Twin Vee PowerCats, Co. 10-Q

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, 2021 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 140 people on March 31, 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; (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 20 independent boat dealers in 25 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. 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 hull and running surface of the boat and have begun tooling the molds which are required to build the physical fiberglass boat, we have entered into a supply agreement for the supply of the lithium battery packs that we plan to use to power the electric boats, completed the design and prototyping of the boat control system, and completed the design and are more than halfway through prototyping of the electric outboard motor. We expect to begin production of our FX1 fully integrated electric boat and motor and commence selling to end user customers by the second quarter of 2023. 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. 17 Table of Contents Through the first quarter of 2022, we continue to experience strong demand for our products. Our company objective is 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. For the first three months ended March 31, 2022, we increased our manufacturing throughput to an average of 4 boats a week. The increase in production drove our net revenue up 83% compared to 19% for the three months ended March 31, 2021. While driving our top line net sales growth, we are also experiencing increased labor 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. Our goal continues to increase production to 5 boats per week which has resulted in an increase in operating expenses. More specifically, our headcount has increased and is expected to further increase as we hired additional production employees and midlevel managers resulting in higher salaries and wages. We continue focus on hiring highly qualified production and administrative staff to order to increase our productivity, drive efficiencies, and improve product quality. To help meet our production objectives we have also invested approximately $2.5 million in facility upgrades, capital equipment and molds. As we move forward into the second quarter of 2022, 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 our research and development efforts. Results of Operations Comparison of the Three Months Ended March 31, 2022 and 2021 The following table provides certain selected financial information for the periods presented: Three months ended March 31, 2022 2021 Change % Change Net sales $ 5,886,000 $ 3,207,643 $ 2,678,357 83 % Cost of products sold $ 3,451,646 $ 1,719,737 $ 1,731,909 101 % Gross profit $ 2,434,354 $ 1,487,906 $ 946,448 64 % Operating expenses $ 3,482,507 $ 1,333,144 $ 2,149,363 161 % (Loss) income from operations $ (1,048,153 ) $ 154,762 $ (1,202,915 ) (777 %) Other expense $ (143,164 ) $ (22,813 ) $ 120,351 528 % Net (loss) income $ (1,191,317 ) $ 131,949 $ (1,323,266 ) (1,003 %) Basic and dilutive income per share of common stock $ (0.17 ) $ 0.03 $ (0.20 ) (616 %) Weighted average number of shares of common stock outstanding 7,000,000 4,000,000 18 Table of Contents Net Sales and Cost Sales Our net sales increased $2,678,357, or 83% to $5,886,000 for the three months ended March 31, 2022 from $3,207,643 for the three months ended March 31, 2021. This increase was due to an increase in the number of boats sold during the three months ended March 31, 2022. The number of our boats produced and sold during the three months ended March 31, 2022 increased 48% over the three months ended March 31, 2021, due to our production plan, which we continue to implement and refine, enabling us to produce more boats during the quarter. Additionally, we have increased our sale prices to help offset the increases in operating expenses, which includes increased labor cost, described below, as well as increased costs of production supplies. Our average revenue per unit for the three months ended March 31, 2022 is up approximately 21% over revenue per unit for the three months ended March 31, 2021. The average revenue per unit increase is due to an increase in boat pricing and a shift in product mix with higher margins. We discontinued our classic models and replaced them with our GFX models which generate more revenue per unit. Gross Profit Gross profits increased by $946,448, or 64% to $2,434,354 for the three months ended March 31, 2022 from $1,487,906 for the three months ended March 31, 2021. Gross profit as a percentage of sales for the three months ended March 31, 2022 and 2021 was 41% and 46% respectively. We attribute the 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. Total Operating Expenses Our total operating expenses for the three months ended March 31, 2022 and 2021 were $3,482,507 and $1,333,144 respectively. Operating expenses as a percentage of sales were 59% compared to 42% in the prior year. Selling, general and administrative expenses increased by approximately 128%, or $382,896 to $682,321 for the three months ended March 31, 2022, compared to $299,425 for the three months ended March 31, 2021. The large portion of the increase resulted from expenses totaling $236,896 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. We incurred significant increases in our liability insurance and workers compensation insurance totaling $51,498, an increase of 142%, due to our increased revenue levels and increased wages. Office related expenses increased $39,435 or 125%, due to increased staffing levels and work volume. We also saw an increase in travel related expenses of $26,674 or 449%, due to our Forza segment for research and design efforts. Other miscellaneous items make up the remaining $28,393 of increased selling, general and administrative expense. Salaries, wages and other compensation expenses increased by approximately 143%, or $1,325,640 to $2,253,810 for the three months ended March 31, 2022, compared to $928,170 for the three months ended March 31, 2021. Total salaries and wages increased by $888,933 as a result of aggressively ramping up of production, which required increasing our production and mid-level staff. Included in salaries and wages for the three months ended March 31, 2022 was a charge for non-cash stock-based compensation expense of $224,832 due to the issuance of options to employees and consultants. As we have grown as an organization, we have added benefits to maintain a competitive workforce by adding paid time off, a 401K program, paid holidays and health insurance, which resulted in increased expenses of $92,601. We have also incurred production and executive bonus expense of $68,419 for the three months ended March 31, 2021 compared to $21,600 for the three months ended March 31, 2021, an increase of $46,819, as a result of meeting our production first quarter production objectives. Our compensation to the Board of Directors for the three months ended March 31, 2022 and 2021 was $20,750 and $0, respectively. During the first half of 2021 we were not required to have a Board and did not incur the related expense. The remaining increase, approximately $63,300 of salaries and wages during the three months ended March 31, 2022 was associated with payroll taxes. Professional fees increased by 315%, or $185,713 to $244,739 for the three months ended March 31, 2022, compared to $59,026 for the year ended 2021. 