TWIN VEE POWERCATS CO. 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 endedDecember 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 inFort Pierce Florida is a 7.5-acre facility with several buildings totaling over 75,000 square feet. We employed approximately 160 people onJune 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; (ii) our electric-powered boat segment which is developing fully electric boats, through our wholly owned subsidiary, Forza X1, Inc., aDelaware corporation ("Forza") and (iii) our franchise segment which is developing a standard product offering and will be selling franchises acrossthe United States through our wholly owned subsidiary,Fix My Boat, Inc. , aDelaware 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 acrossNorth America and theCaribbean 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. 21 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 theU.S. Patent and Trademark Office relating to, among other things, our propulsion system being developed and
boat design. Through the first six months of 2022, we continued to experience strong demand 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 have made significant progress on all fronts in the first six months endedJune 30, 2022 , we started production on our new 260GFX and we unveiled our 400GFX at our dealer meeting in July of 2022, we have added 20 dealers and 26 locations to our dealer network and we have increased our manufacturing throughput to an average of 4.75 boats a week. The increase in production drove our net revenue up 158% for the three months endedJune 30, 2022 over the second quarter of 2021. 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. Our production of gas-powered boats since the closing of our IPO inJuly 2021 has increased from one boat per week to the current 4.75 boats per week. Our goal is to continue to increase production of gas-powered boats to five boats per week. This increase in production has, and will continue, to result in an increase in operating expenses. More specifically, our headcount has increased and is expected to further increase as we hired and continue to hire additional production employees and midlevel managers resulting in higher salaries and wages. We continue to 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$5 million in facility upgrades, capital equipment and molds.
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
OnJuly 28, 2022 , Forza X1 received notice that the North Carolina Economic investment committee has approved a Job Development Investment Grant ("JDIG") providing for reimbursement to Forza X1 of up to$1,367,100 over a twelve-year period of expenses Forza X1 incurs to establish a new manufacturing plant inMcDowell County, North Carolina . The receipt of grant funding is conditioned upon Forza X1 investing over$10.5 million in land, buildings and fixtures, infrastructure and machinery and equipment by the end of 2025 and Forza X1 creating as many as 170 jobs. There can be no assurance that Forza X1 will meet the conditions necessary to receive the grant funding. Forza X1 is currently in negotiations for a new site to build the Forza factory inNorth Carolina . There can be no assurance that the negotiations will be successful. OnAugust 11, 2022 , Forza X1 announced the pricing of its initial public offering of 3,000,000 shares of its common stock at a public offering price of$5.00 per share, for aggregate gross proceeds of$15,000,000 prior to deducting underwriting discounts and other offering expenses. In addition, Forza X1 has granted the underwriters a 45-day option to purchase up to an additional 450,000 shares of common stock at the public offering price less discounts, to cover over-allotments. The initial public offering is scheduled to close onAugust 16, 2022 , subject to customary closing conditions. 22 Results of Operations
Comparison of the Three Months Ended
The following table provides certain selected financial information for the
periods presented:
Three Months Ended
June 30,
2022 2021 Change % Change
Net Sales $ 8,519,613 $ 3,297,571 $ 5,222,042 158 %
Cost of products sold $ 5,072,401 $ 1,981,427 $ 3,090,974 156 %
Gross profit $ 3,447,212 $ 1,316,144 $ 2,131,068 162 %
Operating expenses $ 3,919,191 $ 1,433,077 $ 2,486,114 173 %
(Loss) Income from operations $ (471,979 ) $ (116,933 ) $ (355,046 ) 304 %
Other (expense) income $ (66,803 ) $ 167,784 $ (234,587 ) (140 %)
Net (loss) income $ (538,782 ) $ 50,851 $ (589,633 ) (1,160 %)
Basic and dilutive income per
share of common stock $ (0.08 ) $ 0.01 $ (0.09 ) (705 %)
Weighted average number of
shares of common stock
outstanding 7,000,000 4,000,000
Net Sales and Cost Sales
Our net sales increased $5,222,042 , or 158% to $8,519,613 for the three months
ended June 30, 2022 from $3,297,571 for the three months ended June 30, 2021 .
This increase was due to an increase in the number of boats sold during the
three months ended June 30, 2022 . The number of our boats sold during the three
months ended June 30,2022 increased 90% over the three months ended June 30,
2021 , 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
described below, in addition to increased costs of product parts and components
and our increased inventory that we are maintaining to protect against supply
chain shortages.
