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. 45 Company Overview Twin Vee PowerCats Co. (“Twin Vee” “we”, “us” or the “Company”) is a designer, manufacturer and marketer of recreational and commercial power boats. We believe our company, founded in 1996, has been an innovator in the recreational and commercial power catamaran industry. 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 of operations in Fort Pierce, Florida is a 7.5-acre facility with several buildings totaling approximately 100,000 square feet, including a nearly complete 30,000 square foot expansion which began in mid-2024. We currently employ approximately 70 people. Twin Vee products are marketed under two brands: Twin Vee for our catamarans, or dual hull vessels, and Bahama Boat Works for our “V”-hull boats. Consumers can use our boats 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-boat market. We currently primarily sell our boats through a network of 17 independent boat dealers across North America, Hawaii, and Australia who resell our boats to the end user Twin Vee customers. We continue efforts to recruit high quality boat dealers to join our network 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 boats are currently outfitted with gas-powered outboard combustion engines. During 2024, Forza X1, Inc., our minority owned electric boat subsidiary determined to cease production of electric boats and on November 26, 2024, Forza X1, Inc. (“Forza”), was merged into Twin Vee Merger Sub, Inc., a wholly-owned subsidiary of Twin Vee (“Merger Sub”) and became a wholly owned subsidiary. Revenue from the sale of our boats accounted for nearly 100% of our net revenue in the third quarter of 2025 and for the fiscal year 2024. Our boats are manufactured in Fort Pierce, Florida. We believe our company has been an innovator in the recreational and commercial power boat industry. We currently have 12 Twin Vee models in or nearing production ranging in size from 24-foot to 40-foot, and 9 monohull (Bahama) models in or nearing production ranging in size from 22-foot to 41-foot. Revenues are also derived from the sale of short-term contracts to provide used boat listing services through Wizz Banger, Inc., which is recognized into revenues over the life of the contract. During the 2025 and 2024 fiscal years, we focused our efforts on increased throughput through our facility, and integrating the new models from our Bahama Boats brand that we acquired in 2025. During the year ended December 31, 2025, two individual dealers each represented over 10% of our total sales and in the aggregate represented 27% of total sales. During the year ended December 31, 2024, three individual dealers represented over 10% of our total sales, and in the aggregate represented 40% of total sales. Recent Developments First Amendment to the License and Conditional Sale Agreement with Revver Digital, LLC Effective July 14, 2025, we and our recently formed, wholly owned subsidiary, Wizz Banger, Inc. (“Wizz Banger”), entered into a First Amendment (the “First Amendment”) to that certain license and conditional sale agreement (the “License and Sale Agreement”), entered into and effective as of February 4, 2025, by and between us and Revver Digital, LLC, providing us with the right to acquire certain intellectual property of OWM (the “OWM Intellectual Property”) related to (a) the online marketplace, advertisement, marketing, and sale services of yachts, boats, and yacht and boat accessories and (b) arranging of loans, insurance, and warranty services related to yachts and boats under the brands “Yachts for Sale” and “Boats for Sale” through the websites available at the domains (the “Domains”) “yachtsforsale.com” and “boatsforsale.com” (the “Business”). Pending the closing of the sale to us of the OWM Intellectual Property, the License and Sale Agreement grants us a license to use and sublicense the OWM Intellectual Property to conduct the Business in consideration of: (a) the payment to OWM of a monthly revenue-sharing royalty (the “Revenue-Sharing Royalty”) of six percent (6%) of the Aggregate Subscription Revenue (as defined in the License and Sale Agreement) of the Business; 46 and (b) a credit to OWM of $500 per OWM dealer who lists boats or yachts on the Domains during such period (the “Dealer Storefront Credit”). On the date of the closing of the sale to us of the OWM Intellectual Property, the License and Sale Agreement provides that in consideration of the transfer of, and as a purchase price for, the OWM Intellectual Property, we will assume certain liabilities of OWM related to the Business and pay to OWM $5,000,000, less the aggregate amount of all Revenue-Sharing