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 onSeptember 30, 2022 , some of whom have been with our company for over twenty years. We have organized our business into three operating segments: (i) our gas-powered boat segment which manufactures and distributes gas-powered boats under the Twin Vee name; (ii) our electric-powered boat segment which is developing fully electric boats, through our 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 21 independent boat dealers in 26 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. Due to the growing demand for sustainable, environmentally friendly electric and alternative fuel commercial and recreational vehicles, our majority 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 25-foot FX1 dual console model, including hull, deck and small parts. This design has gone from an intellectual concept in CAD to fiberglass and foam plugs, fiberglass molds and, finally, working boat parts in just over one year. On October the 28th, the running surface of the boat and all major components were tested successfully for several hours on theIndian River Lagoon inFort Pierce, Florida . While the motor and control systems have been successfully trialed previously, this was the first voyage thatincludedall major components, production batteries, fully functioning "alpha"engine design, control system - including 22"Garmin screen, and Osmosis telematics unit. The performance of the boat exceeded all expectations and will provide a great baseline for improvements, iterations, and design enhancements. We anticipate revenues from the sale of these fully integrated electric boats and motors to commence in late 2023. Forza X1 will continue to build prototype engines and boats for the next six to nine months. 19 Through the first nine months of 2022, we continued to experience strong sales for our products. Our company's objectives have been to add new, larger boat models to our GFX lineup, expand our dealers and distribution network, and increase unit production to fulfill our customer and dealer orders. We have made significant progress on all fronts in the first nine months endedSeptember 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 to our dealer network, we now have 21 dealers and 26 locations. We have increased our production by 69%, for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , which has increased our net revenue up 119% for the nine months endedSeptember 30, 2022 . For the three months endedSeptember 30, 2022 , our net revenue increased 114% compared to the three months endedSeptember 30, 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.
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 OnAugust 16, 2022 , Forza issued and sold toThinkEquity LLC , as the underwriter in a firm commitment underwritten initial public offering (the "Forza IPO") pursuant to the term of an underwriting agreement that it entered into withThinkEquity LLC onAugust 11, 2022 (the "Forza Underwriting Agreement") ,an aggregate of 3,450,000 shares of Forza's common stock, par value$0.001 per share, at an initial public offering price of$5.00 per share, for gross proceeds of$17,250,000 , before deducting underwriting discounts, commissions and offering expenses. Pursuant to the Forza Underwriting Agreement, Forza also issued to the underwriter warrants to purchase up to 172,500 shares of Common Stock. After the Forza IPO, Forza was no longer a wholly owned subsidiary of the Company. OnOctober 3, 2022 , we issued and sold toThinkEquity LLC , as the underwriter in a firm commitment underwritten public offering (the "Offering") pursuant to the term of an underwriting agreement that we entered into withThinkEquity LLC onSeptember 28, 2022 (the "Underwriting Agreement"),an aggregate of 2,500,000 shares of our Common Stock at a public offering price of$2.75 per share, for gross proceeds of$6,875,000 , before deducting underwriting discounts, commissions and offering expenses. Pursuant to the Underwriting Agreement, we also issued to the underwriter warrants to purchase up to 143,750 shares of Common Stock. We continue adding new models to our lineup. We are now adding 3 new STX Sport Tournament models and 4 new, completely unique, special models that we have been designing and will be launching under a new boat brand namedLFG Marine Group . LFG Marine will be a 100% owned division within Twin Vee. These