Gross Profit
Gross profits increased by$2,131,068 , or 162% to$3,447,212 for the three months endedJune 30, 2022 from$1,316,144 for the three months endedJune 30, 2021 . Gross profit as a percentage of sales, for the three months endedJune 30, 2022 and 2021 was 41% and 40% respectively. In the second quarter of 2021, demand for our product was just starting to strengthen after the initial impacts of COVID-19, additional discounts were offered to stimulate sales, which impacted our gross profit in the period endingJune 30, 2021 . 23 Total Operating Expenses
Our total operating expenses for the three months endedJune 30, 2022 and 2021 were$3,919,191 and$1,433,077 respectively. Operating expenses as a percentage of sales were 46% compared to 43% in the prior year. Selling, general and administrative expenses increased by approximately 126%, or$359,568 to$637,744 for the three months endedJune 30, 2022 , compared to$278,176 for the three months endedJune 30, 2021 . The majority of that increase resulted from expenses totaling$183,043 incurred from being publicly traded company, which we did not incur in the prior period. Directors and officers' insurance, filing fees, board fees and investor relations are some of these expenses. We also incurred increases in repairs and maintenance, insurance, hiring expenses, and travel totaling approximately$120,000 along with numerous other smaller increases. Salaries and wages related expenses increased by approximately 167%, or$1,746,037 to$2,793,281 for the three months endedJune 30, 2022 , compared to$1,047,244 for the three months endedJune 30, 2021 . The increase in salaries and wages of$1,260,339 was the result of aggressively ramping up of production, which required increasing our production staff and adding mid-level staff. Included in salaries and wage related expenses for the three months endedJune 30, 2022 was stock based compensation expense of$302,000 due to the issuance of options to employees. We have added a full package of benefits for our employees, in order to retain our quality employees, which resulted in an increase in salaries and wages of$103,000 . The remaining increase in salaries and wages during the three months endedJune 30, 2022 is associated with taxes. Research and design expenses increased by$174,807 to$174,807 for the three months endedJune 30, 2022 , from$0 for the three months endedJune 30, 2021 . Part of the use of proceeds from our IPO, was the development of an electric boat and an electric motor.
Professional fees increased by 264%, or$140,360 to$193,542 for the three months endedJune 30, 2022 , compared to$53,182 for the three months ended 2021. This increase was also due to the additional costs we incurred associated with being public. We engaged the services of an outside financial consultant, as well as an audit firm for quarterly reporting andSEC legal counsel to fulfill our public company reporting obligations. Depreciation expense increased by 120%, or$65,342 to$119,817 for the three months endedJune 30, 2022 , compared to$54,475 for the three months ended 2021. This increase is due to the addition of fixed assets, primarily molds, to increase our production levels and throughput. Our other (expenses) increased by 140%, or$234,587 to an expense of$66,803 for the three months endedJune 30, 2022 , compared to income of$167,784 for the three months ended, 2021. In 2021 we had a net gain from insurance recoveries of$185,225 , which we did not receive in 2022. Our interest expense increased by$26,275 and our net change in fair value of marketable securities was$27,038 , compared to$0 , in 2021. 24 Net Loss
Net loss for the three months endedJune 30, 2022 was$538,782 , compared to net income for the three months endedJune 30, 2021 of$50,851 . Our electric segment, which does not generate any revenue, at this time, incurred a loss of$599,931 , for the three months endedJune 30, 2022 , related to research and design.. Basic and dilutive loss per share of common stock for the three months endedJune 30, 2022 , was ($0.08 ) compared to basic and diluted income per share for the three months endedJune 30, 2021 of$0.01 .