Royalties paid to OWM through such date and the aggregate amount of all Dealer Storefront Credits accrued for the benefit of OWM through such date. The First Amendment was entered into in order to (i) amend the definition of “Foreground Intellectual Property” (as defined therein), (ii) to clarify the respective rights of the parties thereunder, (iii) to assign the License and Sale Agreement to Wizz Banger, and (iv) to provide for a guaranty by us of Wizz Banger’s obligations and liabilities under the License and Sale Agreement, as amended, as provided therein and effect other amendments to the License and Sale Agreement as set forth therein. Bahama Boat Works Acquisition On June 5, 2025, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), with Bahama Boat Works, LLC (“Bahama Boat Works”), pursuant to which we acquired various tangible and intangible assets (the “Assets”) from Bahama Boat Works’ relating to the Bahama boat brand (the “Bahama Boat Brand”). In accordance with the Asset Purchase Agreement, in consideration of the transferred Assets we paid Bahama Boat Works $100,000 and agreed to pay up to $2,900,000 in additional contingent consideration based upon a percentage of the revenues we receive from future sales to customers of new Bahama Boat Brand 31’, 35’, 37’, and 41’ boat models (the “Bahama Boat Revenues”). The Asset Purchase Agreement provides that Bahama Boat Works will receive 20% of the first $7,500,000 of Bahama Boat Revenues we receive and 10% of the Bahama Boat Revenues we receive in excess of $7,500,000 (but not exceeding $21,500,000) until such time as Bahama Boat Works has been paid an aggregate of $3,000,000 by us from such sales. The Asset Purchase Agreement may be terminated by mutual written consent of the parties or by us, in our sole discretion, if we decide to discontinue further development, production, or commercialization of the Bahama Boat Brand product line before the balance of the contingent consideration due to Bahama Boat Works is paid. Upon any such termination, the parties may either seek to sell the Bahama Boat Brand and associated assets pursuant to a mechanism set forth in the Asset Purchase Agreement or we, in our sole discretion, may elect to return the Assets to Bahama Boat Works. Underwritten Public Offering On May 8, 2025, we entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity LLC, as representative of the several underwriters named therein (the “Representative”), pursuant to which we agreed to sell to the Representative in a firm commitment underwritten public offering (the “May 2025 Offering”) an aggregate of 750,000 shares (the “Shares”) of our common stock at the public offering price of $4.00 per share, resulting in gross proceeds of $3.0 million, before deducting underwriting discounts, commissions and offering expenses. The Shares were sold pursuant to an effective shelf registration statement on Form S-3 (File No. 333-266858) filed with the SEC under the Securities Act and declared effective by the Commission on August 24, 2022, a base prospectus, dated August 24, 2022, included in the Registration Statement at the time it originally became effective, and a prospectus supplement, dated May 8, 2025, filed with the Commission pursuant to Rule 424(b) under the Securities Act. Pursuant to the Underwriting Agreement, we also issued to designees of the Representative unregistered warrants to purchase up to 37,500 shares of our common stock, which equals 5% of the shares of common stock purchased in the May 2025 Offering. The May 2025 Offering closed on May 12, 2025. The net proceeds to us from the May 2025 Offering, after deducting the underwriting discount, the Representative’s fees and expenses and our estimated offering expenses, were $2,555,101. 47 Repurchase Request On April 21, 2025, Northpoint Commercial Finance LLC (“Northpoint”) came into possession of certain Twin Vee and AquaSport inventory of United Marine and Storage LLC, a former dealer of our products. Northpoint requested that we take possession of and repurchase the inventory in accordance with the Repurchase Agreement that we previously entered into with Northpoint. During the second quarter, we sold five of the six repossessed boats, resulting in a net loss on the sale of approximately $14,875 after transportation, refurbishment, and commissions for the second quarter. During the third quarter, we paid our obligation to Northpoint for the one remaining repurchase obligation of $58,984 and are currently marketing this boat for sale. We expect to fully recover the amount of the repurchase obligation. Nasdaq Compliance On May 10, 2024, we received written notice