# Massimo Group: Form 10-Q for the period ended Sep 30, 2024

- Company: [Massimo Group](/companies/mamo.md) (CIK 1952853)
- Form: 10-Q
- Filed: 2024-11-14
- Accepted by EDGAR: Nov 14, 2024, 16:45 ET
- Period: 2024-09-30
- Accession: 0001493152-24-045987
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1952853/000149315224045987/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1952853/000149315224045987/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-07-01 to 2024-09-30 | $25.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2024-01-01 to 2024-09-30 | $91.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2024-07-01 to 2024-09-30 | $7.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2024-01-01 to 2024-09-30 | $28.9m | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-07-01 to 2024-09-30 | $94.8k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2024-01-01 to 2024-09-30 | $257.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-07-01 to 2024-09-30 | $303.5k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2024-01-01 to 2024-09-30 | $7.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-07-01 to 2024-09-30 | $64.5k | us-gaap:InterestExpenseNonoperating |
| Interest expense | 9 months, 2024-01-01 to 2024-09-30 | $268.8k | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | −$621.7k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | −$2.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $3.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | −$0.06 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | −$0.06 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 41,325,388 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 41,005,556 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | −$2.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-07-01 to 2024-09-30 | $82.3k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $424.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Current assets | at 2024-09-30 | $45.1m | us-gaap:AssetsCurrent |
| Total assets | at 2024-09-30 | $57.1m | us-gaap:Assets |
| Current liabilities | at 2024-09-30 | $26.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-09-30 | $34.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-09-30 | $22.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 57,586 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Report and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“fiscal 2023”), as filed with the Securities and Exchange Commission (the “SEC”), on April 15, 2024. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors. See “Cautionary Note Regarding Forward-Looking Statements .”*

### Overview of Company

Massimo Group is a holding company established on October 10, 2022 under the laws of the State of Nevada. We, through our subsidiaries, are primarily engaged in the manufacturing and sales of a wide selection of farm and ranch tested UTVs, recreational ATVs, and Pontoon Boats. Mr. David Shan, the Chairman of the Board and Chief Executive Officer, is the controlling shareholder of the Company.

A Reorganization of the legal structure was completed on June 1, 2023. The controlling Shareholder transferred his 100% equity interest in Massimo Motor and 100% equity interest in Massimo Marine to Massimo Group. After this Reorganization, we ultimately own 100% equity interests of Massimo Motor Sports and Massimo Marine.

Before and after the Reorganization, we, together with our subsidiaries, are effectively controlled by the same controlling Shareholder, and therefore, the Reorganization is considered as a recapitalization of entities under common control in accordance with ASC 805-50-25. The consolidation of the Company and our subsidiaries have been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements in accordance with ASC 805-50-45-5.

We listed our common stocks on the Nasdaq Capital Market under the symbol “MAMO” on April 4, 2024 and completed our IPO of 1,300,000 shares of common stock on April 4, 2024, raising approximately $5.0 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us.

We currently generate most of our revenues from the sales of UTVs and ATVs, which represented 98.0% and 90.1% of total revenue for the three months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024 and 2023, revenue from sales of UTVs and ATVs represented 96.5% and 87.1% of total revenue, respectively.

We also generate revenue from the sales of Pontoon Boats, which represented 2.0% and 9.9% of our revenue for the three months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024 and 2023, revenue from the sales of Pontoon Boats represented 3.5% and 12.9% of our revenue, respectively.

### Trends and Key Factors that Affect Operating Results

We believe the most significant factors that affect our business and results of operations include the following:

- **Risk of intense competition in the industry:** The powersports vehicles and boats industry in the United States is highly competitive. Competition in such markets is based upon a number of factors, including price, quality, service, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors including sales and marketing support programs (such as financing, joint advertising programs and cooperative advertising). Certain of our competitors are more diversified and have financial and marketing resources which are substantially greater than ours, which allow these competitors to invest more heavily in intellectual property, product development, and sales and marketing support. Failure to compete effectively with rival products, features, or models, or to draw in new dealers, could significantly harm our business, financial condition, or operating results. We are subject to competitive pricing. Such pricing pressure may limit our ability to maintain prices or to increase prices for our products in response to raw material, component and other cost increases and so negatively affect our profit margins.
- **Risk of economic and policy changes within China:** We import our products from various Chinese suppliers. The Chinese government continues to play a significant role in regulating industry within China by imposing industrial policies, providing subsidies and heavily regulating or prohibiting unwanted activities. There is no assurance the Chinese government will not interfere with the operations of Linhai Powersports (with which we have a significant supplier relationship) or any of our other suppliers. In addition, the Chinese government has implemented certain measures, including interest rate adjustments, to control the pace of economic growth in China. These measures, or other economic, political, or social developments in China may affect our China-based suppliers, which may adversely affect our business and operating results. We also import our products from Taiwan. The Taiwan issue is a longstanding point of contention between China and the United States. The U.S. maintains unofficial relations with Taiwan, while also recognizing the One China policy, which acknowledges Beijing as the legitimate government of Taiwan. Both China and the U.S. have engaged in military posturing around the Taiwan Strait. This increases the risk of accidental clashes or misunderstandings that could escalate into conflict, which will affect both our China-mainland-based and Taiwan-based suppliers.
- **Risk of unavailability of additional capital:** We will require significant expenditures to fund future growth. We intend to fund our growth out of the proceeds of the IPO and internal sources of liquidity or through additional financing from external sources. Our ability to obtain external financing in the future at a reasonable cost is subject to a variety of uncertainties, including our future financial condition, results of operations and cash flows and the condition of the global and domestic financial markets. If we require additional funds and cannot obtain them on acceptable terms when required or at all, we may be unable to fulfill our working capital needs, upgrade our existing facilities or expand our business and may have to reduce the level of our operations. These factors may also prevent us from entering into transactions that would otherwise benefit our business or implementing our future strategies. Any debt financing that we undertake may be expensive and might impose covenants that restrict our operations and strategic initiatives, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our capital stock, make investments and engage in mergers, consolidations and asset sale transactions. Equity financings may be on terms that are dilutive or potentially dilutive to our shareholders, and the prices at which new investors would be willing to purchase our equity securities may be lower than the trading prices of such equities. If new sources of financing are required, but are unattractive, insufficient or unavailable, then we could be required to modify our business plans or growth strategy which could have a material adverse effect on our business, results of operations or financial condition.
- **Risk of uncertainty in the cost and production level of raw materials:** We depend on third-party suppliers to manufacture many of the products we sell, in particular, ATVs and UTVs, as opposed to our recreational boats which we manufacture in our Dallas facility. For the three and nine months ended September 30, 2024, we purchased approximately 62% and 64% of our products from three of these suppliers. Competition for the output of these suppliers is intense. If these independent suppliers were unwilling or unable to supply us with products at prices which enable us to maintain our gross margins, it would materially adversely affect our business, results of operations or financial condition. Although we are looking to broaden our supplier base and to reduce our dependence upon a limited number of suppliers, there is no assurance we will be able to do so and increasing the number of suppliers from which we purchase products may increase our costs.
- **Risk related to overseas freights fluctuation:** The inflation rate and supply chain crisis experienced in 2021 and 2022 led to a significant increase in overseas freight costs. However, by December 31, 2023, there was a notable easing in both inflation and freight costs, reflecting an improvement in economic conditions and a stabilization in the supply chain.
- **Risk related to inflation:** In recent years, our China-based suppliers have increased the cost of their products due to inflation. We may not be able to pass along price increases in raw materials, parts, or components to customers. As a result, an increase in the cost of the raw materials, parts, and components our suppliers use in the manufacture of our products could reduce our profitability and have a material adverse effect on our business, results of operations or financial condition.
- **Risk of fluctuations in the sale of Pontoon Boats:** A segment of our sales revenue stemming from Massimo Marine exhibits a seasonal sales pattern. Boat sales are also influenced by the financing arrangements for boat purchases, which are susceptible to fluctuations in interest rates. For the three and nine months ended September 30, 2024 and 2023, our revenue generated from Massimo Marine was approximately 2.0%, 3.5%, 9.9% and 12.9% of our total revenue, respectively.

2

### Results of Operations

### For the Three and Nine Months Ended September 30, 2024 and 2023

The following table summarizes the results of condensed consolidated statements of operations and comprehensive income (unaudited) for the three and nine months ended September 30, 2024 and 2023 in U.S. dollars, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| **Revenues** | $25,602,310 | $29,907,697 | $91,156,640 | $75,483,811 |
| **Cost of revenues** | 18,649,995 | 19,850,258 | 62,253,681 | 51,706,682 |
| **Gross profit** | 6,952,315 | 10,057,439 | 28,902,959 | 23,777,129 |
| **Operating expenses:** |  |  |  |  |
| Selling expense | 2,628,915 | 2,104,505 | 7,936,761 | 6,541,244 |
| General and administrative | 3,895,232 | 2,716,733 | 12,096,874 | 9,038,488 |
| Impairment loss on supplier deposit | 29,883 | - | 772,780 | - |
| Research and development | 94,771 | - | 257,021 | - |
| **Total operating expenses** | 6,648,801 | 4,821,238 | 21,063,436 | 15,579,732 |
| **Income from operations** | 303,514 | 5,236,201 | 7,839,523 | 8,197,397 |
| **Other income (expense):** |  |  |  |  |
| Other income, net | 210,701 | 41,133 | 590,538 | 113,001 |
| Loss on litigation | (3,573,651) | - | (3,573,651) | - |
| Interest expense | (64,462) | (213,901) | (268,803) | (494,011) |
| **Total other income (expense), net** | (3,427,412) | (172,768) | (3,251,916) | (381,010) |
| **(Loss) income before income taxes** | (3,123,898) | 5,063,433 | 4,587,607 | 7,816,387 |
| **(Recovery of ) provision for income taxes** | (621,665) | 1,106,046 | 1,092,528 | 1,236,551 |
| **Net (loss) income and comprehensive (loss) income** | $(2,502,233) | $3,957,387 | $3,495,079 | $6,579,836 |
| Earnings per Share – basic | $(0.06) | $0.10 | $0.09 | $0.16 |
| Weighted average shares outstanding – basic \* | 41,325,388 | 40,000,000 | 40,863,370 | 40,000,000 |
| Earnings per Share –diluted | $(0.06) | $0.10 | $0.09 | $0.16 |
| Weighted average shares outstanding –diluted\* | 41,325,388 | 40,000,000 | 41,005,556 | 40,000,000 |

### Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

|  | For the Three months ended September 30, 2024 Amount | As % of Sales | 2023 Amount | As % of Sales | Amount Increase (Decrease) | Percentage Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $25,602,310 | 100.0% | $29,907,697 | 100.0% | $(4,305,387) | (14.4)% |
| Cost of sales | 18,649,995 | 72.8% | 19,850,258 | 66.4% | (1,200,263) | (6.0)% |
| Gross profit | 6,952,315 | 27.2% | 10,057,439 | 33.6% | (3,105,124) | (30.9)% |
| Operating expenses |  |  |  |  |  |  |
| Selling expenses | 2,628,915 | 10.3% | 2,104,505 | 7.0% | 524,410 | 24.9% |
| General and administrative expenses | 3,895,232 | 15.2% | 2,716,733 | 9.1% | 1,178,499 | 43.4% |
| Impairment loss on supplier deposit | 29,883 | 0.1% | - | - | 29,883 | 100.0% |
| Research and development | 94,771 | 0.4% | - | - | 94,771 | 100.0% |
| Total operating expenses | 6,648,801 | 26.0% | 4,821,238 | 16.1% | 1,827,563 | 37.9% |
| Income from operations | 303,514 | 1.2% | 5,236,201 | 17.5% | (4,932,687) | (94.2)% |
| Other income (expenses) |  |  |  |  |  |  |
| Other income, net | 210,701 | 0.8% | 41,133 | 0.1% | 169,568 | 412.2% |
| Loss on litigation | (3,573,651) | (14.0)% | - | - | (3,573,651) | 100.0% |
| Interest expense | (64,462) | (0.3)% | (213,901) | (0.7)% | 149,439 | (69.9)% |
| Total other income (expenses) | (3,427,412) | (13.4)% | (172,768) | (0.6)% | (3,254,644) | (1,883.8)% |
| (Loss) income before income taxes | (3,123,898) | (12.2)% | 5,063,433 | 16.9% | (8,187,331) | (161.7)% |
| (Recovery of) provision for income taxes | (621,665) | (2.4)% | 1,106,046 | 3.7% | (1,727,711) | (156.2)% |
| Net (loss) income | $(2,502,233) | (9.8)% | $3,957,387 | 13.2% | $(6,459,620) | (163.2)% |

### Revenues

Revenues decreased by $4.3 million, or 14.4%, from $29.9 million in the third quarter of fiscal 2023, to $25.6 million in the third quarter of fiscal 2024. The decrease in revenue was primarily due to the significant drop in Pontoon boat sales. The boat category experienced a significant downturn in line with an industry-wide slowdown. This broader trend is in part influenced by the current high interest rates and inflationary pressures that are impacting on consumer spending, particularly on the high-ticket but non-essential markets. The boat category fits the profile. Relatedly, the fact that dealers have faced high rejection rates from floorplan financing providers like Northpoint, has made it challenging for dealers to maintain optimal inventory levels, affecting our performance in the sales of Pontoon Boats. Additionally, there was a decrease in sales of UTV, ATV and e-bikes. Part of this decrease is in line with a slow industry-wide trend, while another factor was our seasonal promotions in the third quarter. Some discounted sales may have affected the performance of our regularly priced items.

### Revenue by Type

| Revenue category | For the three months ended September 30, 2024 Revenue | % of total Revenue | 2023 Revenue | % of total Revenue | Amount Increase (Decrease) | Percentage Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| UTVs, ATVs and e-bikes | $25,084,727 | 98.0% | $26,953,580 | 90.1% | $(1,868,853) | (6.9)% |
| Pontoon Boats | 517,583 | 2.0% | 2,954,117 | 9.9% | (2,436,534) | (82.5)% |
| Total | $25,602,310 | 100.0% | $29,907,697 | 100.0% | $(4,305,387) | (14.4)% |

### Revenue from sales of UTVs, ATVs and e-bikes

Revenue from sales of UTVs, ATVs and e-bikes decreased by $1.9 million, or 6.9%, from $27.0 million in the third quarter of fiscal 2023, to $25.1 million in the third quarter of fiscal 2024. The decrease in revenue was partially driven by the slow industry-wide trend, and partially by the seasonal promotions we offered in the third quarter of fiscal 2024.

### Revenue from sales of Pontoon Boats

Revenue from sales of Pontoon Boats decreased by $2.4 million, or 82.5%, from $2.9 million in the third quarter of fiscal 2023, to $0.5 million in the third quarter of fiscal 2024. The decrease in revenue was primarily attributable to the significant industry-wide downturn due to the impact of the high interest rate and the inflation as demonstrated in the high rejection rates dealer have encountered from floorplan financing providers such as Northpoint. This trend aligns with the industry-wide challenges that intensified in the third quarter of fiscal 2024. Additionally, economic uncertainty in the U.S. has led to reduced spending on luxury boats, further constraining our Pontoon Boat sales.

### Gross profit

Our gross profit decreased by $3.1 million, or 30.9%, from $10.1 million in the third quarter of fiscal 2023, to $7.0 million in the third quarter of fiscal 2024. The gross profit margin was 27.2% in the third quarter of fiscal 2024, compared with 33.6% in the same period last year. The decrease of 6.5% in the gross profit margin is consistent with (i) reduced sale prices aimed at clearing slow-moving inventory, and (ii) the decline in sales of Pontoon Boat, without a corresponding reduction in fixed overhead costs, such as rent and salaries.

Our cost and gross profit by revenue types are as follows:

| Category | For the three months ended September 30, 2024 Cost of revenue | Gross profit | Gross profit % | For the three months ended September 30, 2023 Cost of revenue | Gross profit | Gross profit % | Variance in Cost of revenue | Variance in gross profit | Variance in gross profit % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| UTVs, ATVs and e-bikes | $18,139,031 | $6,945,696 | 27.7 | $17,497,459 | $9,456,121 | 35.1 | $641,572 | $(2,510,425) | (7.4) |
| Pontoon Boats | 510,964 | 6,619 | 1.3 | 2,352,799 | 601,318 | 20.4 | (1,841,835) | (594,699) | (19.1) |
| Total | $18,649,995 | $6,952,315 | 27.2 | $19,850,258 | $10,057,439 | 33.6 | $(1,200,263) | $(3,105,124) | (6.5) |

The cost of revenue on UTVs, ATVs and e-bikes increased by $0.6 million, or 3.7%, from $17.5 million in the third quarter of fiscal 2023 to $18.1 million in the third quarter of fiscal 2024, and gross profit decreased by $2.5 million, or 26.5%, from $9.4 million in the third quarter of fiscal 2023 to $6.9 million in the third quarter of fiscal 2024. The gross margin decreased by 7.4%, from 35.1% in the third quarter of fiscal 2023 to 27.7% in the third quarter of fiscal 2024. The increase in the cost of revenue was largely due to higher overhead costs, mainly from research and design input and the additional rent expense as we expand our warehouse space in fiscal 2024. The decrease in gross margin was primarily a result of selling some inventory at lower price at our seasonal promotions in the third quarter of fiscal 2024.