Comparison of the Six Months Ended
Six Months Ended
June 30,
2022 2021 Change % Change
Net sales $ 14,405,613 $ 6,505,214 $ 7,900,399 121 %
Cost of products sold $ 8,524,047 $ 3,701,164 $ 4,822,883 130 %
Gross profit $ 5,881,566 $ 2,804,050 $ 3,077,516 110 %
Operating expenses $ 7,401,698 $ 2,766,221 $ 4,635,477 168 %
(Loss) income from operations $ (1,520,132 ) $ 37,829 $ (1,557,961 ) (4,118 %)
Other (expense) income $ (209,967 ) $ 144,971 $ 354,938 (245 %)
Net (loss) income $ (1,730,099 ) $ 182,800 $ (1,912,899 ) (1,046 %)
Basic and dilutive income per
share of common stock $ (0.25 ) $ 0.05 $ (0.29 ) (641 %)
Weighted average number of
shares of common stock
outstanding 7,000,000 4,000,000
Net Sales and Cost Sales
Our net sales increased by $7,900,399 , or 121% to $14,405,613 for the six months
ended June 30, 2022 from $6,505,214 for the six months ended June 30, 2021 . We
attribute the large increase due to strong demand for our product, coupled with
our increase in production. The number of our boats sold during the six months
ended June 30, 2021 increased 70% over the number of our boats sold during the
six months ended June 30, 2021 , due to our increased production plan that we
focused on since the third quarter of 2021. Additionally, we have increased our
sale prices and reduced discounts and rebates, to help offset the increases in
operating expenses described below, in addition to increased costs of product
parts and components and our increased inventory that we are maintaining to
protect against supply chain shortages. Our average revenue per unit for the six
months ended June 30, 2022 is up approximately 17% over revenue per unit for the
six months ended June 30, 2021 .
Gross Profit
Gross profit increased by
25
Total Operating Expenses
Our total operating expenses increased by $4,635,477 , or 168% to $7,401,698 for
the six months ended June 30, 2021 from $2,766,221 for the six months ended June
30, 2021 . Operating expenses as a percentage of sales were 51% and 43% for the
six months ended June 30, 2022 , and 2021, respectively.
Selling, general and administrative expenses increased by 127% or $732,553 to
$1,320,065 for the six months ended June 30, 2022 , from $577,601 . A significant
portion of the increase, $366,600 , resulted from expenses incurred in connection
with being a publicly traded company, which we did not incur in the prior
period. Our insurance increased by $111,868 over the prior period, due to our
increased wages and sales level. Our Delaware state franchise taxes increased by
$74,210 . Our travel expenses increased by $56,250 . We also have experienced
moderate increases for office supplies, hiring expenses, computer related
expenses, and several other accounts which attributed to $123,625 of the
increase.
Salaries and wage related expenses increased by 155% or $3,071,678 to $5,047,091
for the six months ended June 30, 2022 from $1,975,414 for the six months ended
June 30, 2021 . We have been aggressively working on increasing production, and
this included increasing our production staff as well as adding mid-level staff,
resulting in an increase of $2,149,272 of additional salaries and wage expense
for the six months ended June 30, 2022 as compared to for the six months ended
June 30, 2021 . Included in salaries and wage related expenses for the six months
ended June 30, 2022 was stock based compensation expense of $526,723 due to the
issuance of options to employees. We have added a full package of benefits for
our employees, to retain our quality employees, which resulted in an increase of
$181,085 . The remaining increase of salaries and wages related expenses during
the six months ended June 30, 2022 is associated with taxes and benefits.
Research and design expenses for the six months ended June 30, 2022 , and 2021
were $396,352 and $0 , respectively. Part of the use of proceeds from our IPO,
was the development of an electric boat and an electric motor.
Professional fees for the six months ended June 30, 2022 and 2021 were $438,281
compared to $112,208 , respectively. This increase is also due to the expenses
incurred from being a public company. We engaged the services of an outside
financial consultant, as well as an audit firm for quarterly reporting and SEC
legal counsel in order to fulfill our public company reporting obligations.