from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that for the preceding 30 consecutive business days (March 28, 2024 through May 9, 2024), our common stock did not maintain a minimum closing bid price of $1.00 per share as required by Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). We were provided 180 calendar days, or until November 6, 2024, to regain compliance. On November 7, 2024, we received written notification from Nasdaq granting our request for a 180-day extension to regain compliance with the Minimum Bid Price Requirement. Compliance would be achieved if the closing bid price of our common stock is at or above $1.00 for a minimum of ten consecutive business days at any time prior to May 5, 2025. On April 4, 2025, we filed an amendment (the “Amendment”) to our Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the Reverse Stock Split at a ratio of 1-for-10, effective as of 11:59 p.m. Eastern Time, on April 7, 2025 (the “Effective Time”), in order to regain compliance with the Minimum Bid Price Requirement. Our common stock began trading on a reverse split-adjusted basis on April 8, 2025 under the existing ticker symbol “VEEE.” Any share amounts and exercise or conversion prices in this report have been adjusted retrospectively for the Reverse Stock Split. On April 28, 2025, we received a letter from Nasdaq stating that Nasdaq had determined that we now comply with the Minimum Bid Price Requirement. Establishment of Strategic Steering Committee On January 6, 2026, we announced the formation of a strategic steering committee to focus on advancing autonomous marine technologies to address key challenges in unmanned maritime systems and help bridge gaps exposed in current defense and commercial autonomy efforts. The executive-level steering committee includes members of our board of directors and management team. Its primary focus is to explore, evaluate, and identify potential technology partners in the autonomous and AI space whose capabilities may complement Twin Vee’s marine design and manufacturing platform and to present such opportunities to our board of directors and management, as appropriate. Formation of Black Line Defense On January 22, 2026, we formed Black Line Defense, a wholly owned subsidiary focused on the design and manufacture of manned and autonomous maritime platforms for defense, security, and surveillance missions. Black Line Defense is seeking to pursue opportunities with the U.S. Department of Defense, Homeland Security, and allied agencies, targeting government programs allocating billions of dollars toward small-craft fleets over the coming years. The subsidiary aims to leverage Twin Vee’s existing vertically integrated manufacturing footprint, including in-house design, composite lamination, CNC tooling, wire-harness fabrication, rigging, quality control, and scalable production capacity. Black Line Defense is structured to enter the government market with limited incremental capital investment while offering cost-competitive, rapidly deployable vessel solutions for patrol, interdiction, logistics, and unmanned operations. 48 Appointment of Certain Officers On September 17, 2025, our board of directors appointed Scott Searles to serve as Interim Chief Financial Officer, effective immediately, while we undertake a search to identify a permanent successor. Mr. Searles terminated his employment as our Interim Chief Financial Officer in January 2026. On January 9, 2026, Joseph Visconti was appointed as Interim Chief Financial Officer, effective immediately, while we undertake a search to identify a permanent successor. Sale of North Carolina Building On September 26, 2025, we entered into a purchase and sale agreement with Highland Myco Holdings, LLC for the sale of our property located at 100 College Drive, Marion, North Carolina, which was completed on October 31, 2025. We received $500,000 as a closing payment, with an additional $3,750,000 payable in installments of $500,000 plus accrued interest at a rate of 5% on October 31, 2026, $500,000 plus accrued interest on April 30, 2027, and a balloon payment of $2,750,000 plus accrued interest on October 31, 2027. February 2026 Offering On February 19, 2026, we entered into a placement agency agreement (the “Placement Agency Agreement”) with ThinkEquity LLC, as sole placement agent (the “Placement Agent”), pursuant to which we agreed to issue and sell directly to various investors in a best efforts public offering (the “February 2026 Offering”) an aggregate of 6,383,000 shares (the “Shares”) of our common stock at a public offering price of $0.47 per share. The Shares were sold pursuant to a registration statement on Form S-1 (File No. 333-292661) relating