The cost of revenue on Pontoon Boats decreased by $1.9 million, or 78.3%, from $2.4 million in the third quarter of fiscal 2023 to $0.5 million in the third quarter of fiscal 2024, and gross profit decreased by $0.6 million, or 98.9%, from $0.6 million in the third quarter of fiscal 2023 to $6,619 in the third quarter of fiscal 2024. The gross margin decreased by 19.1%, from 20.4% in the third quarter of fiscal 2023 to 1.3% in the third quarter of fiscal 2024. The decrease in gross margin was primarily a result of a decline in sales of Pontoon Boat, without a corresponding reduction in fixed overhead costs, such as rent, utilities, and salaries.

### Selling expenses

Our selling expenses mainly include warranty expense, advertising and promotion expense, interest expense incurred for selling products, shipping and handling fee and merchant service fee. Our selling expenses increased by $0.5 million, or 24.9%, from $2.1 million in the third quarter of fiscal 2023 to $2.6 million in the third quarter of fiscal 2024, representing 10.3% and 7.0% of our total revenue in the third quarter of fiscal 2024 and fiscal 2023, respectively. The increase in selling expenses was mainly due to an increase in shipping and handling fees, which were approximately $1.5 million and $0.7 million in the third quarter of fiscal 2024 and fiscal 2023, respectively. The increase was partly offset by a decrease in warranty expense of approximately $0.4 million, due to enhanced quality control and customer service measures. The adoption of a traveling technician team has enabled timely responses to customer requests, reducing repair costs.

### General and administrative expenses

Our general and administrative expenses primarily include salaries and benefits, professional fees, office expenses, travel expenses, insurance expenses, rent expense and depreciation expenses. General and administrative expenses increased by $1.2 million, or 43.4%, from $2.7 million in the third quarter of fiscal 2023 to $3.9 million in the third quarter of fiscal 2024. The increase was mainly due to increased salaries and benefits, travel expense and rent expense. Our general and administrative expenses represented 15.2% and 9.1% of our total revenue in the third quarter of fiscal 2024 and the third quarter of fiscal 2023, respectively.

Our salaries and benefits were $1.4 million and $1.1 million, representing 35.2% and 41.6% of our total general and administrative expenses in the third quarter of fiscal 2024 and in the third quarter of fiscal 2023, respectively. The increase in balance was mainly due to stock-based compensation expense of $0.3 million recognized on RSUs and stock option grant.

Our rent expenses increased by $0.3 million or 104.0%, from $0.3 million in the third quarter of fiscal 2023 to $0.6 million in the third quarter of fiscal 2024, representing 13.9% and 9.8% of our total general and administrative expenses in the third quarter of fiscal 2024 and 2023, respectively. This increase was due to two new lease agreements signed in May 2024 and a rent increment following the lease renewal.

Our professional fee increased by $0.1 million or 15.8%, from $0.7 million in the third quarter of fiscal 2023 to $0.8 million in the third quarter of fiscal 2024, representing 19.4% and 24.0% of our total general and administrative expenses in the third quarter of fiscal 2024 and 2023, respectively. The slight increase was mainly due to public company costs, including audit and investor relation fees.

### Loss on litigation

During the three months ended September 30, 2024, we recorded a one-time loss of approximate $3.6 million on legal judgment on lawsuit with Nebula. The Final Judgment on July 8, 2024 awarded Nebula $3.3 million in damages, $1.4 million in attorneys’ fees and other court cost and $1.1 million in interest on balances since September 15, 2020. We have recorded an additional accrual of $3.6 million as of September 30, 2024, bringing the total accrual related to this lawsuit to approximately $5.9 million. We have filed the appeal in August 2024.

### Interest expenses

Our interest expense decreased by $149,439 or 69.9%, from $213,901 in the third quarter of fiscal 2023 to $64,462 in the third quarter of fiscal 2024. The decrease in interest expense was mainly due to a reduction in the average loan balance in third quarter of fiscal 2024 compared with the same period of last year, in response to higher interest rates. We repaid all bank loans in early August 2024.

### Other income, net

Our other income was $210,701 in the third quarter of fiscal 2024, as compared with $41,133 in the third quarter of fiscal 2023, an increase of $169,568, or 412.2%. The increase was primarily due to the write-off a long outstanding negative balance of account receivable of approximately $100,000 and an increase in insurance claim of approximately $100,000 in third quarter of fiscal 2024 compared to the same period in last year.

### Income before income taxes

We had a decrease of $8.2 million in income before income taxes, from $5.1 million income in the third quarter of fiscal 2023 to approximately $3.1 million loss in the third quarter of fiscal 2024. The decrease was primarily attributable to the decrease in gross profit by $3.1 million, an increase of general and administrative expenses of approximately $1.2 million and a loss of legal judgment of approximately $3.6 million in the third quarter of fiscal 2024, as well as other expenses as discussed above.

### (Recovery of) provision for income taxes

The income tax recovery was approximately $0.6 million in the third quarter of fiscal 2024, compared to $1.1 million expenses in the same period of fiscal 2023. The change was mainly due to a net loss of $3.1 million before income taxes generated in the third quarter of fiscal 2024 compared to the same period in last year.

### Net (loss) income

We had net loss of $2.5 million and net income of $4.0 million in the third quarter of fiscal 2024 and 2023, respectively. The decrease was primarily due to the lower revenues and gross profit as discussed above.

### Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

|  | For the nine months ended September 30, 2024 Amount | As % of Sales | 2023 Amount | As % of Sales | Amount Increase (Decrease) | Percentage Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $91,156,640 | 100.0% | $75,483,811 | 100.0% | 15,672,829 | 20.8% |
| Cost of sales | 62,253,681 | 68.3% | 51,706,682 | 68.5% | 10,546,999 | 20.4% |
| Gross profit | 28,902,959 | 31.7% | 23,777,129 | 31.5% | 5,125,830 | 21.6% |
| Operating expenses |  |  |  |  |  |  |
| Selling expenses | 7,936,761 | 8.7% | 6,541,244 | 8.7% | 1,395,517 | 21.3% |
| General and administrative | 12,096,874 | 13.3% | 9,038,488 | 12.0% | 3,058,386 | 33.8% |
| Impairment loss on supplier deposit | 772,780 | 0.8% | - | - | 772,780 | 100.0% |
| Research and development | 257,021 | 0.3% | - | - | 257,021 | 100.0% |
| Total operating expenses | 21,063,436 | 23.1% | 15,579,732 | 20.6% | 5,483,704 | 35.2% |
| Income from operations | 7,839,523 | 8.6% | 8,197,397 | 10.9% | (357,874) | (4.4)% |
| Other income (expenses) |  |  |  |  |  |  |
| Other income, net | 590,538 | 0.6% | 113,001 | 0.1% | 477,537 | 422.6% |
| Loss on litigation | (3,573,651) | (3.9)% | - | - | (3,573,651) | 100.0% |
| Interest expense | (268,803) | (0.3)% | (494,011) | (0.7)% | 225,208 | (45.6)% |
| Total other income (expenses) | (3,251,916) | (3.6)% | (381,010) | (0.5)% | (2,870,906) | 753.5% |
| Income before income taxes | 4,587,607 | 5.0% | 7,816,387 | 10.4% | (3,228,780) | (41.3)% |
| Provision for income taxes | 1,092,528 | 1.2% | 1,236,551 | 1.6% | (144,023) | (11.6)% |
| Net income | $3,495,079 | 3.8% | $6,579,836 | 8.7% | $(3,084,757) | (46.9)% |

### Revenue

Revenues increased by $15.7 million, or 20.8%, from $75.5 million for the nine months ended September 30, 2023, to $91.2 million for the nine months ended September 30, 2024. The increase in revenue was primarily due to combined effects of rising demand in the U.S. ATV and UTV market and our modified sales strategy. In 2024, we continued to expand our distribution network with various retailers to increase our products’ market penetration. We strategically focused our efforts on large retail stores in the U.S. (the “big box stores”) that offer their own financing plans, while moving away from retailers that have liberal return policies.

### Revenue by Type

| Revenue category | For the nine months ended September 30, 2024 Revenue | % of total Revenue | 2023 Revenue | % of total Revenue | Amount Increase (Decrease) | Percentage Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| UTVs, ATVs and e-bikes | $88,011,145 | 96.5% | $65,765,577 | 87.1% | $22,245,568 | 33.8% |
| Pontoon Boats | 3,145,495 | 3.5% | 9,718,234 | 12.9% | (6,572,739) | (67.6)% |
| Total | $91,156,640 | 100.0% | $75,483,811 | 100.0% | $15,672,829 | 20.8% |

### Revenue from sales of UTVs, ATVs and e-bikes

Revenue from sales of UTVs, ATVs and e-bikes increased by $22.2 million, or 33.8%, from $65.8 million for the nine months ended September 30, 2023 to $88.0 million for the nine months ended September 30, 2024. The increase in revenue was primarily attributed to the expansion into more big box stores. This surge is consistent with the increasing ranch/farm-work utilization of UTVs across the 1.89 million farms in the U.S. with an average size of 464 acres and the new customer’s rural lifestyle focus. The increase in sales is also due to a shift in our sales strategy, focusing mostly on in-store sales to this retail chain store customer, which generally involve larger volumes and no returns. In addition, sales to this new customer consist of high-turnover inventory products that are of high quality and have a strong customer reputation. This enhances the efficiency of our capital utilization.

### Revenue from sales of Pontoon Boats

Revenue from sales of Pontoon Boats decreased by $6.6 million, or 67.6%, from $9.7 million for the nine months ended September 30, 2023 to $3.1 million for the nine months ended September 30, 2024. The revenue decrease was primarily due to an industry-wide downturn driven by high interest rates and inflation, which are impacting the consumption of non-essential goods. In addition, the fact that the dealers have experienced high rejection rates at the floorplan financing providers such as Northpoint has directly affected the inventory level the dealers maintain and therefore our sales in this category. This is consistent with the industry-wide trend. The challenging economic environment and economic uncertainty in the U.S. has led to reduced spending on luxury boats directly impacting the sales of luxury boats such as our yacht.

### Gross profit

Our gross profit increased by $5.1 million, or 21.6%, from $23.8 million for the nine months ended September 30, 2023 to $28.9 million for the nine months ended September 30, 2024. Gross margin was 31.7% for the nine months ended September 30, 2024, compared with 31.5% in the same period last year. Our gross margin for the nine months ended September 30, 2024 remained constant when compared with the same period in 2023.