initial models are geared more toward the freshwater market but can also be used and enjoyed in the saltwater environment.The LFG Marine Group will have its own website, its own marketing but the boats will be designed, manufactured, and shipped from our Twin Vee, factory inFort Pierce, Florida to existing and new dealers. Our initial LFG models will include a 25-foot muti hull center console, 25-foot dual console, 25-foot deck boat and a new 22-foot single engine mono hull. All of these models are past the design stage and the tooling is being completed. The 25-foot dual console is currently being completed in the factory and should be in the water within 2-3 weeks. We anticipate that revenue from LGF boat sales will begin in Q1 of 2023. Results of Operations
Comparison of the Three Months Ended
The following table provides certain selected financial information for the
periods presented:
Three Months Ended
September 30,
2022 2021 Change % Change
Net sales $ 8,812,021 $ 4,118,246 4,693,775 114 %
Cost of products sold $ 5,477,947 $ 2,508,170 2,969,777 118 %
Gross profit $ 3,334,074 $ 1,610,076 1,723,998 107 %
Operating expenses $ 4,191,034 $ 1,932,610 2,258,424 117 %
Operating loss $ (856,960 ) $ (322,534 ) (534,426 ) 166 %
Net loss $ (877,109 ) $ (383,277 ) (503,832 ) 131 %
Net loss per common share: Basic
and Diluted $ (0.10 ) $ (0.06 ) (0.04 ) 64 %
Weighted average number of
common shares outstanding: Basic
and diluted 7,013,478 6,282,700
Net Sales and Cost Sales
Our net sales increased $4,693,775 , or 114% to $8,812,021 for the three months
ended September 30, 2022 from $4,118,246 for the three months ended September
30, 2021 . This increase was due to an increase in the number of boats sold
during the three months ended September 30, 2022 . The number of our boats sold
during the three months ended September 30, 2022 increased 65% over the three
months ended September 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.
20
Gross Profit
Gross profits increased by
Total Operating Expenses
Our total operating expenses for the three months endedSeptember 30, 2022 and 2021 were$4,191,034 and$1,932,610 respectively. Operating expenses as a percentage of sales were 48% compared to 47% in the prior year. Our total operating expenses, for our gas-powered boat segment, for the three months endedSeptember 30, 2022 and 2021 were$3,210,921 and$1,850,513 respectively. Our gas-powered segment, operating expenses as a percentage of sales were 36% compared to 45% in the prior year, showing a 9% improvement quarter over quarter. Our total operating expenses, for Forza, our electric powered boat and development segment, for the three months endedSeptember 30, 2022 and 2021
were$979,584 and$0 respectively. Selling, general and administrative expenses increased by approximately 38%, or$194,339 to$707,321 for the three months endedSeptember 30, 2022 , compared to$512,982 for the three months endedSeptember 30, 2021 . A significant portion of this increase,$101,724 was due increased costs in liability and workman's compensation insurance. These insurance charges increase based on your employment level and sales revenue, both of which, have increased significantly quarter over quarter. Another$42,551 was due to Forza now carrying cost of being publicly traded. Our sales and marketing expenses for the quarter increased$40,188 , the majority of this increase was due to hosting a dealer meeting in 2023, which we did not due in 2022. Our travel expense increased approximately$26,662 , this is due to Forza's remote workforce being required to travel for development and testing. Salaries and wages related expenses increased by approximately 137%, or$1,669,801 to$2,891,863 for the three months endedSeptember 30, 2022 , compared to$1,222,062 for the three months endedSeptember 30, 2021 . Of the increase in salaries and wages of$1,216,037 was the result of aggressively ramping up of production, which required increasing our production staff and adding mid-level staff, as well as the staffing of our Forza segment, which account for$698,967 of the increase. Included in salaries and wage related expenses for the three months endedSeptember 30, 2022 was stock based compensation expense of$287,607 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$90,113 . The remaining increase in salaries and wages during the three months endedSeptember 30, 2022 is associated with taxes.
