level 3: Significant unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires a significant judgment or estimation. |
Financial instruments measured as fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires it to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed, or initial amounts recorded may not be indicative of the amount that the Company or holders of the instruments could realize in a current market exchange.
The carrying amounts of cash equivalents approximate their fair value due to their liquid or short-term nature, such as accounts receivable and payable, and other financial instruments in current assets or current liabilities.
Inventories
Inventories are valued at the lower of cost and net realizable value, with cost determined using the average cost method. Net realizable value is defined as sales price less cost of completion, disposable and transportation and a normal profit margin. Production costs, consisting of labor and overhead, are applied to ending finished goods inventories at a rate based on estimated production capacity. Excess production costs are charged to cost of products sold. Provisions have been made to reduce excess or obsolete inventories to their net realizable value.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization, using the straight-line method over the assets’ useful life. Leasehold improvements are amortized over the shorter of the assets’ useful life or the lease term. The estimated useful lives of property and equipment range from three to five years. Upon sale or retirement, the cost and related accumulated depreciation is eliminated from their respective accounts, and the resulting gain or loss is included in results of operations. Repairs and maintenance charges, which do not increase the useful lives of the assets, are charged to operations as incurred.
Impairment of Long-Lived Assets
Management assesses the recoverability of its long-lived assets when indicators of impairment are present. If such indicators are present, recoverability of these assets is determined by comparing the undiscounted net cash flows estimated to result from those assets over the remaining life to the assets’ net carrying amounts. If the estimated undiscounted net cash flows are less than the net carrying amount, the assets would be adjusted to their fair value, based on appraisal or the present value of the undiscounted net cash flows.
| 11 |
Advertising
Advertising and marketing costs are expensed
as incurred. During the three months ended March 31, 2023 and 2022, advertising costs incurred by the Company totaled $
Research and Development
The Company expenses research and development
costs relating to new product development as incurred. For the three months ended March 31, 2023 and 2022, research and development
costs amounted to $
Shipping and Handling Costs
Shipping and handling costs include those costs
incurred to transport product to customers and internal handling costs, which relate to activities to prepare goods for shipment.
The Company has elected to account for shipping and handling costs associated with outbound freight after control over a product
has been transferred to a customer as a fulfillment cost. The Company includes shipping and handling costs, including cost billed
to customers, in cost of sales in the statements of operations. All manufactured boats are free on board (FOB), from the Fort Pierce
manufacturing plant. Dealers are required to either pick up the boats themselves or contract with a transporter. For the three
months ended March 31, 2023, and 2022, shipping and handling costs amounted to $
Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, it uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company calculates the associated lease liability and corresponding ROU asset upon lease commencement using a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease. The operating lease ROU asset also includes any lease payments made and is reduced by lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for lease payments is recognized on a straight-line basis over the lease term.
Supplier Concentrations
The Company is dependent on the ability of its suppliers to provide products on a timely basis and on favorable pricing terms. The loss of certain principal suppliers or a significant reduction in product availability from principal suppliers could have a material adverse effect on the Company. Business risk insurance is in place to mitigate the business risk associated with sole suppliers for sudden disruptions such as those caused by natural disasters.
The Company is dependent on third-party equipment
manufacturers, distributors, and dealers for certain parts and materials utilized in the manufacturing process. During the three
months ended March 31, 2023, the Company purchased all engines for its boats under supplier agreements with two vendors. During
the three months ended March 31, 2022, the Company purchased all engines for its boats under supplier agreements with one vendor.
For the three months ended March 31, 2023 and 2022, total purchases to these vendors were $
| 12 |
Employee Retention Credit
On Mach 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.
Pursuant to the employee retention credit,
eligible employers could receive a 50% - 70% credit on qualified wages against their employment taxes each quarter during the eligible
period in 2020 and 2021, respectively, with any excess credits eligible for refunds. During the three months ended March 31, 2023,
the Company recognized income related to the employee retention credit of $
The Company recognizes stock-based compensation costs for its restricted stock measured at the fair value of each award at the time of grant, as an expense over the period during which an employee is required to provide service. Compensation cost is recognized over the service period for the fair value of awards that vest.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recover or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is entirely dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
The Company files income tax returns in the U.S. federal jurisdiction and various states.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments Credit Losses —Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected, which includes the Company’s accounts receivable. This ASU is effective for the Company for reporting periods beginning after December 15, 2022. The Company does not anticipate this to be material, as the Company does not typically extend credit to its dealers or customers.
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements.
| 13 |
2. Marketable securities
Assets and liabilities measured at fair value on a recurring basis based on Level 1 and Level 2 fair value measurement criteria as of March 31, 2023 and December 31, 2022 are as follows:
| Fair Value Measurements Using | ||||||||||||||||
| Balance as of March 31, 2023 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Nonobservable Inputs (Level 3) | |||||||||||||
| Marketable securities: | ||||||||||||||||
| Corporate Bonds | $ | $ | $ | $ | ||||||||||||
| Certificates of Deposits | ||||||||||||||||
| Total marketable securities | $ | $ | $ | $ | ||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Balance as of December 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Nonobservable Inputs (Level 3) | |||||||||||||
| Marketable securities: | ||||||||||||||||
| Corporate Bonds | $ | $ | $ | $ | ||||||||||||
| Certificates of Deposits | ||||||||||||||||
| Total marketable securities | $ | $ | $ | $ | ||||||||||||
The Company’s investments in US government bonds are measured based on publicly available quoted market prices for identical securities as of March 31, 2023 and December 31, 2022. The Company’s investments in corporate bonds, commercial paper and certificates of deposits are measured based on quotes from market makers for similar items in active markets.