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 three months ended March 31, 2022 increased by 72%, or $33,569 to $80,092 for the three months ended March 31, 2022, compared to $46,523 for the three months ended March 31, 2021. Over the past year we made significant investments in equipment, leasehold improvements and boat molds that resulted in an increased our depreciation expense. 19 Table of Contents Research and design expenses for the three months ended March 31, 2022, was $221,545 compared to $0, for the three months ended March 31, 2021. These expenses are primarily associated with our development of our electric propulsion system for Forza X1. Other expense increased by $120,351 to $143,164 for the three months ended March 31, 2022, compared to $22,813 for the three months ended, 2021. The increase in other expense is primarily the result of $85,538 in net change in fair value of marketable securities. Interest expense increased $22,128 to $39,840, and we incurred a net of loss on disposal of assets of $18,408. Net Loss Net loss for the three months ended March 31, 2022 was $1,191,317, compared to net income of $131,949 for the three months ended March 31, 2021. While our revenue levels increased, our expenses also increased as we continue to invest in our operations to improve production levels. 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 the three months ended March 31, 2022. 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 three months ended March 31, 2022, ($0.17) compared to basic and dilutive income per share of common stock for the three months ended March 31, 2021, $0.03. Liquidity and Capital Resources A primary source of funds for the three months ended March 31, 2022 was from cash from operation and use of proceeds from our IPO. Our primary use of cash was related to increasing inventory levels to meet the high level of demand coupled with the current supply chain challenges. With uncertainty on component availability, prolonged lead time and rising prices, we have been bringing in inventory far earlier than in previous years. The following table provide selected financial data about us as of March 31, 2022 and December 31, 2021. March 31, December 31, 2022 2021 Cash and cash equivalents $ 5,061,380 $ 6,975,302 Marketable securities $ 5,978,043 $ 6,064,097 Current assets $ 12,606,264 $ 13,073,346 Current liabilities $ 3,122,630 $ 2,155,420 Working capital $ 9,483,634 $ 10,917,926 As of March 31, 2022, we had sufficient cash and cash equivalents to meet ongoing expenses for at least twelve months from the date of the filing of this Quarterly Report on Form 10-Q. As of March 31, 2022, we had $11,039,423 of cash, cash equivalents and marketable securities, total current assets of $12,606,264, and total assets of $20,501,774. Our total liabilities were $4,768,559. Our total liabilities were comprised of current liabilities of $3,122,630 which included accounts payable and accrued liabilities of $2,629,731, due to affiliated companies of $115,043 and current portion of operating lease right of use liability of $377,856, and long-term liabilities of $1,645,929. 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 $20,5995,184. Our total current liabilities were $2,155,420 and total liabilities of $3,899,484 which included long-term operating lease liabilities for the lease of our facility. Accumulated deficit was $3,208,873 as of March 31, 2022 compared to accumulated deficit of $2,017,556 as of December 31, 2021. Our working capital decreased by $1,434,292 to $9,483,634 as of March 31, 2022, compared to $10,917,926 on December 31, 2021, due primarily to increased accounts payable and accrued liabilities. 20 Table of Contents 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 as well as proceeds from our initial public offering. Cash Flow Three Months Ended Years Ended March 31, December 31, 2022 2021 $ Change % Change 2021 2020 $ Change % Change Cash provided by (used in) operating activities $ (1,149,673 ) $ 189,898 $ (1,339,571 ) (705 %) $ (1,947,539 ) $ 364,648 $ (1,582,891 ) (634 %) Cash used in investing activities $ (647,855 ) $ (443,250 ) $ (204,605 ) 46 % $ (8,037,264 ) $ (200,452 ) $ 7,836,812 (3,910 %) Cash provided by (used in) financing activities $ (116,394 ) $ 457,866 $ (574,260 ) (125 %) $ 16,068,289 $ 512,046 $ 15,556,243 3,038 % Net Change in Cash $ (1,913,922 ) $ 204,514 $ (2,118,436 ) (1,036 %) $ 6,975,302 $ 891,816 $ 6,083,486 682 % Cash Flow from Operating Activities For the three months ended March 31, 2022, net cash flows used in operating activities was $1,149,673 compared to net cash provided by operating activities of $189,898 during the three months ended March 31, 2021. We have increased inventory levels by $1,413,413, due to supply chain delays that continue to impact lead time and parts availability, this is further emphasized by our production ramp up. Accounts payable increased $768,632, which is also associated with our increased bring in of inventory. Our accrued liabilities increased $203,424, primarily due to accrued rebate expense and accrued professional fees. Our net loss from operation was $1,191,317, was decreased by non-cash expenses of $597,649, primarily due to stock-based compensation of $224,832, change of right-of-use asset and lease liabilities of $93,106, loss on disposal of assets of $18,408, net change in fair value of marketable securities of $85,538 and depreciation of $80,092. Cash Flow from Investing Activities During the three months ended March 31, 2022, we used $647,855 for investment activities, compared to $443,250 used during the three months ended March 31, 2021. We invested $728,371 in the purchase property and equipment, primarily for new model boat molds of approximately $439,000, leasehold improvements of approximately $142,000, new production equipment of approximately $130,000, and new computers and furniture of approximately $16,000. We had proceeds from the sale of property of approximately $80,000. 21 Table of Contents Cash Flows from Financing Activities For the three months ended March 31, 2022, net cash used by financing activities was approximately $116,394, compared to net cash provided by financing activities of $457,866. During the three months ended March 31, 2022, we used $116,394 for deferred offering cost relating to Forza. 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: 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. 22 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 , 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, 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 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 . 23 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 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.