to the securities filed with the Securities and Exchange Commission (“SEC”) and became effective on February 13, 2026, and a prospectus, dated February 19, 2026. The February 2026 Offering closed on February 23, 2026. The net proceeds to us from the February 2026 Offering, after deducting the underwriting discount, the Representative’s fees and expenses and our estimated offering expenses, were approximately $2,540,109. Financial Condition We finished the year with revenue up 3% compared to the prior year. Our cash, cash equivalents, and restricted cash were $1.6 million at December 31, 2025. Our property, plant, and equipment decreased as a result of the sale of the North Carolina building, sale and disposition of research and development assets related to the former electric boat development activities, and the termination of a long term building and equipment lease, partially offset by investments in additional boat molds for new models, equipment to support our increased production levels, and leasehold improvements to improve the quality of our products and new and expanded production facilities. Results of Operations Comparison of the Years Ended December 31, 2025 and 2024 The following table provides certain selected financial information for the years presented: Year Ended December 31, 2025 2024 $ Change % Change Net sales $ 14,819,130 $ 14,388,517 $ 430,613 3.0 % Cost of products sold (excluding depreciation & amortization) $ 13,562,025 $ 15,139,942 $ (1,577,917 ) (10 %) Gross income (loss) $ 1,257,105 $ (751,425 ) $ 2,008,530 267 % Operating expenses $ 10,038,404 $ 13,800,344 $ (3,761,940 ) (27 %) Loss from operations $ (8,781,299 ) $ (14,551,769 ) $ 5,770,470 40 % Other income $ 174,026 $ 541,863 $ (367,837 ) (68 %) Net loss $ (8,607,273 ) $ (14,009,906 ) $ 5,402,633 (39 %) Basic and dilutive loss per share of common stock $ (4.37 ) $ (11.01 ) $ 6.64 60 % Weighted average number of shares of common stock outstanding 1,968,121 1,003,204 49 Net Sales and Cost Sales Our net sales increased $430,613, or 3% to $14,819,130 for the year ended December 31, 2025 from $14,388,517 for the year ended December 31, 2024. The Company sold 93 boats during fiscal year ended December 31, 2025, an increase of 7% compared to the 87 boats sold during the fiscal year ended December 31, 2024. The average price per unit decreased approximately $7,800 or 5%. The decrease in average price per boat was due primarily to the introduction of the 22’ BayCat in early 2025, which sold 15 units at an average selling price of below $100,000, and an overall lower average price per large boat sold during the year. Gross Profit Gross profits increased by $2,008,530, or 267% to $1,257,105 in 2025 compared to a negative $751,425 for the year ended December 31, 2024. Gross profit as a percentage of sales for the year ended December 31, 2025 was 8.5% compared to a negative 5.2% for the year ended December 31, 2024. The increase in gross profit reflects our ongoing efforts to reduce our cost structure, such as bringing certain manufacturing operations in-house, better utilization of our ERP system and direct labor leveraged against higher volumes. Total Operating Expenses Operating expenses for the year ended December 31, 2025 and 2024 were $10,038,404 and $13,800,344, respectively, a decrease of $3,761,940 or 27%. Operating expenses for the years ended December 31, 2025 and 2024 included an impairment charge of $418,416 and 1,674,000, respectively, related to the impairment of the partially constructed Forza building based on an appraisal prior to the merger of Twin Vee and Forza. Before the impact of this charge, operating expenses for the year ended December 31, 2025 and 2024 were $9,619,988 and $12,126,344, respectively, a decrease of $2,506,356 or 21%. Selling, general and administrative expenses decreased by approximately 19%, or $593,466 to $2,502,402 for the year ended December 31, 2025, compared to $3,095,868 for the year ended December 31, 2024. Salaries and wage-related expenses decreased by approximately 12%, or $581,471 to $4,325,348 for the year ended December 31, 2025, compared to $4,906,819 for the year ended December 31, 2024. This decline is primarily related to significant reductions in headcount at Forza, including a $759,765 decline in stock-based compensation partially offset by $422,844 in combined salaries and wages and stock-based compensation related to the development of Wizz Banger. Also resulting from the reduction in headcount year over year were related reductions in the cost of benefits, primarily health insurance, holiday pay and 401K. Professional fees decreased by 48%, or $802,384 to $867,090 for the year ended December 