| 14 |
3. Inventories
At March 31, 2023 and December 31, 2022 inventories consisted of the following:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw Materials | $ | $ | ||||||
| Inventory in transit | ||||||||
| Work in Process | ||||||||
| Finished Product | ||||||||
| Total Inventory | $ | $ | ||||||
4. Property and Equipment
At March 31, 2023 and December 31, 2022, property and equipment consisted of the following:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Software and website development | ||||||||
| Computer hardware and software | ||||||||
| Boat molds | ||||||||
| Vehicles | ||||||||
| Electric prototypes and tooling | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation and amortization expense of property
and equipment for the three months ended March 31, 2023 and 2022 are $
| 15 |
5. Leases – Related Party
Operating right of use (“ROU”)
assets and operating lease liabilities are recognized at the lease commencement date. Operating lease liabilities represent the
present value of lease payments not yet paid. Operating right of use assets represent our right to use an underlying asset and
is based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease
incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company
estimates incremental secured borrowing rates corresponding to the maturities of the leases. We used the U.S. Treasury rate of
The Company’s office lease contains rent escalations over the lease term. The Company recognizes expense for this office lease on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the Company’s right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
The Company leases its office and warehouse
facilities, and the land which are located at 3101 S US-1, Fort Pierce, Florida (the “Property”) from Visconti Holdings,
LLC. Visconti Holdings, LLC is a single member LLC that holds the ownership of the property, and its sole member is Joseph C. Visconti,
the CEO of the Company and the CEO and majority shareholder of the Company’s parent company. The Company entered into the
lease on January 1, 2020, and as amended January 1, 2021, the lease has a term of five years. The current base rent payment
is $
At March 31, 2023 and December 31, 2022, supplemental balance sheet information related to leases were as follows:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Operating lease ROU asset | $ | $ | ||||||
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Operating lease liabilities: | ||||||||
| Current portion | $ | $ | ||||||
| Non-current portion | ||||||||
| Total | $ | $ | ||||||
At March 31, 2023, future minimum lease payments under the non-cancelable operating leases are as follows:
| Year Ending December 31, | |||||
| 2023 (excluding the three months ended March 31, 2023) | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2025 | |||||
| Total lease payment | |||||
| Less imputed interest | ( | ) | |||
| Total | $ | ||||
| 16 |
The following summarizes other supplemental information about the Company’s operating lease:
| March 31, | ||||
| 2023 | ||||
| Weighted average discount rate | % | |||
| Weighted average remaining lease term (years) | ||||
6. Leases
Operating right of use (“ROU”)
assets and operating lease liabilities are recognized at the lease commencement date. Operating lease liabilities represent the
present value of lease payments not yet paid. Operating right of use assets represent the Company’s right to use an underlying
asset and is based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct
costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid,
the Company estimates incremental secured borrowing rates corresponding to the maturities of the leases. We used the U.S. Treasury
rate of
The Company leases a warehouse facility, and
the land which are located at 150 Commerce Street, Old Fort, North Carolina (the “Property”) from NC Limited Liability
Company. The Company entered into the lease on October 7, 2022, the lease has a term of two years. The current base rent payment
is $
At March 31, 2023 and December 31, 2022, supplemental balance sheet information related to leases were as follows:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Operating lease ROU asset | $ | $ | ||||||
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Operating lease liabilities: | ||||||||
| Current portion | $ | $ | ||||||
| Non-current portion | ||||||||
| Total | $ | $ | ||||||
At March 31, 2023, future minimum lease payments under the non-cancelable operating leases are as follows:
| Year Ending December 31, | ||||
| 2023 (excluding the three months ended March 31, 2023) | $ | |||
| 2024 | ||||
| Total lease payment | $ | |||
| Total imputed interest | ||||
| Total | $ | |||
| 17 |
The following summarizes other supplemental information about the Company’s operating lease:
| March 31, | ||||
| 2023 | ||||
| Weighted average discount rate | % | |||
| Weighted average remaining lease term (years) | ||||
| Three Months Ended March 31, 2023 | ||||
| Operating lease cost | $ | |||
| Total lease cost | $ | |||
7. Finance Leases
The Company has finance leases for a vehicle
and a forklift. The Company entered into the forklift lease in January of 2023, it is a
8. Accrued Liabilities
At March 31, 2023 and December 31, 2022, accrued liabilities consisted of the following:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accrued wages and benefits | $ | $ | ||||||
| Accrued Interest | ||||||||
| Accrued bonus | ||||||||
| Accrued rebates | ||||||||
| Accrued professional fees | ||||||||
| Accrued operating expense | ||||||||
| Accrued inventory | ||||||||
| Warranty reserve | ||||||||
| Total accrued liabilities | $ | $ | ||||||
| 18 |
9. Notes Payable – SBA EIDL Loan
On April 22, 2020, the Company received an
SBA Economic Injury Disaster Loan (“EIDL”) in the amount of $
As part of the EIDL loan, the Company granted the SBA a continuing security interest in and to any and all collateral to secure payment and performance of all debts, liabilities and obligations of the Company to the SBA under the EIDL loan. The collateral includes substantially all tangible and intangible personal property of the Company.
A summary of the minimum maturities of term debt follows for the years set forth below.
| Year | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 and thereafter | |||||
| Total | $ | ||||
10. Related Party Transactions
As discussed in note 5, the Company has leased its facilities from a company owned by its CEO.
During the three months ended March 31, 2023,
and 2022, the Company recorded management fees of $
During the three months ended March 31, 2023,
Twin Vee received a monthly fee of $
11. Commitments and Contingencies
Repurchase Obligations
Under certain conditions, the Company is obligated
to repurchase new inventory repossessed from dealerships by financial institutions that provide credit to the Company’s dealers.
The maximum obligation of the Company under such floor plan agreements totaled approximately $
| 19 |
Short-term lease
In August of 2022, Forza signed a six-month
lease for a duplex, to be used by its employees to minimize travel expenses as it started construction on its new manufacturing
facility, for $
Litigation
The Company is currently involved in various civil litigation in the normal course of business none of which is considered material.
Irrevocable line of credit
As of March of 2023, the Company had $
12. Stockholders’ Equity
Twin Vee
Common Stock Issuance
On October 3, 2022, the Company issued and
sold to ThinkEquity LLC, as the underwriter in a firm commitment underwritten public offering (the “Offering”)
pursuant to the term of an underwriting agreement that the Company entered into with ThinkEquity LLC on September 28, 2022 (the
“Underwriting Agreement”),an aggregate of shares of the Company’s common stock, par value
$ per share, at a public offering price of $ per share, for gross proceeds of $
Common Stock Warrants
As of March 31, 2023, the Company had outstanding
warrants to purchase
| 20 |
Equity Compensation Plan
The Company maintains an equity compensation plan (the “Plan”) under which it may award employees, directors and consultants’ incentive and non-qualified stock options, restricted stock units, stock appreciation rights and other stock-based awards with terms established by the Compensation Committee of the Board of Directors which has been appointed by the Board of Directors to administer the Plan. The number of awards under the Plan automatically increased on January 1, 2023. As of March 31, 2023, there were shares remaining available for grant under this Plan.
Accounting for Stock -Based Compensation
Stock Compensation Expense
For the three months ended March 31, 2023 and 2022, the Company recorded $ and $, respectively, of stock-based compensation expense, which is included in salaries and wages on the accompanying condensed consolidated statement of operations. Included in the $ of stock options expense for the three months ending March 31, 2023, is Forza’s stock-based compensation expense of $.
Stock Options
Under the Company’s 2021 Stock Incentive Plan the Company has issued stock options. A stock option grant gives the holder the right, but not the obligation to purchase a certain number of shares at a predetermined price for a specific period of time. The Company typically issues options that vest pro rata on a monthly basis over various periods. Under the terms of the Plan, the contractual life of the option grants may not exceed ten years.