Depreciation expenses for the six months ended
Our other expenses increased by 245%, or$354,937 to$209,967 for the six months endedJune 30, 2022 , compared to other income of$144,971 for the six months endedJune 30, 2021 . The majority of the increase was due to a net gain from insurance recoveries of$180,124 , in 2021, which we did not receive in 2022, an increase in interest expense of$48,403 and our net loss in fair value of marketable securities was$112,576 compared to$0 , during the six months endedJune 30, 2021 . Net Loss
Net loss for the six months endedJune 30, 2022 was$1,730,099 , compared to net income for the six months endedJune 30, 2021 of$182,800 . Our electric segment, which does not generate any revenue, at this time, incurred a loss of$1,114,222 , for the six months endedJune 30, 2022 , related to research and design. Our gas-powered segment incurred a loss of$553,724 , for the six months endedJune 30, 2022 . This loss was due to our aggressive ramp up in production. Basic and dilutive loss per share of common stock for the six months endedJune 30, 2022 , was ($0.25 ) compared to basic and diluted income per share for the six months endedJune 30, 2021 of$0.05 . 26
Liquidity and Capital Resources
The primary sources of funds for the six months endedJune 30, 2022 were cash from operations and 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 and our investment into our electric boat segment. With uncertainty on component availability, prolonged lead time and rising prices, we have been bringing in inventory far earlier than in previous years. With our increased levels of inventory, increased revenues, and increased operating costs, we have also experienced an increase in our accounts payable. Our electric boat segment currently does not generate revenue, and incurred a loss of$1,114,222 for the six months endedJune 30, 2022 .
To date, we have spent approximately
The following table provides selected financial data about us as of
June 30, December 31,
2022 2021 Change % Change
Cash and cash equivalents $ 5,910,533 $ 6,975,302 $ (1,064,769 ) (15.3 %)
Marketable securities $ 3,948,930 $ 6,064,097 $ (2,115,167 ) (34.9 %)
Current assets $ 12,320,261 $ 13,073,346 $ (753,085 ) (5.8 %)
Current liabilities $ 3,975,876 $ 2,155,420 $ 1,820,456 84.5 %
Working capital $ 8,344,385 $ 10,917,926 $ (2,573,541 ) (23.6 %)
As of June 30, 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 June 30, 2022 , we had $9,859,463 of cash,
cash equivalents and marketable securities, total current assets of $12,320,261 ,
and total assets of $21,019,907 . Our total liabilities were $5,523,582 . Our
total liabilities were comprised of current liabilities of $3,975,876 which
included accounts payable and accrued liabilities of $2,945,784 , due to
affiliated companies of $115,043 and current portion of operating lease right of
use liability of $382,922 , and long-term liabilities of $1,547,706 . 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.
27
Accumulated deficit was
Our working capital decreased by
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 IPO.
Cash Flow
Six Months Ended Years Ended
June 30, December 31,
2022 2021 $ Change % Change 2021 2020 $ Change % Change
Cash (used in) provided by operating
activities $ (1,196,245 ) $ 5,045 (1,201,290 ) $ (23,812 %) $ (1,947,539 ) $ 364,648 $ (2,312,187 ) (634 %)
Cash provided by (used in) investing
activities $ 273,105 $ (604,990 ) 878,095 $ (145 %) $ (8,037,264 ) $ (200,452 ) $ (7,836,812 ) (3910 %)
Cash (used in) provided by financing
activities $ (141,629 ) $ 114,771 (256,400 ) $ (223 %)
3,038 %
Net change in cash$ (1,064,769 ) $ (485,174 )
(579,595 )$ 119 %$ 6,975,302 $ 891,816 $ 6,083,486 682 %
Cash Flow from Operating Activities
For the six months endedJune 30, 2022 , net cash flows used in operating activities was$1,196,245 compared to net cash provided by operating activities of$5,045 during the six months endedJune 30, 2021 . We have increased inventory levels by$2,569,780 , 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 decreased$1,061,573 . Our accrued liabilities decreased$226,537 , primarily due to accrued rebate being paid out. Our net loss from operation was$1,730,099 , was decreased by non-cash expenses of$1,078,845 , primarily due to stock-based compensation of$526,723 , change of right-of-use asset and lease liabilities of$189,647 , loss on disposal of assets of$49,990 , net change in fair value of marketable securities of$112,576 and depreciation of$199,909 . 28
Cash Flow from Investing Activities
During the six months endedJune 30, 2022 , we provided$273,105 in investment activities, compared to$604,990 used during the six months endedJune 30, 2021 . We invested$1,809,486 in the purchase of property and equipment, primarily for new model boat molds of approximately$1,076,604 , leasehold improvements of approximately$114,908 , new production equipment of approximately$431,444 , and new computers, software and furniture of approximately$59,411 . We had proceeds from the sale of property of approximately$80,000 , and proceeds from the sale of marketable securities of$2,002,591 .
Cash Flows from Financing Activities
For the six months ended
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 withU.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 withFinancial 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. 29
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 inthe 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. 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.
30
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.
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
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