Research and design expenses increased by
Professional fees increased by 28%, or$29,927 to$135,311 for the three months endedSeptember 30, 2022 , compared to$105,384 for the three months ended 2021. This increase was also due to the additional costs we incurred associated with Forza being public. We engaged the services of an outside financial consultant, as well as an audit firm for quarterly reporting andSEC legal counsel to fulfill our public company reporting obligations. Depreciation and amortization expense increased by 455%, or$141,511 to$172,602 for the three months endedSeptember 30, 2022 , compared to$31,091 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) decreased by 50%, or$30,594 to an expense of$30,149 for the three months endedSeptember 30, 2022 , compared to$60,743 for the three months ended, 2021. Our interest income increased for the quarter by 30,958, compared to 2021, accounting for the change. 21 Net Loss Net loss for the three months endedSeptember 30, 2022 was$887,109 , compared to$383,277 for the three months endedSeptember 30, 2021 . Our electric segment, which does not generate any revenue, at this time, incurred a loss of$1,042,663 , for the three months endedSeptember 30, 2022 , related to research and design. Our gas-powered segment had income of$160,025 for the three months endedSeptember 30, 2022 . Basic and dilutive loss per share of common stock for the three months endedSeptember 30, 2022 , was ($0.10 ) compared to ($0.06 ) for the three months endedSeptember 30, 2021 .
Comparison of the Nine Months Ended
Nine months Ended
September 30,
2022 2021 Change % Change
Net sales $ 23,217,634 $ 10,623,460 12,594,174 119 %Cost of products sold$ 14,001,994 $ 6,209,334
7,792,660 125 % Gross profit$ 9,215,640 $ 4,414,126 4,801,514 109 % Operating expenses$ 11,592,732 $ 4,698,831 6,893,901 147 % Loss from operations$ (2,377,092 ) $ (284,705 ) (2,092,387 ) 735 % Other income (expense)$ 240,116 $ (84,228 ) 324,344 (385 %) Net loss$ (2,617,208 ) $ (200,477 ) (2,416,731 ) 1,205 % Basic and dilutive loss per share of common stock$ (0.37 ) $ (0.04 ) (0.33 ) 789 % Weighted average number of shares of common stock outstanding 7,004,542 4,769,200Net Sales and Cost Sales
Our net sales increased by$12,594,174 , or 119% to$23,217,634 for the nine months endedSeptember 30, 2022 from$10,623,460 for the nine months endedSeptember 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 nine months endedSeptember 30, 2021 increased 69% over the number of our boats sold during the nine months endedSeptember 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 and introduced new larger models 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 nine months endedSeptember 30, 2022 increased approximately 35% over revenue per unit for the nine months endedSeptember 30, 2021 . Gross Profit Gross profit increased by$4,801,514 or 109% to 9,215,640 for the nine months endedSeptember 30, 2022 from$4,414,126 for the nine months endedSeptember 30, 2021 . Gross profit as a percentage of net sales for the nine months endedSeptember 30, 2022 , was 40% as compared to 42% for the same period in fiscal 2021. 22 Total Operating Expenses Our total operating expenses for the nine months endedSeptember 30, 2022 and 2021 were$11,592,732 and$4,698,831 respectively. Operating expenses as a percentage of sales were 50% compared to 44% in the prior year. Our total operating expenses, for our gas-powered boat segment, for the nine months endedSeptember 30, 2022 and 2021 were$9,520,918 and$4,581,634 respectively. Our gas-powered segments, operating expenses as a percentage of sales were 41% compared to 43% in the prior year, showing a 2% improvement quarter over quarter. Our total operating expenses, for Forza, our electric powered boat and development segment, for the nine months endedSeptember 30, 2022 and 2021 were$2,037,307 and$1,046,129 respectively. Forza operating expenses as a percentage of consolidated sales were 9%. Selling, general and administrative expenses increased by 86% or$936,804 to$2,027,387 for the nine months endedSeptember 30, 2022 , from$1,090,583 . A significant portion of the increase,$405,191 , resulted from expenses incurred in connection with being a publicly traded company, which we did not incur for the majority of the prior period. Our insurance increased by$223,977 over the prior period, due to our increased wages and sales level. Our state taxes increased by$122,769 . Our advertising and marketing increased$46,527 , primarily due to hosting a dealer sales meeting in 2022, which we did not host in 2021, over concerns