The Company utilizes the Black-Scholes model to determine fair value of stock option awards on the date of grant. The Company utilized the following assumptions for option grants during the year ended December 31, 2022 and 2021:
| Year ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Expected term | years | - years | ||||||
| Expected average volatility | - % | - % | ||||||
| Expected dividend yield | ||||||||
| Risk-free interest rate | –% | - % | ||||||
| 21 |
The expected volatility of the option is determined using historical volatilities based on historical stock price of comparable boat manufacturing companies. The Company estimated the expected life of the options granted based upon historical weighted average of comparable boat manufacturing companies. The risk-free interest rate is determined using the U.S. Department of the Treasury yield curve rates with a remaining term equal to the expected life of the option. The Company has never paid a dividend, and as such the dividend yield is %
| Options Outstanding | Weighted Average | |||||||||||||||||
| Number of | Weighted Average | Remaining life | ||||||||||||||||
| Options | Exercise Price | (years) | Fair value of option | |||||||||||||||
| Outstanding, December 31, 2022 | $ | $ | ||||||||||||||||
| Granted | — | |||||||||||||||||
| Exercised | — | |||||||||||||||||
| Expired | ( |
) | ( |
) | — | ( |
) | |||||||||||
| Forfeited/canceled | — | |||||||||||||||||
| Outstanding, March 31, 2023 | $ | $ | ||||||||||||||||
| Exercisable options, March 31, 2023 | $ | |||||||||||||||||
At March 31, 2023, 570,292 Twin Vee options are unvested and expected to vest over the next four years.
Forza
Common Stock Warrants
As of March 31, 2023, Forza had outstanding warrants to purchase 172,500 shares of common stock issuable at a weighted-average exercise price of $6.25 per share that were issued to the representative of the underwriters on August 16, 2022 in connection with Forza’s IPO. The representative’s warrants are exercisable at any time and from time to time, in whole or in part, and expire on August 16, 2027. There was no warrant activity during the three months ended March 31, 2023.
| 22 |
Equity Compensation Plan
Forza maintains an equity compensation plan under which it may award employees, directors and consultants’ incentive and non-qualified stock options, restricted stock, stock appreciation rights and other stock-based awards with terms established by the Compensation Committee of the Board of Directors which has been appointed by the Board of Directors to administer the plan. The number of awards under the Plan will automatically increase on January 1, 2023. As of March 31, 2023, there were 568,750 shares remaining available for grant under this Plan. Stock based compensation expense is included in the Statements of Operations, under salaries and wages.
Accounting for Stock -Based Compensation
For the three months ended March 31, 2023 and 2022, Forza recorded $341,163 and $0, respectively, of stock-based compensation expense, which is included in salaries and wages on the accompanying condensed consolidated statement of operations.
Stock Options
Under Forza’s 2022 Stock Incentive Plan (the “Forza Plan”), Forza has issued stock options. A stock option grant gives the holder the right, but not the obligation, to purchase a certain number of shares at a predetermined price for a specific period of time. Forza typically issues options that vest pro rata on a monthly basis over various periods. Under the terms of the Forza Plan, the contractual life of the option grants may not exceed ten years.
Forza utilizes the Black-Scholes model to determine fair value of stock option awards on the date of grant. Forza utilized the following assumptions for option grants during the year ended December 31, 2022:
| Year ended | ||||
| December 31, | ||||
| 2022 | ||||
| Expected term | years | |||
| Expected average volatility | - % | |||
| Expected dividend yield | ||||
| Risk-free interest rate | - % |
The expected volatility of the option is determined using historical volatilities based on historical stock price of comparable boat manufacturing companies. Forza estimated the expected life of the options granted based upon historical weighted average of comparable boat manufacturing companies. The risk-free interest rate is determined using the U.S. Department of the Treasury yield curve rates with a remaining term equal to the expected life of the option. Forza has never paid a dividend, and as such the dividend yield is 0.0%
| 23 |
| Options Outstanding | Weighted Average | |||||||||||||||||
| Number of | Weighted Average | Remaining life | ||||||||||||||||
| Options | Exercise Price | (years) | Fair value of option | |||||||||||||||
| Outstanding, December 31, 2021 | $ | — | $ | |||||||||||||||
| Granted | ||||||||||||||||||
| Exercised | ||||||||||||||||||
| Forfeited/canceled | — | |||||||||||||||||
| Outstanding, December 31, 2022 | $ | $ | ||||||||||||||||
| Granted | — | |||||||||||||||||
| Exercised | ||||||||||||||||||
| Forfeited/canceled | ( | ) | ||||||||||||||||
| Outstanding, March 31, 2023 | $ | $ | ||||||||||||||||
| Exercisable options, March 31, 2023 | $ | |||||||||||||||||
13. Customer and Supplier Concentration
Significant dealers and suppliers are those that account for greater than 10% of the Company’s revenues and purchases.
During the three months ended March 31, 2023,
two individual dealers had sales of over
During
the three months ended March 31, 2023, we purchased substantial portions of materials from three third-party vendors (51%). As
of March 31, 2023, the amount due to the vendors was $
| 24 |
14. Segment
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company reported its financial performance based on the following segments: Gas-powered Boats, Franchise and Electric Boats.
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for business segments are generally based on the sale of boats and the sale of franchises. Income (loss) from operations for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Operating income for each segment excludes other income and expenses. The Company does not include intercompany transfers between segments for management reporting purposes.
The following table shows information by reportable segments for the three months ended March 31, 2023 and 2022:
For the three months ended March 31, 2023
| Gas-Powered Boats | Franchise | Electric Boat and Development | Total | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Operating expense | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ( | ) | ||||||||||||||
| Net loss | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
For the three months ended March 31, 2022
| Gas-Powered Boats | Franchise | Electric Boat and Development | Total | |||||||||||||
| Net sales | $ | $ | ( | ) | $ | $ | ||||||||||
| Cost of products sold | ||||||||||||||||
| Operating expense | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 25 |
Property and equipment, net classified by business were as follows:
| March 31, | December 31, | |||||||||
| 2023 | 2022 | |||||||||
| Gas-Powered Boats | $ | $ | ||||||||
| Franchise | $ | $ | ||||||||
| Electric-Boats | $ | $ | ||||||||
15. Subsequent Events
The Company has evaluated all event or transactions that occurred after March 31, 2023 through May 15, 2023, which is the date that the condensed consolidated financial statements were available to be issued. During this period, the only material subsequent events requiring recognition or disclosure are provided below.
On May 5, 2023, the Company and AquaSport Co. entered into an agreement with Ebbtide Corporation, a Tennessee corporation (“Ebbtide”), dated May 5, 2023 (the “Agreement”), providing the Company with the right to lease the AQUASPORT™ boat brand inclusive of its shuttered manufacturing facility. The potential asset purchase includes AquaSport’s trademarks, 150,000-square-foot manufacturing facility situated on 18.5 acres in White Bluff Tennessee, and related tooling, molds, and equipment to build five AquaSport models ranging in size from 21 to 25-foot boats (the “AquaSport Assets”).
Under the Agreement,
AquaSport’s obligations under the Agreement have been guaranteed by the Company.
| 26 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q. This discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto. You should also review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and under Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
OVERVIEW
We are a designer, manufacturer and marketer of recreational and commercial power catamaran boats. We believe our company has been an innovator in the recreational and commercial power catamaran industry. We currently have 8 gas-powered models in production ranging in size from our 24-foot, dual engine, center console to our newly designed 40-foot offshore 400 GFX. Our twin-hull catamaran running surface, known as a symmetrical catamaran hull design, adds to the Twin Vee ride quality by reducing drag, increasing fuel efficiency, and offering users a stable riding boat. Twin Vee’s home base operations in Fort Pierce Florida is a 7.5-acre facility with several buildings totaling over 75,000 square feet. We employed approximately 160 people on September 30, 2022, some of whom have been with our company for over twenty years.
