Twin Vee PowerCats, Co. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion, which focuses on our results of operations, contains forward-looking information and statements. Actual events or results may differ materially from those indicated or anticipated, as discussed in the section entitled “Forward Looking Statements.” The following discussion of our financial condition and results of operations should also be read in conjunction with our financial statements and notes to financial statements contained elsewhere in this Annual Report on Form 10-K. Company 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 10 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 120 people at December 31, 2021, 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; (ii) our electric-powered boat segment which is developing fully electric boats, through our wholly 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 19 independent boat dealers in 23 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. Due to the growing demand for sustainable, environmentally friendly electric and alternative fuel commercial and recreational vehicles, our wholly owned subsidiary, Forza X1, Inc., 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. Both FX1 models are being designed with advanced high-powered, liquid-cooled battery packs that will be provided by the third-party supplier with whom we have entered into a five year supply agreement and a vehicle control unit with proprietary control software all integrated into a 22” master control touch screen that will be used to control most functions of the boat. We have also filed three design and four utility patent applications with the U.S. Patent and Trademark Office relating to, among other things, our propulsion system being developed and boat design. In September of 2021 launched our wholly owned subsidiary, Fix My Boat Inc. Fix My Boat, will be the first nationally branded, mobile marine service company utilizing a franchise model for marine mechanics across the country. During the second half of 2021 we shifted our focus from our IPO efforts to expanding our production. As we moved toward our goal of more than doubling production from one boat a week during the business slowdown in the first half of 2020 due to the COVID pandemic, to four boats per week, our operating expenses increased. More specifically, our headcount increased as we hired additional production employees and midlevel managers resulting in higher salaries and wages. We are continuing to employ higher qualified production and administrative staff to increase our productivity, efficiencies, and quality controls. We have also invested heavily in facility upgrades, additional equipment and molds, again in the efforts to increase our production output and quality. 41 Table of Contents Financial Condition Our consolidated balance sheet indicates a strong financial position as of December 31, 2021. We finished the year with revenue up 43% over the prior year, and we saw our working capital increase by approximately $10.5 million for the year ended 2021, primarily resulting from our IPO on July 23, 2021. Our cash, cash equivalents and marketable securities were $13.0 million at December 31, 2021. Our property, plant, and equipment along with prepaid expenses went up notably, as we have invested in additional boat molds for new model, equipment to support our increased production levels, and leasehold improvements to improve the quality of our products. While we have largely return to normal operations, the COVID-19 pandemic continues to cause challenges. During fiscal 2021, we experienced supply chain disruptions and an overall increase in the price of raw materials and other components used in our production. We also incurred higher labor costs and challenges to fill open positions due to a highly competitive job market. Additionally, we experienced periodic operational disruptions as our employees contracted or were potentially exposed to COVID-19 pandemic, we are unable to predict the impact the pandemic may have on our future results of operations or financial condition. Results of Operations Comparison of the Years Ended December 31, 2021 and 2020 The following table provides certain selected financial information for the years presented: Years Ended December 31, 2021 2020 Change % Change Net sales $ 15,774,170 $ 11,063,619 $ 4,710,551 43 % Cost of products sold $ 9,498,384 $ 6,289,316 $ (3,209,068 ) 51 % Gross profit $ 6,275,786 $ 4,774,303 $ 1,501,483 31 % Operating expenses $ 7,906,507 $ 4,053,469 $ (3,853,038 ) 95 % (Loss) income from operations $ (1,630,721 ) $ 720,834 $ (2,351,555 ) 326 % Other income $ 619,712 $ 450,243 $ 169,469 38 % Net (loss) income $ (1,011,009 ) $ 1,171,077 $ (2,182,086 ) 186 % Basic and dilutive (loss) income per share of common stock $ (0.19 ) $ 0.29 $ (0.48 ) 166 % Weighted average number of shares of common stock outstanding 5,331,400 4,000,000 Net Sales and Cost Sales Our net sales increased $4,710,551, or 43% to $15,774,170 for the year ended December 31, 2021 from $11,063,619 for the year ended December 31, 2020. We attribute the large increase in net sales to a strengthening economy during 2021 compared to 2020. During the first half of 2020, we were impacted significantly by COVID-19, during the 3 rd quarter of 2020 we started to see a rebound in sales as the economy started to strengthen. The number of boats sold during fiscal year ended December 31, 2021 increased 27% over the number of our boats sold during the fiscal year ended December 31, 2020, due not only to the strengthening economy over 2020, but also our increased production plan that we focused on during the second half of 2021. Additionally, we have increased our sale prices to help offset the increases in operating expenses, which includes increased labor cost, described below, in