31, 2025, compared to $1,669,474 for the year ended 2024. The decrease in professional fees related primarily to the merger between Twin Vee and Forza during 2024. Costs incurred were for legal representation, auditor consents, fairness opinions, appraisals, filings and other similar costs. Depreciation and amortization expense for the year ended December 31, 2025 decreased by less than 1%, or $10,987 to $1,734,230 for the year ended December 31, 2025 compared to $1,745,217 for the year ended December 31, 2024. This decrease is due to significant investments in equipment, leasehold improvements and boat molds more than offset by the sale of Forza R&D equipment and the termination of a significant lease agreement for building and equipment. Research and development expenses for the year ended December 31, 2025, was $0 compared to $586,379, for the year ended December 31, 2025. This reduction was due to the discontinuance of the development of our electric propulsion system for Forza. 50 Other income decreased by 68%, or $367,839 to $174,026 for the year ended December 31, 2025, compared to $541,863 for the year ended, 2024. The decrease in other income is primarily the result of lower dividends and interest on investments resulting from the liquidation of investments to fund operations and capital investments. Net Loss Net loss for the year ended December 31, 2025, was $8,607,273, compared to $14,009,906 for the year ended December 31, 2024, an improvement of 39%. Both 2025 and 2024 were challenging years with overall boat production down from previous periods. We reduced both variable and fixed operating costs, including shutting down the Forza research and development operation. The deleveraging of our fixed costs on such a low revenue base led to continued losses. We have reduced our head count to match current production levels and continue to right-size the business for the current state of the economy, while keeping our core strengths intact. Basic and dilutive loss per share of common stock improved for the year ended December 31, 2025 to ($4.37) compared to ($11.01) for the year ended December 31, 2024. Liquidity and Capital Resources A primary source of funds for the year ended December 31, 2025 was net cash received from sales of our equity securities and revenue generated from operations. Our primary use of cash was related to funding the low-level revenue related cash-losses from operations and capital improvements. Our priority over the next year is to grow our revenue base while managing working capital, including improving inventory turns. The following table provides selected financial data about us as of December 31, 2025 and December 31, 2024. December 31, December 31, 2025 2024 Change % Change Cash and cash equivalents $ 1,431,578 $ 7,491,123 $ (6,059,545 ) (81 )% Restricted cash $ 215,117 $ 215,117 $ — — Current assets $ 4,897,217 $ 10,419,141 $ (5,521,924 ) (53 )% Current liabilities $ 2,244,513 $ 3,747,990 $ (1,503,477 ) (40 )% Working capital $ 2,652,704 $ 6,671,151 $ (4,018,447 ) (60 )% We do not have sufficient cash and cash equivalents to meet ongoing expenses for at least twelve months from the date of the filing of this Annual Report. As of December 31, 2025, we had $1,646,695 of cash, cash equivalents, restricted cash and marketable securities, total current assets of $4,897,217, and total assets of $16,234,369. Our total liabilities were $2,766,558. Our total liabilities were comprised of current liabilities of $2,244,513, which included accounts payable and accrued liabilities of $1,829,083, contract liability of $395,932, and finance lease liability of $19,498, and long-term liabilities of $522,045. As of December 31, 2024, we had $7,706,240 of cash, cash equivalents, restricted cash, and total current assets of $10,419,141 and total assets of $25,887,905. Our total current liabilities were $3,747,990 and total liabilities of $6,671,055 which included long-term operating lease liabilities for the lease of our facility. Going Concern For the year ended December 31, 2025, we incurred a loss from operations of $8,781,299 and a net loss of $8,607,273. As of December 31, 2025, we had accumulated deficits of $34,000,228. To address these conditions: ● We have demonstrated improving recent recovery trends, with revenues and gross margins increasing compared to the prior year, however not to a level that yet supports a positive cash flow. ● As of December 31, 2025, we maintain a cash, cash equivalents and restricted cash balance exceeding $1.6 million. 