We have organized our business into three operating segments: (i) our gas-powered boat segment which manufactures and distributes gas-powered boats under the Twin Vee name; (ii) our electric-powered boat segment which is developing fully electric boats, through our majority owned subsidiary, Forza X1, Inc., a Delaware corporation (“Forza”) and (iii) our franchise segment which is developing a standard product offering and will be selling franchises across the United States through our wholly owned subsidiary, Fix My Boat, Inc., a Delaware corporation.
Our gas-powered boats allow consumers to use them for a wide range of recreational activities including fishing, diving and water skiing and commercial activities including transportation, eco tours, fishing and diving expeditions. We believe that the performance, quality and value of our boats position us to achieve our goal of increasing our market share and expanding the power catamaran boating market. We currently primarily sell our boats through a current network of 20 independent boat dealers in 34 locations across North America and the Caribbean who resell our boats to the end user Twin Vee customers. We continue recruiting efforts for high quality boat dealers and seek to establish new dealers and distributors domestically and internationally to distribute our boats as we grow our production and introduce new models. Our gas-powered boats are currently outfitted with gas-powered outboard combustion engines.
| 27 |
Due to the growing demand for sustainable, environmentally friendly electric and alternative fuel commercial and recreational vehicles, Forza, is designing and developing a line of electric-powered catamaran boats ranging in size from 18-feet to 28-feet. Forza’s initial two models, the FX1 Dual Console and FX1 Center Console, are being designed to be 24-foot in length, have an 8’ beam or width and utilize a catamaran hull surface to reduce drag and increase run times. The initial launch of FX1 will include our proprietary single electric outboard motor. Our electric boats are being designed as fully integrated electric boats including the hull, outboard motor and control system. To date, we have completed the design of the 25-foot FX1 dual console model, including hull, deck and small parts. This design has gone from an intellectual concept in CAD to fiberglass and foam plugs, fiberglass molds and, finally, working boat parts in just over one year. On October the 28th, 2022, the running surface of the boat and all major components were tested successfully for several hours on the Indian River Lagoon in Fort Pierce, Florida. While the motor and control systems have been successfully trialed previously, this was the first voyage that included all major components, production batteries, fully functioning “alpha” engine design, control system – including 22” Garmin screen, and Osmosis telematics unit. The performance of the boat exceeded all expectations and will provide a great baseline for improvements, iterations, and design enhancements. We anticipate revenues from the sale of these fully integrated electric boats and motors to commence in late 2023. Forza will continue to build prototype engines and boats for the next six to nine months.
The first three months of 2023, we continued to experience strong sales for our products. Our company’s objectives have been to add new, larger boat models to our GFX lineup, expand our dealers and distribution network, and increase unit production to fulfill our customer and dealer orders. We are now also adding a monohull line, we started shipping our first model of the monohull, the 22 foot, in February of 2023. We have increased our sales by 51% for the first quarter of 2023, compared to 2022, shipping 54 boats compared to 40 in 2022. While net sales growth has been significant, the investments we are making also increases our labor, operating, sales and general administration costs. Our manufacturing process is labor intensive, and with the addition of new models to our production line we have added staff and expanded our training program.
While our sales have continued to increase, we are monitoring the overall market carefully, the addition of the monohull boat accounted for 17% of our total sales in the first quarter or 18% of our increase in sales. We anticipate that sales of the monohull will continue to increase,
As we move forward, we anticipate our operating income to be moderate toward breakeven for our core gas-powered boat segment, however, our electric boat division will continue to incur losses as we continue to develop our fully integrated electric boats, which includes research and development efforts.
Recent Developments
On April 20, 2023 we incorporated AquaSport Co., a wholly owned subsidiary, in the state of Florida in connection with our plan to lease the AQUASPORT™ boat brand and manufacturing facility in White Bluff Tennessee. On May 5, 2023, we and AquaSport Co. entered into an agreement with Ebbtide Corporation (“Ebbtide”) providing us with the right to acquire assets, AQUASPORT™ boat brand, trademarks, 150,000-square-foot manufacturing facility situated on 18.5 acres in White Bluff Tennessee, related tooling, molds, and equipment to build five Aquasport models ranging in size from 21 to 25-foot boats (the “AquaSport Assets”).
Under the agreement, we have the right to purchase the AquaSport assets from Ebbtide for $3,100,000 during the five-year term of the Agreement (or extension period), less credit for a $300,000 security deposit paid by us and $16,000 a month for any rent paid under the Agreement by AquaSport Co. to Ebbtide. AquaSport Co. will lease the AquaSport assets from Ebbtide under the agreement at a monthly rent of $22,000 pending our acquisition of the AquaSport assets. The lease is for a term of five years, commencing June 1, 2023, with one option to renew the lease for an additional five years.
| 28 |
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table provides certain selected financial information for the periods presented:
| Three months ended | ||||||||||||||||
| March 31, | ||||||||||||||||
| 2023 | 2022 | Change | % Change | |||||||||||||
| Net sales | $ | 8,877,215 | $ | 5,886,000 | $ | 2,991,215 | 51 | % | ||||||||
| Cost of products sold | $ | 5,655,385 | $ | 3,451,646 | $ | 2,203,739 | 64 | % | ||||||||
| Gross profit | $ | 3,221,830 | $ | 2,434,354 | $ | 787,476 | 32 | % | ||||||||
| Operating expenses | $ | 5,591,353 | $ | 3,482,507 | $ | 2,108,846 | 61 | % | ||||||||
| Loss from operations | $ | (2,369,523 | ) | $ | (1,048,153 | ) | $ | (1,321,370 | ) | 126 | % | |||||
| Other (expense) income | $ | (541,058 | ) | $ | 143,164 | $ | (684,222 | ) | (478 | %) | ||||||
| Net loss | $ | (1,828,465 | ) | $ | (1,191,317 | ) | $ | (637,148 | ) | 53 | % | |||||
| Basic and dilutive loss per share of common stock | $ | (0.19 | ) | $ | (0.17 | ) | $ | (0.02 | ) | 13 | % | |||||
| Weighted average number of shares of common stock outstanding | 9,520,000 | 7,000,000 | ||||||||||||||
Net Sales and Cost Sales
Our net sales increased $2,991,215, or 51% to $8,877,215 for the three months ended March 31, 2023 from $5,886,000 for the three months ended March 31, 2022. This increase was due to an increase in the number of boats sold during the three months ended March 31, 2023. The number of our boats sold during the three months ended March 31, 2023 increased 35% over the three months ended March 31, 2022, due to our increased production plan, enabling us to produce more boats during the quarter. Additionally, we have increased our sale prices and reduced discounts and rebates, to help offset the increases in operating expenses. We are experiencing a shift in our model mix, moving from catamarans to monohull boats. We believe that our sales levels will remain consistent until the new facility in Tennessee is operational, then we would anticipate increased revenues. The monohull boats have slim margins, as we get more experienced with this model we will work to take costs out and improve the overall margins.