regarding Covid. We also have experienced moderate increases several accounts totaling$49,880 of the increase. Selling, general and administrative expenses associated specifically to Forza, our electric boat and development segment, totaled$267,657 . Salaries and wage related expenses increased by 148% or$4,741,478 to$7,938,954 for the nine months endedSeptember 30, 2022 from$3,197,476 for the nine months endedSeptember 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$3,365,308 of additional salaries and wage expense for the nine months endedSeptember 30, 2022 as compared to for the nine months endedSeptember 30, 2021 ,$698,967 can be directly associated with Forza, for our electric boat and development segment. Included in salaries and wage related expenses for the nine months endedSeptember 30, 2022 was stock based compensation expense of$814,330 due to the issuance of options to employees,$158,705 was directly associated with Forza, for our electric boat and development segment. We have added a full package of benefits for our employees, to retain our quality employees, which resulted in an increase of$315,566 . The remaining increase of salaries and wages related expenses during the nine months endedSeptember 30, 2022 is associated with taxes and benefits. Research and design expenses, for Forza, our electric boat and development segment, for the nine months endedSeptember 30, 2022 , and 2021 were$680,288 and$61,091 , 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 nine months endedSeptember 30, 2022 and 2021 were$573,592 compared to$217,591 , 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 andSEC legal counsel in order to fulfill our public company reporting obligations. Depreciation and amortization expenses for the nine months endedSeptember 30, 2022 and 2021 were$372,511 and$132,089 , respectively. This increase is due to the addition of fixed assets, primarily molds, to increase our production levels and throughput.
Our other expenses increased by 385%, or$324,344 to$240,116 for the nine months endedSeptember 30, 2022 , compared to other income of$84,228 for the nine months endedSeptember 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$50,966 and our net loss in fair value of marketable securities was$150,569 compared to$10,576 during the nine months endedSeptember 30, 2021 . The increase in expenses was also offset by an increase of interest income of$63,883 , and other income of$32,994 .
23
Net Loss
Net loss for the nine months ended September 30, 2022 was $2,617,208 , compared
to $200,477 for the nine months ended September 30, 2021 . Forza, which
represents our electric boat and development segment, which does not generate
any revenue, at this time, incurred a loss of $2,156,886 , for the nine months
ended September 30, 2022 , related to research and design. Our gas-powered
segment incurred a net loss of $393,697 , or 1.7% of net sales, for the nine
months ended September 30, 2022 . This loss was due to our aggressive ramp up in
production. Basic and dilutive loss per share of common stock for the nine
months ended September 30, 2022 , was ($0.37 ) compared to ($0.04 ) for the nine
months ended September 30, 2021 .
Liquidity and Capital Resources
The primary sources of funds for the nine months endedSeptember 30, 2022 were cash from operations and proceeds from our IPO, the Forza IPO and our follow on offering consummated inOctober 2022 . Forza raised gross proceeds of$17,250,000 from the Forza IPO and gross proceeds of$6,875,000 from our follow on offering consummated inOctober 2022 . 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$2,156,886 for the nine months endedSeptember 30, 2022 . To date, Twin Vee has spent approximately$2,500,00 on the funding of the development on our electric boats. The proceeds raised from the initial public offering of the common stock of Forza X1, will be used to build a manufacturing facility, purchase equipment, inventory and working capital.
The following table provides selected financial data about us as of
September 30, December 31,
2022 2021 Change % Change
Cash and cash equivalents $ 19,975,562 $ 6,975,302 13,000,260 186.4 %
Marketable securities $ 2,910,936 $ 6,064,097 (3,153,161 ) (52.0 %)
Current assets $ 26,248,656 $ 13,073,346 13,175,310 100.8 %
Current liabilities $ 3,995,584 $ 2,155,420 1,840,164 85.4 %
Working capital $ 22,253,072 $ 10,917,926 11,335,146 103.8 %
As of September 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. Included in cash and cash equivalents for the
three and nine months ended September 30, 2022 is proceeds from the Forza IPO.