51 ● During the fourth quarter of 2025, we completed the sale of our Marion, North Carolina facility, generating $500,000 in cash in the fourth quarter of 2025, and expected cash payments of $500,000 in 2026 and $3,250,000 in 2027, plus interest at 5%. ● On February 19, 2026, the Company announced the pricing of a best-efforts public offering of 6,383,000 shares of common stock. Each share of common is being sold at a public offering price of $0.47 per share. Total gross proceeds from the offering, before deducting placement agent fees and other offering expenses, were approximately $3 million. The offering closed on February 23, 2026. ● Management continues to implement cost controls, operational improvements, and revenue initiatives to further strengthen our financial position. Despite our ongoing efforts to mitigate these conditions, there can be no assurance that our expenses will not increase in future periods or that the cash generated from operations in future periods will be sufficient to satisfy our operating needs. If we need to raise additional capital to fund our continued operations, there can be no assurance that funding will be available on acceptable terms on a timely basis, or at all. The various ways that we could raise capital carry potential risks. Any additional sources of financing will likely involve the issuance of our equity securities, which will have a dilutive effect on our stockholders. Any debt financing, if available, may involve restrictive covenants that may impact our ability to conduct our business. If we do not succeed in raising additional funds on acceptable terms or at all, we may be unable to fill new orders and develop new products. As such, we cannot conclude that such plans will be effectively implemented within one year after the date that the financial statements included in this Report are filed with the SEC, and there is uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt about our ability to continue as a going concern. If we are unable to generate sufficient revenue from operations and/or raise capital when needed or on attractive terms, we be forced to delay, reduce or eliminate efforts to expand our dealer network or develop new models and may be forced to cease operations or liquidate assets. Cash Flow Years Ended December 31, 2025 2024 Change % Change Cash used in operating activities $ (6,878,557 ) $ (6,973,617 ) $ 95,060 1 % Cash used in investing activities $ (1,590,634 ) $ (1,861,632 ) $ 270,998 15 % Cash provided by (used in) financing activities $ 2,409,646 $ (213,744 ) $ 2,623,390 1,227 % Cash Flow from Operating Activities For the year ended December 31, 2025, net cash flows used in operating activities was $6,878,557 compared to $6,973,617 during the year ended December 31, 2024. We have decreased net inventory levels by $24,019 and reduced our outstanding obligations to suppliers by $1,100,243. Our net loss was $8,607,273, decreased by non-cash expenses, primarily due to stock-based compensation of $303,133, depreciation and amortization of $1,734,230, impairment of property & equipment of $418,416, change of right-of-use asset and lease liabilities of $390,686, and loss on disposal of property & equipment and lease terminations of $190,918. Cash Flow from Investing Activities During the year ended December 31, 2025, we used $1,590,634 for investment activities, compared to $1,861,632 used during the year ended December 31, 2024. We increased our property and equipment by $2,157,199 and sold certain property and equipment generating cash proceeds of $552,478. The majority of the property and equipment purchased were molds for our boat production, for Twin Vee, and additions to facilities in Ft. Pierce Florida. 52 Cash Flows from Financing Activities For the year ended December 31, 2025, net cash provided by financing activities was $2,409,646 compared to net cash used in financing activities of $213,744 for the year ended December 31, 2024. The cash flow from financing activities for the year ended December 31, 2025 was primarily from the proceeds from a follow-on underwritten public offering of Twin Vee common stock. CRITICAL ACCOUNTING POLICIES 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 consolidated balance sheets. 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, and warranty reserves. Inventories Inventories are valued at the lower of cost and net realizable value, with cost determined using the weighted average cost method on a first-in first-out basis. 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. 53 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, the 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. 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 . 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 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.