Gross Profit
Gross profits increased by $787,476, or 32% to $3,221,830 for the three months ended March 31, 2023 from $2,434,354 for the three months ended March 31, 2022. Gross profit as a percentage of sales, for the three months ended March 31, 2023 and 2022 as 36% and 41% respectively, this improvement is driven by improved efficiencies.
| 29 |
Total Operating Expenses
Our total operating expenses for the three months ended March 31, 2023 and 2022 were $5,591,353 and $3,482,507 respectively. Operating expenses as a percentage of sales were 63% compared to 59% in the prior year. Our total operating expenses, for our gas-powered boat segment, for the three months ended March 31, 2023 and 2022 were $3,510,423 and $2,953,616 respectively. Our gas-powered segment, operating expenses as a percentage of sales were 40% compared to 50% in the prior year, showing a 10% improvement quarter over quarter. Our total operating expenses for Forza, our electric powered boat and development segment, for the three months ended March 31, 2023 and 2022 were $2,079,809 and $502,636, respectively.
Selling, general and administrative expenses increased by approximately 50%, or $340,369 to $1,022,690 for the three months ended March 31, 2023, compared to $682,321 for the three months ended March 31, 2022. A significant portion of this increase, $67,317 was due to increased costs in liability and workman’s compensation insurance. These insurance charges increase based on your employment level and sales revenue, both of which have increased significantly quarter over quarter. Another $78,891 was due to Forza now carrying cost of being publicly traded. Our sales and marketing expenses for the quarter increased $110,112, this is due to the promotion of our products. We recently added dealers to our dealer network and provided them with signage for show displays, additionally we attended an increased number of boat shows. Our travel expenses increased approximately $81,472 primarily due to Forza’s remote workforce being required to travel for development and testing. Hiring expenses increased $44,750 primarily due to Forza’s utilization of a recruiting firm to hire specialized engineers. Lastly our dues and subscriptions increased $48,439, we are in the process of implementing a new ERP system that requires a monthly subscription fees.
Salaries and wages related expenses increased by approximately 49%, or $1,096,212 to $3,350,022 for the three months ended March 31, 2023, compared to $2,253,810 for the three months ended March 31, 2022. Of the increase, salaries and wages accounted for of $612,360, due to ramping up production, which required increasing our production staff, we have also added two lean employees and two sales and marketing individuals, as well as the staffing of our Forza segment, which account for $199,078 of the increase. Included in salaries and wage related expenses for the three months ended March 31, 2023 was stock based compensation expense of $482,964, which was an increase of $258,082 compared to the three months ended March 31, 2022. Forza now has a board of director and the fees associated with the board were $25,875 for the three months ended March 31, compared to $0, for the three months ended March 31, 2022. We have added a full package of benefits for our employees, in order to retain our quality employees, which resulted in an increase of $47,594. The remaining increase in salaries and wages during the three months ended March 31, 2023 is associated with taxes.
Research and development expenses increased by $481,103, or 217% to $702,648 for the three months ended March 31, 2023, from $221,545 for the three months ended March 31, 2022. Part of the use of proceeds from our IPO, was the development of an electric boat and an electric motor.
Professional fees increased by 22%, or $52,978 to $297,717 for the three months ended March 31, 2023, compared to $244,739 for the three months ended 2022. This increase was also due to the additional costs we incurred associated with Forza being public. We engaged the services of an outside financial consultant, as well as an audit firm for quarterly reporting and SEC legal counsel to fulfill our public company reporting obligations.
Depreciation and amortization expense increased by 173%, or $138,184 to $218,276 for the three months ended March 31, 2023, compared to $80,092 for the three months ended 2022. This increase is due to the addition of fixed assets, primarily molds, to increase our production levels and throughput.
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Our other income increased by 478%, or $684,222 to $541,058 for the three months ended March 31, 2023, compared to an expense of $143,164 for the three months ended, 2022. We received $329,573 of government grant income, due to the Employee Retention Credit. Our dividend income increased by $233,912. During the three months ended March 31, 2023 we had $8,034 of unrealized gains on marketable securities, compared to a loss of $85,538, in the three months ended March 31, 2022.
Net Loss
Net loss for the three months ended March 31, 202 was $1,828,465, compared to $1,191,317 for the three months ended March 31, 2022, and increase of $637,148 or 53%. Our electric segment, which does not generate any revenue, at this time, incurred a loss of $2,005,132, for the three months ended March 31, 2023, related to research and development. Our gas-powered segment had income of $181,849 for the three months ended March 31, 2023. Basic and dilutive loss per share of common stock for the three months ended March 31, 2023 was ($0.19) compared to ($0.17) for the three months ended March 31, 2022.
Liquidity and Capital Resources
A primary source of funds for the year ended December 31, 2022 and through March 31, 2023 was net cash received from our secondary offering, as well as Forza’s initial public offering and revenue generated from operations. Our primary use of cash was related to funding the expansion of our operations through capital improvements, adding staff and increasing inventory levels to meet the increase in demand for our products. With uncertainty on component availability, prolonged lead time and rising prices, we have been adding to our inventory far earlier than in previous years.
The following table provides selected financial data about us as of March 31, 2023 and December 31, 2022.
| March 31, | December 31, | |||||||||||||||
| 2023 | 2022 | Change | % Change | |||||||||||||
| Cash, cash equivalents and restricted cash | $ | 21,022,515 | $ | 23,501,007 | $ | (2,478,492 | ) | (10.5 | %) | |||||||
| Marketable securities | $ | 2,434,551 | $ | 2,927,518 | $ | (492,967 | ) | (16.8 | %) | |||||||
| Current assets | $ | 28,555,019 | $ | 29,887,529 | $ | (1,332,510 | ) | (4.5 | %) | |||||||
| Current liabilities | $ | 3,854,142 | $ | 3,791,063 | $ | 63,079 | 1.7 | % | ||||||||
| Working capital | $ | 24,700,877 | $ | 26,096,466 | $ | (1,395,589 | ) | (5.3 | %) | |||||||
As of March 31, 2023, we had $23,457,066 of cash, cash equivalents, restricted cash and marketable securities, total current assets of $28,555,019, and total assets of $36,895,728. Our total liabilities were $5,220,340. Our total liabilities were comprised of current liabilities of $3,854,142 which included accounts payable and accrued liabilities of $3,345,337, current portion of operating leases right of use liability of $486,174, finance leases liability of $16,831, contract liability of $5,800 and long-term liabilities of $1,366,198. As of December 31, 2022, we had $26,428,525 of cash, cash equivalents and marketable securities, total current assets of $29,887,529 and total assets of $38,231,480. Our total current liabilities were $3,791,063 and total liabilities of $5,210,591 which included long-term operating leases liabilities for the lease of our facility.
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The accumulated deficit was $8,321,580 as of March 31, 2023 compared to accumulated deficit of $7,154,808 as of December 31, 2022.
Our working capital decreased by $1,395,589 to $24,700,877 as of March 31, 2023, compared to $26,096,466 on December 31, 2022.