addition to increased costs of production supplies to protect against supply chain shortages. Our average revenue per unit for the year ended December 31, 2021 is up approximately 12% over revenue per unit for the year ended December 31, 2020. The average revenue per unit increase, is not only due to our increase in sales prices, we also attribute this increase to a shift in our model mix. Early in 2021, we discontinued our 19-foot model, which equaled approximately 5% of our sales in the previous year. We further saw a decrease in our 24-foot model over the prior year, while our larger models all saw increases. Gross Profit Gross profits increased by $1,501,483, or 31% to $6,275,786 for the year ended December 31,2021 from $4,774,303 for the year ended December 31, 2020. Gross profit as a percentage of sales, for the year ended December 31, 2021 and 2020 was 40% and 43% respectively. We attribute the 3% decline in gross profit percentage to increased cost of raw materials and purchased components. We anticipate continued pressure on our gross profit percentage due to price increases on raw materials and purchased components. 42 Table of Contents Total Operating Expenses Our total operating expenses for the year ended December 31, 2021 and 2020 were $7,906,507 and $4,053,469 respectively. Operating expenses as a percentage of sales were 50% compared to 37% in the prior year. Selling, general and administrative expenses increased by approximately 98%, or $853,676 to $1,726,345 for the year ended December 31, 2021, compared to $872,669 for the year ended December 31, 2020. The large portion of the increase resulted from expenses totaling $332,910 incurred from being publicly traded company, which we did not incur in the prior year including, directors and officers insurance, filing fees, legal expenses and investor relations costs. Our repairs and maintenance increased $168,047 or 168%, primarily due to equipment repairs and increased garbage disposal for our increased production levels. We also incurred significant increases our liability insurance and workers compensation insurance totaling $89,761, an increase of 76%, due to our increased revenue levels and increased wages. Numerous other items make up the remaining $262,958 of increased selling, general and administrative expense increase. Salaries and wages increased by approximately 88%, or $2,531,826 to $5,389,599 for the year ended December 31, 2021, compared to $2,857,773 for the year ended December 31, 2020. The increase in salaries and wages of $2,531,826 was the result of aggressively ramping up of production, which required increasing our production and adding mid-level staff. Included in salaries and wages for the year ended December 31, 2021 was a charge for non-cash stock-based compensation expense of $309,832 due to the issuance of options to employees. We have also incurred production and executive bonus expense of $560,299 for the year ended December 31, 2021 compared to $168,304 for the year ended December 31, 2020, an increase of $391,995, as a result of meeting our 2021 production objectives. The remaining increase of salaries and wages during the year ended December 31, 2021 was associated with payroll taxes and benefits. Professional fees increased by 128%, or $213,630 to $380,929 for the year ended December 31, 2021, compared to $167,299 for the year ended 2020. This increase was primarily due to the additional costs we incurred associated with being a public company and included an increase in audit, legal and related consulting fees in order to fulfill our public company SEC reporting obligations. Depreciation expense for the year ended December 31, 2021 increased by 27%, or $42,795 to $198,523 for the year ended December 31, compared to $155,728 in December 31, 2020. During the year ended December 31, 2021 we made significant investments in equipment, leasehold improvements and boat molds that resulted in an increased our depreciation expense. Research and design expenses for the year ended December 31, 2021, was $211,111 compared to $0, for the year ended December 31,2020. These expenses are associated with our development of our electric propulsion system for Forza X1. Other income increased by 38%, or $169,469 to $619,712 for the year ended December 31, 2021, compared to income of $450,243 for the year ended, 2020. The increase in other income is primarily the result of $608,224 in government grant income associated with our PPP loan that was recognized in 2021, lower interest expense, and a gain from insurance recovery net of loss on disposal of assets of $434,724. This was offset by a loss on the disposal of assets of $254,600 in 2021 and the forgiveness of our PPP loan in 2020. Net Loss Net loss for the year ended December 31, 2021 was $1,011,009, compared to net income of $1,171,077 for the year ended December 31, 2020. We have spent much of 2021 assembling the tools and people necessary to increase production levels. While our revenue levels increased, our expenses also increased. That coupled with the additional expenses associated with being a public company and our research and development efforts for our electric boat division, resulted in a net loss for 2021. With these investments, we are building the foundation for our future, not only for our gas powered boats, but also for our electric boat division. We continue to deal with the fallout of the global pandemic, as well as the impact of additional costs of growth, but are encouraged by our continued increase in revenue. Basic and dilutive loss per share of common stock for the year ended December 31, 2021, ($0.19) compared to basic and dilutive income per share of common stock for the year ended December 31, 2020, $0.29. Liquidity and Capital Resources A primary source of funds for the year ended December 31, 2021 was net cash received from our initial public offering. 