As of September 30, 2022 , we had $22,886,498 of cash, cash equivalents and
marketable securities, total current assets of $26,248,656 , and total assets of
$35,223,690 . Our total liabilities were $5,444,979 . Our total liabilities were
comprised of current liabilities of $3,995,584 which included accounts payable
and accrued liabilities of $2,465,968 , due to affiliated companies of $115,043
and current portion of operating lease right of use liability of $387,993 , and
long-term liabilities of $1,449,395 . As of December 31, 2021 , we had $13,039,399
of cash, cash equivalents and marketable securities, total current assets of
$13,073,346 and total assets of $20,599,184 . Our total 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
24
Our working capital increased by$11,335,146 to$22,253,072 as ofSeptember 30, 2022 , compared to$10,917,926 onDecember 31, 2021 , due primarily to the Forza IPO. 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 Nine Months Ended September 30, 2022 2021 $ Change % Change Cash used in operating activities$ (2,584,381 ) $ (743,435 ) (1,840,946 ) 248 % Cash provided by (used in) investing activities$ 688,423 $ (7,323,287 ) 8,011,710 (109 %) Cash provided by financing activities$ 14,896,218 $ 16,153,814 (1,257,596 ) (8 %) Net Change in Cash$ 13,000,260 $ 8,087,092 4,913,168 61 % Years Ended December 31, 2021 2020 $ Change % Change Cash provided by (used in) operating activities$ (1,947,539 ) $ 364,648 (2,312,187 ) (634 %) Cash used in investing activities$ (8,037,264 ) $ (200,452 ) (7,836,812 ) 3,910 % Cash provided by financing activities$ 16,068,289 $ 512,046 15,556,243 3,038 % Net Change in Cash$ 6,975,302 $ 891,816 6,083,486 682 %
Cash Flow from Operating Activities
For the nine months endedSeptember 30, 2022 , net cash flows used in operating activities was$2,584,381 compared to$743,435 during the nine months endedSeptember 30, 2021 . We have increased inventory levels by$2,593,469 , 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$726,795 . Our accrued liabilities decreased$81,498 , primarily due to accrued rebate being paid out. Our net loss from operation was$2,617,208 , was decreased by non-cash expenses of$1,236,831 , primarily due to stock-based compensation of$814,330 , change of right-of-use asset and lease liabilities of$286,271 , loss on disposal of assets of$49,990 , net change in fair value of marketable securities of$150,569 and depreciation of$372,511 . 25
Cash Flow from Investing Activities
During the nine months endedSeptember 30, 2022 , we provided$688,423 in investment activities, compared to$7,323,287 used during the nine months endedSeptember 30, 2021 . We invested$2,394,169 in the purchase of property and equipment, primarily for new model boat molds of approximately$1,437,000 , leasehold improvements of approximately$173,000 , new production equipment of approximately$591,000 , and new computers, software and furniture of approximately$66,000 . We had proceeds from the sale of property of approximately$80,000 , and proceeds from the sale of marketable securities
of$3,002,592 .
Cash Flows from Financing Activities
For the nine months endedSeptember 30, 2022 , net cash provided by financing activities was approximately$14,896,218 , compared to$16,153,814 for the nine months endedSeptember 30, 2021 . The cash flow from financing activities for the nine months endedSeptember 30, 2022 included net proceeds of$15,231,350 from the Forza IPO. 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. 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. 26 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.Paycheck Protection ProgramU.S. GAAP does not contain authoritative accounting standards for forgivable loans provided by governmental entities to a for-profit entity. Absent authoritative accounting standards, interpretative guidance issued and commonly applied by financial statement preparers allows for the selection of accounting policies amongst acceptable alternatives. Based on the facts and circumstances, we determined it most appropriate to account for the Paycheck Protection Program ("PPP") loan proceeds as an in-substance government grant by analogy to International Accounting Standards 20 "(IAS 20)", Accounting for Government Grants and Disclosure of Government Assistance. Under the provisions of IAS 20, "a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan." IAS 20 does not define "reasonable assurance"; however, based on certain interpretations, it is analogous to "probable" as defined in FASB ASC Subtopic 450-20-20 underU.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. 27
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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