We believe that our cash and cash equivalents will provide sufficient resources to finance operations for the next 12 months from the date of the filing of this Quarterly Report on Form 10-Q. In addition to cash, cash equivalents and marketable securities, we anticipate that we will be able to rely, in part, on cash flows from operations in order to meet our liquidity and capital expenditure needs in the next year. We do anticipate Forza’s expenses to increase during the next two years as it constructs its planned manufacturing facility in McDowell, North Carolina, the cost of which we expect will be paid for through the proceeds of Forza’s initial public offering, and certain grant funding, provided the conditions to receipt of the grant funding are met, of which there can be no assurance.
Cash Flow
| Three months ended | ||||||||||||||||
| March 31, | ||||||||||||||||
| 2023 | 2022 | Change | % Change | |||||||||||||
| Cash used in operating activities | $ | (2,232,650 | ) | $ | (1,149,673 | ) | $ | (1,082,977 | ) | (94 | %) | |||||
| Cash used in investing activities | $ | (243,007 | ) | $ | (647,855 | ) | $ | (404,848 | ) | (62 | %) | |||||
| Cash used in financing activities | $ | (2,835 | ) | $ | (116,394 | ) | $ | 113,559 | (98 | %) | ||||||
| Cash at end of period | $ | 21,022,515 | $ | 5,061,380 | $ | 15,961,135 | 315 | % | ||||||||
Cash Flow from Operating Activities
For the three months ended March 31, 2023, net cash flows used in operating activities was $2,232,650 compared to $1,149,673 during the three months ended March 31, 2022. We have increased inventory levels by $788,455, due to supply chain delays that continue to impact lead time and parts availability, this is further emphasized by our production ramp up, and added models. Accounts payable increased $650,441. Our accrued liabilities decreased $611,553 and prepaid expenses decreased $263,842. Our net loss from operation was $1,828,465, was decreased by non-cash expenses of $811,412, primarily due to stock-based compensation of $482,964, change of right-of-use asset and leases liabilities of $118,206, net change in fair value of marketable securities of $8,034 and depreciation of $218,276.
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Cash Flow from Investing Activities
During the three months ended March 31, 2023, we used $243,007 in investment activities, compared to $647,855 used during the three months ended March 31, 2022. We invested $744,008 in the purchase of property and equipment, primarily for new model boat molds of approximately $402,184, leasehold improvements of approximately $114,532, new production equipment of approximately $141,933, new website of approximately $59,63 and new computers, software and furniture of approximately $2,6296. We had proceeds from the sale of investments of approximately $501,001.
Cash Flows from Financing Activities
For the three months ended March 31, 2023, net cash provided by financing activities was approximately $2,835 compared to net cash used in financing activities of $116,394 for the three months ended March 31, 2022. The cash flow from financing activities for the three months ended March 31, 2023 included payment of finance leases obligation.
CRITICAL ACCOUNTING ESTIMATES
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results.
Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The notes to our condensed consolidated financial statements contained herein contain a summary of our significant accounting policies. We consider the following accounting policies critical to the understanding of the results of our operations:
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Revenue Recognition
We account for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606 which was adopted at the beginning of fiscal year 2018 using the modified retrospective method. We did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the effect was immaterial.
Payment received for the future sale of a boat to a customer is recognized as a customer deposit, which is included in contract liabilities on the balance sheet. Customer deposits are recognized as revenue when control over promised goods is transferred to the customer.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States “U.S. GAAP” requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Included in those estimates are assumptions about allowances for inventory obsolescence, useful life of fixed assets, warranty reserves and bad-debt reserves.
Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Net realizable value is defined as sales price less cost of completion, disposable and transportation and a normal profit margin. Production costs, consisting of labor and overhead, are applied to ending finished goods inventories at a rate based on estimated production capacity. Excess production costs are charged to cost of products sold. Provisions have been made to reduce excess or obsolete inventories to their net realizable value.
Impairment of Long-Lived Assets
Management assesses the recoverability of its long-lived assets when indicators of impairment are present. If such indicators are present, recoverability of these assets is determined by comparing the undiscounted net cash flows estimated to result from those assets over the remaining life to the assets’ net carrying amounts. If the estimated undiscounted net cash flows are less than the net carrying amount, the assets would be adjusted to their fair value, based on appraisal or the present value of the undiscounted net cash flows.
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Product Warranty Costs
As required by FASB ASC Topic 460, Guarantees, we are including the following disclosure applicable to our product warranties.
We accrue for warranty costs based on the expected material and labor costs to provide warranty replacement products. The methodology used in determining the liability for warranty cost is based upon historical information and experience. Our warranty reserve is calculated as the gross sales multiplied by the historical warranty expense return rate.
Leases
We adopted FASB Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), using the modified retrospective adoption method with an effective date of January 1, 2019. This standard requires all lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments.
Under Topic 842, we applied a dual approach to all leases whereby we are a lessee and classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by us. Lease classification is evaluated at the inception of the lease agreement.
Paycheck Protection Program
U.S. GAAP does not contain authoritative accounting standards for forgivable loans provided by governmental entities to a for-profit entity. Absent authoritative accounting standards, interpretative guidance issued and commonly applied by financial statement preparers allows for the selection of accounting policies amongst acceptable alternatives. Based on the facts and circumstances, we determined it most appropriate to account for the Paycheck Protection Program (“PPP”) loan proceeds as an in-substance government grant by analogy to International Accounting Standards 20 “(IAS 20)”, Accounting for Government Grants and Disclosure of Government Assistance. Under the provisions of IAS 20, “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IAS 20 does not define “reasonable assurance”; however, based on certain interpretations, it is analogous to “probable” as defined in FASB ASC Subtopic 450-20-20 under U.S. GAAP, which is the definition we have applied to our expectations of PPP loan forgiveness. Under IAS 20, government grants are recognized in earnings on a systematic basis over the periods in which we recognize costs for which the grant is intended to compensate (i.e., qualified expenses). Further, IAS 20 permits for the recognition in earnings either (1) separately under a general heading such as other income, or (2) as a reduction of the related expenses. We have elected to recognize government grant income separately within other income to present a clearer distinction in its financial statements between its operating income and the amount of net income resulting from the PPP loan and forgiveness.
Deferred Income Taxes and Valuation Allowance
We account for income taxes under ASC 740 “Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations.
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OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. We have adopted and maintain disclosure controls and procedures (as defined Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized, and reported within the time periods specified in the rules of the SEC. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such a date, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting, related to not yet having retained sufficient staff or engaged sufficient outside consultants with appropriate experience in GAAP presentation, especially of complex instruments, to devise and implement effective disclosure controls and procedures over internal controls.
Remediation Plan
Management has developed and is executing a remediation plan to address the previously disclosed material weaknesses, due to inadequate staffing levels. We have retained a full-time Controller and a Staff Accountant; we have selected and are working on implementing a robust operating system and we are utilizing the assistance of outside advisors where appropriate.
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To remediate the existing material weaknesses, additional time is required to demonstrate the effectiveness of the remediation efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As of March 31, 2023, controls and procedures have been implemented to remediate the material weakness, however testing of controls continues.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2023, we hired replacement staff in our finance department and are developing and refining our controls and other producers that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC are recorded, processed, summarized and reported within the time periods specified in SEC rules and in accordance with GAAP.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 1A. RISK FACTORS.