Our cost and gross profit by revenue types are as follows:

| Category | For the Nine Months Ended September 30, 2024 Cost of revenue | Gross profit | Gross profit % | For the Nine Months Ended September 30, 2023 Cost of revenue | Gross profit | Gross profit % | Variance in Cost of revenue | Variance in gross profit | Variance in gross profit % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| UTVs, ATVs and e-bikes | $59,598,896 | $28,412,249 | 32.3 | $43,547,341 | $22,218,236 | 33.8 | $16,051,555 | $6,194,013 | (1.5) |
| Pontoon Boats | 2,654,785 | 490,710 | 15.6 | 8,159,341 | 1,558,893 | 16.0 | (5,504,556) | (1,068,183) | (0.4) |
| Total | $62,253,681 | $28,902,959 | 31.7 | $51,706,682 | $23,777,129 | 31.5 | $10,546,999 | $5,125,830 | 0.2 |

Cost of revenue on UTVs, ATVs and e-bikes increased by $16.1 million, or 36.9%, from $43.5 million for the nine months ended September 30, 2023, to $59.6 million for the nine months ended September 30, 2024 and gross profit increased by $6.2 million, or 27.9%, from $22.2 million for the nine months ended September 30, 2023, to $28.4 million for the nine months ended September 30, 2024. Gross margin decreased by 1.5%, from 33.8% for the nine months ended September 30, 2023 to 32.3% for the nine months ended September 30, 2024. The increase in the cost of revenue was in line with the increase in sales. The decrease in gross profit margin was mainly due to reduced sales prices to clear out slow-moving inventory in recent quarter.

Cost of revenue on Pontoon Boats decreased by $5.5 million, or 67.5%, from $8.2 million for the nine months ended September 30, 2023, to $2.7 million for the nine months ended September 30, 2024, and gross profit decreased by $1.1 million, or 68.5%, from $1.6 million for the nine months ended September 30, 2023, to $0.5 million for the nine months ended September 30, 2024. Gross margin decreased by 0.4%, from 16.0% for the nine months ended September 30, 2023, to 15.6% for the nine months ended September 30, 2024. Our gross margin for the nine months ended September 30, 2024 remained constant compared to the nine months ended September 30, 2023.

### Selling expenses

Our selling expenses mainly include warranty expense, advertising and promotion expense, interest expense, shipping and handling fee and merchant service fee. These expenses increased by $1.4 million, or 21.3%, from $6.5 million for the nine months ended September 30, 2023, to $7.9 million for the nine months ended September 30, 2024, representing 8.7% and 8.7% of total revenue in both periods. The increase was mainly due to higher shipping and handling fees, which rose from approximately $3.1 million for the nine months ended September 30, 2023 to $4.6 million in the same period in 2024, consistent with the increase in sales. The increase was partly offset by a reduction in warranty expense of approximately $0.5 million, due to enhanced quality control and customer service. The addition of a traveling technician team has enabled us to respond to customer requests promptly, reducing repair costs.

### General and administrative expenses

Our general and administrative expenses primarily include salaries and benefits, professional fees, office expenses, travel expenses, insurance expenses, rent expense and depreciation expenses. General and administrative expenses increased by $3.1 million, or 33.8%, from $9.0 million for the nine months ended September 30, 2023, to $12.1 million for the nine months ended September 30, 2024. The increase was mainly due to higher rent expense, salaries and benefit, and insurance expense. Our general and administrative expenses represented 13.3% and 12.0% of our total revenue for the nine months ended September 30, 2024 and 2023, respectively.

Our salaries and benefits were $4.2 million and $3.3 million, representing 34.8% and 36.1% of our total general and administrative expenses for the nine months ended September 30, 2024 and 2023, respectively. The increase was primarily due to $0.5 million severance package following an employment termination and a $0.6 million stock-based compensation expenses recognized for RSUs and stock option grants.

Our rent expenses increased by $0.9 million or 95.6%, from $0.9 million for the nine months ended September 30, 2023, to $1.8 million for the nine months ended September 30, 2024, representing 14.6% and 10.0% of our total general and administrative expenses for the nine months ended September 30, 2024 and 2023, respectively. Our rent expense increased because we had two new lease agreements in May 2024 while one lease agreement in May 2023. We also had monthly rent increment upon renewing the lease agreement. Our property taxes included in the rent expenses also increased by $0.4 million for the nine months ended September 30, 2024, compared to the same period last year.

Our insurance expense increased by $0.6 million or 88.9%, from $0.7 million for the nine months ended September 30, 2023, to $1.3 million for the nine months ended September 30, 2024, representing 10.7% and 7.6% of our total general and administrative expenses for the nine months ended September 30, 2024 and 2023, respectively. The increase was mainly due to a higher general insurance premium year-over-year in correlation with sales growth, as well as the purchase of directors and officers insurance following our transition to a public company.

### Impairment loss on supplier deposit

During the nine months ended September 30, 2024, we recorded a one-time impairment loss of approximate $772,780 on advanced deposit to one supplier. In June 2024, we reached a tentative agreement regarding general settlement terms with one suppler who would pay approximately $312,500 to resolve the claim. Our prepayment of $1.1 million would be considered irrecoverable. Therefore, we wrote off the approximate $772,780 of prepayment to the supplier during the nine months ended September 30, 2024. The settlement agreement was finalized in August 2024. During the nine months ended September 30, 2023, we had no impairment loss of prepayment.

### Loss on litigation

During the nine months ended September 30, 2024, we recorded a one-time loss of approximate $3.6 million on legal judgment on lawsuit with Nebula. The Final Judgment on July 8, 2024 awarded Nebula $3.3 million in damages, $1.4 million in attorneys’ fees and other court cost and $1.1 million in interest on balances since September 15, 2020. We have recorded an additional accrual of $3.6 million as of September 30, 2024, bringing the total accrual related to this lawsuit to approximately $5.9 million. We have filed the appeal in August 2024.

### Interest expenses

Our interest expense decreased by $225,208 or 45.6%, from $494,011 for the nine months ended September 30, 2023, to $268,803 for the nine months ended September 30, 2024. The decrease was mainly due to a lower average loan balance during the nine months ended September 30, 2024, compared to the same period last year, in response to raising interest rates. All bank loans were repaid in early August 2024.