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 previous years. The following table provide selected financial data about us as of December 31, 2021 and December 31,2020. December 31, December 31, 2021 2020 Cash and cash equivalents $ 6,975,302 $ 891,816 Marketable securities $ 6,064,097 $ — Current assets $ 13,073,346 $ 1,834,942 Current liabilities $ 2,155,420 $ 1,440,067 Working capital $ 10,917,926 $ 394,875 43 Table of Contents As of December 31, 2021, we had sufficient cash and cash equivalents to meet ongoing expenses for at least twelve months from the date of the filing of this Annual Report on Form 10-K. As of December 31, 2021, we had $13,039,399 of cash, cash equivalents and marketable securities, total current assets of $13,073,346, and total assets of $20,599,184. Our total liabilities were $3,899,484. Our total liabilities were comprised of current liabilities of $2,155,420 which included accounts payable and accrued liabilities of $1,657,675, contract liability of $14,100 due to affiliated companies of $115,043 and current portion of operating lease right of use liability of $368,602, and long-term liabilities of $1,744,064. As of December 31, 2020, we had $891,816 of cash and cash equivalents, total current assets of $1,834,942 and total assets of $4,504,566. Our total current liabilities were $1,440,067 and total liabilities of $2,955,726 which included long-term operating lease liabilities for the lease of our facility. We believe that our cash and cash equivalents will provide sufficient resources to finance operations for the next 12 months. 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. Cash Flow Years Ended December 31, 2021 2020 Change % Change Cash (used in) provided by operating activities $ (1,947,539 ) $ 364,648 $ (1,582,891 ) (434 %) Cash used in investing activities $ (8,037,264 ) $ (200,452 ) $ 7,836,812 (3,910 %) Cash provided by financing activities $ 16,068,289 $ 512,046 $ 15,556,243 3,038 % Cash at end of year $ 6,975,302 $ 891,816 $ 6,083,486 682 % Cash Flow from Operating Activities For the year ended December 31, 2021, net cash flows used in operating activities was $1,947,539 compared to $364,648 in cash flow provided from operating activities during the year ended December 31, 2020. We have increased inventory levels by $913,510, due to supply chain delays that continue to impact lead time and parts availability. Prepaid expenses and other current assets increased by $903,406, primarily due to Directors and Officers Insurance being paid upfront. Our net loss from operation was $1,011,009, was decreased by non-cash expenses of approximately $1,200,065, primarily due government grant income of $608,224, stock-based compensation of $309,832, change of right-of-use asset and lease liabilities of $384,791, gain on disposal of assets of $224,037 and depreciation of $198,523. Cash Flow from Investing Activities During the year ended December 31, 2021, we used $8,037,264 for investment activities, compared to $200,452 used during the year ended December 31,2020. Approximately, $6,096,562 was invested in marketable securities and $1,940,702 was used to purchase property and equipment. The majority of the investment for property and equipment included $652,229 for new boat model molds, $557,324 for building roof repairs and ventilation system improvements, $357,935 for new production equipment, $164,000 for electric boat tooling and $101,984 for production vehicles. Cash Flows from Financing Activities For the year ended December 31, 2021, net cash provided by financing activities was $16,068,289, compared to $512,046 during the year ended December 31, 2020, primarily consisting of net proceeds from our IPO of $15,852,037, proceeds from PPP loan of $608,224 and $44,628 from the repayment of advances from related parties, offset by repayments to related parties of approximately $331,100 and deferred financing costs of $105,500. 44 Table of Contents CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND 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 consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our 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 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: Revenue Recognition The Company accounts 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. The Company 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. 45 Table of Contents 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. Product Warranty Costs As required by FASB ASC Topic 460, Guarantees , the Company is including the following disclosure applicable to its product warranties. The Company accrues 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. The Company’s warranty reserve is calculated as the gross sales multiplied by the historical warranty expense return rate. Leases The Company 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, the Company applied a dual approach to all leases whereby the Company is a lessee and classifies leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the Company. 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, the Company 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 the Company has applied to its expectations of PPP loan forgiveness. Under IAS 20, government grants are recognized in earnings on a systematic basis over the periods in which the Company recognizes 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. The Company has 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 The Company accounts 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 the Company will not realize tax assets through future operations . 46 Table of Contents 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 Securities and Exchange Commission rules. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable because we are a smaller reporting company.