Investing in our securities involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and notes thereto. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, ”Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2022. Except as disclosed below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
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We have incurred losses for the quarter ended March 31, 2023 and the year ended December 31, 2022 and could continue to incur losses in the future.
For the year ended December 31, 2022, we incurred a loss from operations of $6,021,707 and a net loss of $5,793,414. As of March 31, 2023, we had an accumulated deficit of approximately $8.3 million. There can be no assurance that expenses will not continue to increase in future periods or that the cash generated from operations in future periods will be sufficient to satisfy our operating needs and to generate income from operations and net income.
We have a large, fixed cost base that will affect our profitability if our sales decrease.
The fixed cost levels of operating a powerboat manufacturer can put pressure on profit margins when sales and production decline. Our profitability depends, in part, on our ability to spread fixed costs over a sufficiently large number of products sold and shipped, and if we make a decision to reduce our rate of production, gross or net margins could be negatively affected. Consequently, decreased demand or the need to reduce production can lower our ability to absorb fixed costs and materially impact our financial condition or results of operations.
Interest rates and energy prices affect product sales.
Our gas-powered products are often financed by our dealers and retail powerboat consumers, we envision this continuing as we expand our operations and grow our network of distributors. This may not occur if interest rates meaningfully rise because higher rates increase the borrowing costs and, accordingly, the cost of doing business for dealers and the cost of powerboat purchases for consumers. Higher energy costs result in increases in operating expenses at our manufacturing facility and in the expense of shipping products to our dealers. In addition, inflation and increases in energy costs may adversely affect the pricing and availability of petroleum-based raw materials, such as resins and foams that are used in our products. Also, higher fuel prices may have an adverse effect on demand for our gas-powered boats, as they increase the cost of ownership and operation and the prices at which we sell the boats. Therefore, higher interest rates and fuel costs can adversely affect consumers’ decisions relating to recreational powerboating purchases.
The capacity of the manufacturing facility that we and Forza utilize will not be sufficient to support our future growth and business plans.
We are currently operating close to full capacity at our current manufacturing facility in Fort Pierce. Forza plans to manufacture its electric boats at a new state of the art carbon neutral factory that it plans to build in McDowell County, North Carolina. Until we are able to expand our manufacturing capacity and Forza is able to build the planned manufacturing facility, we will continue to share our current manufacturing facility with Forza, which has a limited capacity and may not be able to satisfy our and their manufacturing needs. Any facility that we build will require a significant capital investment and is expected to take at least one to two years to build and become fully operational. As a result of limited capacity at our facility, Forza’s ability to produce any boats will be limited to the available capacity of our facility until Forza’s future manufacturing facility is operational. If capacity is not available, Forza will not be able to produce its electric boats as planned.
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In addition. Forza intends to utilize grant funding to pay for certain costs associated with the building of its manufacturing facility. On July 28, 2022, we received notice that the North Carolina Economic investment committee has approved a Job Development Investment Grant (“JDIG”) providing for reimbursement to us of up to $1,367,100 over a twelve-year period to establish a new manufacturing plant in McDowell County, North Carolina. The receipt of grant funding is conditioned upon Forza investing over $10.5 million in land, buildings and fixtures, infrastructure and machinery and equipment by the end of 2025 and Forza creating as many as 170 jobs. There can be no assurance that Forza will meet the conditions necessary to receive the grant funding.
Changes in general economic conditions, geopolitical conditions, domestic and foreign trade policies, monetary policies and other factors beyond our control may adversely impact our business and operating results.
Our operations and performance depend on global, regional and U.S. economic and geopolitical conditions. General worldwide economic conditions have experienced significant instability in recent years including the recent global economic uncertainty and financial market conditions. Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from U.S. and European leaders and financial markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022. Resulting changes in U.S. trade policy could trigger retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a “trade war.” Furthermore, if other countries, including the U.S., become further involved in the conflict, we could face significant adverse effects to our business and financial condition.
The uncertain financial markets, disruptions in supply chains, mobility restraints, and changing priorities as well as volatile asset values could impact our business in the future. The COVID-19 outbreak and government measures taken in response to the pandemic have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, have spiked, while demand for other goods and services, such as travel, have fallen. The future progression of the pandemic and its effects on our business and operations are uncertain. In addition, the outbreak of a pandemic could disrupt our operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in our office or laboratory facilities, or due to quarantines. Pandemics could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors, and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs.
Further, due to increasing inflation, operating costs for many businesses including ours have increased and, in the future, could impact demand or pricing manufacturing of our drug candidates or services providers, foreign exchange rates or employee wages. Inflation rates, particularly in the United States, have increased recently to levels not seen in years, and increased inflation may result in increases in our operating costs (including our labor costs), reduced liquidity and limits on our ability to access credit or otherwise raise capital. In addition, the Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation, which coupled with reduced government spending and volatility in financial markets may have the effect of further increasing economic uncertainty and heightening these risks.
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Actual events involving reduced or limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank, was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver. Although we did not have any cash or cash equivalent balances on deposit with Silicon Valley Bank, uncertainty and liquidity concerns in the broader financial services industry remain and the failure of Silicon Valley Bank and its potential near- and long-term effects on the biotechnology industry and its participants such as our vendors, suppliers, and investors, may also adversely affect our operations and stock price.
We are actively monitoring the effects these disruptions and increasing inflation could have on our operations.
These conditions make it extremely difficult for us to accurately forecast and plan future business activities.
We depend on our network of independent dealers for our gas-powered boats, face increasing competition for dealers, and have little control over their activities.
A significant portion of our sales of our gas-powered boats are derived from our network of independent dealers. We typically manufacture our gas-powered boats based upon indications of interest received from dealers who are not contractually obligated to purchase any boats. While our dealers typically have purchased all of the boats for which they have provided us with indications of interest, it is possible that a dealer could choose not to purchase boats for which it has provided an indication of interest (e.g., if it were to have reached the credit limit on its floor plan), and as a result we once experienced, and in the future could experience, excess inventory and costs. For the three months ended March 31, 2023, our top dealers accounted for approximately 34% of our consolidated revenues. During the three months ended March 31, 2023, two individual dealer had sales of over 10% of our total sales, that dealer represented 45% of total sales. The loss of a significant dealer could have a material adverse effect on our financial condition and results of operations. The number of dealers supporting our products and the quality of their marketing and servicing efforts are essential to our ability to generate sales. Competition for dealers among other boat manufacturers continues to increase based on the quality, price, value, and availability of the manufacturers’ products, the manufacturers’ attention to customer service, and the marketing support that the manufacturer provides to the dealers. We face intense competition from other boat manufacturers in attracting and retaining dealers, affecting our ability to attract or retain relationships with qualified and successful dealers. Although our management believes that the quality of our products in the performance sport boat industry should permit us to maintain our relationships with our dealers and our market share position, there can be no assurance that we will be able to maintain or improve our relationships with our dealers or our market share position. In addition, independent dealers in the boating industry have experienced significant consolidation in recent years, which could result in the loss of one or more of our dealers in the future if the surviving entity in any such consolidation purchases similar products from a competitor. A substantial deterioration in the number of dealers or the quality of our network of dealers would have a material adverse effect on our business, financial condition, and results of operations.