### Other income, net

Other income increased by $477,537, or 422.6%, from $113,001 for the nine months ended September 30, 2023, to $590,538 for the same period in 2024. The increase was primarily due to the following factors: (i) a $177,147 write-off of a vendor’s accounts payable balance following a settlement with the vendor and us; (ii) a $190,000 write-off of a long outstanding negative balance of account receivable, both of which contributed to higher other income; and (iii) an additional approximately $100,000 in insurance claims in the third quarter of fiscal 2024 compared to the same period last year.

### Income before income taxes

Income before income taxes decreased by $3.2 million, from $7.8 million for the nine months ended September 30, 2023, to approximately $4.6 million for the nine months ended September 30, 2024. The decrease was primarily attributable to a $5.1 million rise in gross profit, partly offset by an approximately $3.1 million increase in general and administrative expenses and an approximately $3.6 million loss on litigation and other expenses as discussed above.

### Provision for income taxes

The income tax expense was approximately $1.1 million and $1.2 million for the nine months ended September 30, 2024 and 2023, respectively. We terminated our S Corporation status as of June 1, 2023, in connection with the Reorganization and became a taxable C Corporation. Accordingly, the income tax provision for the first three quarters of fiscal 2024 combined both federal income tax of 21% and the state margin tax at Texas as a C Corporation, and the income tax provision for the nine months ended September 30, 2023 only reflected state margin tax at Texas as a S Corporation for five months and a federal income tax of 21% for the remaining four month’s operation.

### Net income

Net income was $3.5 million and $6.6 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease was primarily due to higher revenues and gross profit, offset by an increase in general and administrative expense and a loss on litigation, as discussed above

### Cash Flows

### For the Periods Ended September 30, 2024 and 2023

The following table sets forth summary of our cash flows for the periods indicated:

|  | Periods Ended September 30, 2024 | 2023 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(2,396,923) | $5,778,608 |
| Net cash used in investing activities | (262,163) | (68,871) |
| Net cash provided by (used in) financing activities | 3,617,055 | (5,499,666) |
| Net increase in cash and cash equivalents | 957,969 | 210,071 |
| Cash and cash equivalents, beginning of the period | 765,814 | 947,971 |
| Cash and cash equivalents, end of the period | $1,723,783 | $1,158,042 |

9

### Operating Activities

Net cash used in operating activities was approximately $2.4 million during the nine months ended September 30, 2024, compared to net cash provided by operating activities of approximately $5.8 million during the nine months ended September 30, 2023, representing an increase in the net cash used in operating activities of $8.2 million during the nine months ended September 30, 2024 compared with the same period in 2023. This is consistent with the Company using part of the IPO proceeds as working capital to grow sales. The increase is primarily due to the following:

- Account payable decreased by approximately $2.9 million during the nine months ended September 30, 2024, compared to a decrease of approximately $0.4 million during the nine months ended September 30, 2023, primarily because we paid off undue account payable in the form of Letter of Credit payments from the old bank in order to release the UCC to the new bank during the nine months ended September 30, 2024.
- Accounts receivable increased by approximately $2.2 million during the nine months ended September 30, 2024, compared to an increase by approximately $1.6 million during the nine months ended September 30, 2023 due to the timing difference of payments by customers.
- Inventory increased by approximately $5.0 million during the nine months ended September 30, 2024, compared to an increase by approximately $0.04 million during the nine months ended September 30, 2023. It is consistent with the fact that we have been building up our inventory in anticipation of the holiday sales.
- Contract liabilities decreased by approximately $0.7 million during the nine months ended September 30, 2024, compared to an increase by approximately $0.5 million during the nine months ended September 30, 2023.
- The balance was partly offset by an increase in net income after non-cash item by approximately $1.3 million during the nine months ended September 30, 2024 compared with same period in 2023.
- Our net income was adjusted for non-cash items, including the write-off of account receivables, non-cash operating lease expense, gain (loss) on disposal of fixed asset, impairment loss of asset, stock-based compensation expense, amortization and depreciation, loss on litigation, deferred tax expense (recovery) and provision (reversal of allowance) for expected credit loss. Non-cash items of approximately $5.6 million during the nine months ended September 30, 2024, compared to non-cash items of approximately $1.2 million during the same period in 2023.

### Investing Activities

Net cash used in investing activities was approximately $262,163 during the nine months ended September 30, 2024, compared to net cash used in investing activities of $68,871 million during the nine months ended September 30, 2023. The increase in net cash used investing activities was primarily attributable to the purchase of property and equipment of $0.4 million, partially offset by a proceed of $0.2 million from sale of property and equipment during the nine months ended September 30, 2024.

### Financing Activities

Net cash provided by financing activities was approximately $3.6 million during the nine months ended September 30, 2024, compared to net cash used in financing activities of approximately $5.5 million during the nine months ended September 30, 2023. The increase in net cash provided by financing activities during the nine months ended September 30, 2024 was primarily attributable to net proceed from IPO of $4.5 million and from the common shares subscription of $0.9 million, offset by the repayment of bank loans of $0.3 million and repayment of loan from a related party of $1.5 million. This compares to 2023, when cash used in financing included, a net repayment of bank loan of $1.6 million, the repayment of $4.0 million to shareholder and payment of IPO related cost.

### Liquidity and Capital Resources

### Overview

The general objectives of our capital management strategy reside in the preservation of our capacity to continue operating, in providing benefits to our stakeholders and in providing an adequate return on investment to our shareholders by selling our products at a price commensurate with the level of operating risk assumed by us.

We thus determine the total amount of capital required consistent with risk levels. This capital structure is adjusted on a timely basis depending on changes in the economic environment and risks of the underlying assets. We are not subject to any externally imposed capital requirements.