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The loss of one or a few dealers could have a material adverse effect on us.
A few dealers have in the past, and may in the future, account for a significant portion of our revenues in any one year or over a period of several consecutive years. For example, during the three months ended March 31, 2023, two individual dealers had sales of over 10% of our total sales, and those dealers represented 48% of total sales. During the three months ended March 31, 2022, three dealers represented 62% of our sales. The loss of business from a significant dealer could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Forza’s planned fully electric sport boat has not yet been developed, and even if developed, interest in it may not develop.
Forza has not completed the design and engineering of the FX1 sport boat. There can be no assurance that Forza will be able to complete development of the FX1 when anticipated, if at all, that we will be able to mass produce the FX1 or that the anticipated features or services to be included in the FX1 will create substantial interest or a market, and therefore Forza’s anticipated FX1 product, its sales and growth for our product may not develop as expected, or at all. For example, in May 2021 we experienced a small fire in connection with the sea trial of a prototype of our electric boat which resulted in a six-month delay in our design timetable as we implemented changes to the design for outboard electric motor system as a result of the fire. We cannot guarantee that similar events will not occur in the future, or that we will be able to contain such events without damage or delay. Even if such a market for the FX1 sport boat develops, there can be no assurance that Forza would be able to maintain that market.
Forza’s operations to date have been primarily limited to finalizing the design and engineering of its electric sport boat as well as organizing and staffing Forza in preparation for launching the FX1 electric boat. As such, Forza has not yet demonstrated, and the success of Forza is wholly dependent upon, its ability to commercialize its products. The successful commercialization of any products will require us to perform a variety of functions, including:
| ● | completing the design and testing for the FX1 sport boat and Forza’s proprietary outboard electric motor; | |
| ● | manufacturing the FX1 sport boats; | |
| ● | developing a vertically integrated direct-to-consumer distribution system; and | |
| ● | conducting sales and marketing activities. |
Forza cannot be certain that its business strategy for its electric-powered boats will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected, and Forza may not have the resources to continue or expand the business operations of its electric-powered boats business.
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Forza may not receive the anticipated grant funding.
On July 28, 2022, Forza received notice that the North Carolina Economic investment committee has approved the JDIG providing for reimbursement to us of up to $1,367,100 over a twelve-year period to establish a new manufacturing plant in McDowell County, North Carolina. The receipt of grant funding is conditioned upon us investing over $10.5 million in land, buildings and fixtures, infrastructure and machinery and equipment by the end of 2025 and us creating as many as 170 jobs. Forza is currently in negotiations for a new site to build the Forza factory in North Carolina. There can be no assurance that the negotiations will be successful. If unsuccessful, it will not meet the conditions necessary to receive the grant funding and will be subject to the limited capacity at the Twin Vee factory that Twin Vee allows Forza, in its discretion, to use. There can be no assurance that Forza will meet the conditions necessary to receive the grant funding. Forza is currently in negotiations for a new site to build the Forza factory in North Carolina. There can be no assurance that the negotiations will be successful.
We have identified weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future.
As a public company, we will be subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures, and internal control over financial reporting.
We do not yet have effective disclosure controls and procedures, or internal controls over all aspects of our financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and in accordance with GAAP. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. We will be required to expend time and resources to further improve our internal controls over financial reporting, including by expanding our staff. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.
We will be required to expend time and resources to further improve our internal controls over financial reporting, including by expanding our staff. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.
We are in the process of hiring additional staff and providing them with the required training, we continue to engage outside consultants with appropriate experience in GAAP presentation, especially of complex instruments, to devise and implement effective disclosure controls and procedures, or internal controls. We will be required to spend time and resources hiring and engaging additional staff and outside consultants with the appropriate experience to remedy these weaknesses. We cannot assure you that management will be successful in locating and retaining appropriate candidates; that newly engaged staff or outside consultants will be successful in remedying material weaknesses thus far identified or identifying material weaknesses in the future; or that appropriate candidates will be located and retained prior to these deficiencies resulting in material and adverse effects on our business.
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Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business, including increased complexity resulting from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures, and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock.
Our independent registered public accounting firm is not required to audit the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results and cause a decline in the market price of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
| (a) | Unregistered Sales of Equity Securities. |
None.
| (b) | Use of Proceeds. |
On July 23, 2021, we closed our initial public offering pursuant to which we offered and sold 3,000,000 shares of our common stock at an offering price of $6.00 per share (for aggregate gross proceeds of $18,000,000), pursuant to our Registration Statement on Form S-1 (as amended) (File No. 333-255134), which was declared effective by the SEC on July 20, 2021, as amended by the Registration Statement on Form S-1 MEF (File No. 333-258058) filed with the SEC on July 20, 2021 and effective as of the date of filing. After deducting underwriting discounts and commissions of approximately $1,260,000, and other offering expenses payable by us of approximately $1,567,150, we received approximately $15,849,037 in net proceeds from our initial public offering. ThinkEquity LLC acted as the representative of the several underwriters for the offering. We also granted a 45-day option to the representative of the underwriters to purchase up to 450,000 additional shares of common stock solely to cover over-allotments, if any, which expired unexercised.
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At the time of the initial public offering, the primary use of the net proceeds was as follows: (i) approximately $1,500,000 for production and marketing of our larger fully equipped boats; (ii) approximately $2,500,000 for the design, development, testing, manufacturing and marketing of our new line of electric boats; (iii) approximately $6,000,000 for the design, development, testing, manufacturing and marketing of our fully electric propulsion system; (iv) approximately $3,500,000 for acquisition of waterfront property and development of the Electra Power Sports- EV Innovation & Testing Center, in Fort Pierce, Florida to build, design and manufacture our electric propulsion systems; and (v) the balance for working capital.
It was originally anticipated that we would retrofit a gas-powered boat with an electric motor that would be designed by us and that we would also sell the motors to other third-party boat manufacturers to retrofit their boats. The retrofitting would require extensive development, testing and manufacturing of multiple variations of electric motors. However, consumer preference in the electric marine market was and is trending towards a single purchase of a fully integrated electric boat rather than a retrofitted existing gas and diesel fuel powered boat with electric outboard motors and battery packs. Therefore, we decided not to continue designing electric motors for retrofitting, resulting in us no longer needing any funding for the design, development, testing, manufacturing and marketing of our fully electric propulsion system and instead those funds are anticipated to be used for working capital needs.
Further, we originally anticipated that we would acquire waterfront property for a testing center in Fort Pierce, the price of real estate in Florida has prohibited us from moving forward. Therefore, we decided to use the $3,500,000 of funds to build additional manufacturing space at our Fort Pierce location.
The remaining planned use of proceeds has not changed since the initial public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index. The Exhibit Index is incorporated herein by reference.
EXHIBIT INDEX
| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TWIN VEE POWERCATS CO. | ||
| Date: May 15, 2023 | By: | /s/ Joseph C. Visconti |
| Joseph C. Visconti | ||
| Chairman and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 15, 2023 | By: | /s/ Carrie Gunnerson |
| Carrie Gunnerson | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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