### Working Capital

As of September 30, 2024, we had cash and cash equivalents of approximately $1.7 million. Our current assets were approximately $45.1 million, including approximately $11.6 million accounts receivable, approximately $30.9 million inventory, approximately $0.3 million advance to suppliers and approximately $0.6 million prepayment and other receivables, and our current liabilities were approximately $26.3 million, including $9.8 million accounts payable to suppliers, $3.6 million accrued payment on a legal judgment, $1.2 million contract liabilities, $2.1 million income tax payable, $6.4 million from a related party and $2.1 million liabilities from obligations under operating and financing leases, which resulted in a positive working capital of $18.8 million.

Our primary source of cash is currently generated from our business and bank borrowings. In the coming years, we will be looking to other sources, such as raising additional capital by issuing shares of stock, to meet our cash needs. While facing uncertainties regarding the size and timing of capital raise, we are confident that we can continue to support our operational needs solely by utilizing cash flows generated from our operating activities organically.

### Loan Balance

Loan balance consists of the following:

|  | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Bank loan – Cathay Bank (1) | $- | $- |
| Other loans - Northpoint (2) | - | 205,440 |
| Other loans – BAC (3) | - | 98,143 |
| Total | $- | $303,583 |

|  |  |
| ---: | --- |
| (1) | On May 13, 2024, the Company’s subsidiary Massimo Motor Sports obtained a line of credit from Cathay Bank, pursuant to which the Company has the availability to borrow a maximum $15.0 million out of this line of credit for one year at the U.S. prime rate + 0.75%. Before then, the company had a line of credit of maximum $10.0 million from Midfirst bank, which is cancelled upon the grant of the line of credit from Cathay Bank. As of September 30, 2024 and December 31, 2023, the outstanding balance was $nil million and $nil. This line of credit is also personally guaranteed by Mr. David Shan, the controlling shareholder. This line of credit is pledged by the Company’s accounts receivable and inventories. |
| (2) | On April 19, 2022, the Company’s subsidiary Massimo Marine obtained a $2.0 million pay as sold line of credit from Northpoint Commercial Finance LLC (“Northpoint”) for acquisition, financing and/or refinancing of inventory. This line of credit is also personally guaranteed by Mr. David Shan, the controlling Shareholder, and Massimo Motor Sports, an affiliated company. As of September 30, 2024 and December 31, 2023, the outstanding balance was $nil and $205,440, respectively. |
| (3) | On February 18, 2022, the Company’s subsidiary Massimo Marine obtained a credit facility for Mercury Marine in the amount of $1.75 million from Brunswick Acceptance Company LLC (“BAC”) to finance purchase of inventory. This line of credit is also personally guaranteed by Mr. David Shan. As of September 30, 2024 and December 31, 2023, the outstanding balance was $nil and $98,143, respectively. |
| (4) | On January 15, 2021, the Company’s subsidiary Massimo Motor Sports obtained a line of credit from Midfirst Bank, pursuant to which the Company has the availability to borrow a maximum $4.0 million out of this line of credit for two years at the U.S. prime rate + 0.25%. On April 18, 2022, this line of credit was further increased to $10.0 million, and on January 3, 2024, the maturity date was renewed to January 3, 2026. |
|  | This line of credit is guaranteed by the Massimo Group, and is also personally guaranteed by Mr. David Shan, the controlling shareholder, and Miller Creek Holdings LLC, a related party controlled by Mr. David Shan. This line of credit is pledged by the Company’s accounts receivable and inventories. |
|  | On May 13, 2024, the credit facility was closed due to transferring to Cathay Bank ((1) above), and all guarantees were released and transferred to Cathay Bank. |

11

### Capital Expenditures

Our capital expenditures consist primarily of expenditures for the purchase of fixed assets and equipment leases as a result of our business growth. Our capital expenditures amounted to approximately $424,164 and $68,871 for the nine months ended September 30, 2024 and 2023, respectively.

### Contractual Commitments

As of September 30, 2024 , the Company’s contractual obligations consisted of the following:

| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Lease commitment | $12,277,800 | $2,912,980 | $5,016,194 | $4,348,626 | $– |

### Off-balance Sheet Commitments and Arrangements

There were no off-balance sheet arrangements for the nine months ended September 30, 2024 and 2023, that have, or that in the opinion of management are likely to have, a current or future material effect on our financial condition or results of operations.

### Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, each as of the date of the financial statements, and revenue and expenses during the periods presented. On an ongoing basis, management evaluates their estimates and assumptions, and the effects of any such revisions are reflected in the financial statements in the period in which they are determined to be necessary. Management bases its estimates on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our consolidated financial statements.

Management has determined that, while there are no critical accounting estimates, the most significant estimates relate to sales returns, products warranty, allowance for credit loss, inventory provision, and the assessment and disclosure of contingent liabilities due to on-going lawsuit. Each of these are discussed below.

### Sales returns

We provide a refund policy to accept returns from end customers, which varies and depends on the different products and customers. The estimated sales returns are determined based upon an analysis of historical sales returns. Return allowances are recorded as a reduction in sales with corresponding sales return liabilities which are included in “accrued return liabilities.” The estimated cost of returned inventory is recorded as a reduction to cost of sales and an increase of right of return assets which is included in “inventories.” As of September 30, 2024 and December 31, 2023, $163,666 and $283,276 of sales return liabilities associated with estimated product returns were recorded in the unaudited condensed consolidated balance sheet, respectively. During the three-month period ended September 30, 2024 and 2023, the Company recorded sales returns of $317,188 and $223,428 respectively. During the nine-month period ended September 30, 2024 and 2023, the Company recorded sales returns of $824,978 and $1,975,270, respectively.

### Warranty

We generally provide a one-year limited warranty against defects in materials related to the sale of products. The Company considers the warranty as an assurance type warranty since the warranty provides the customer the assurance that the product complies with agreed-upon specifications. Estimated future warranty obligations are included in cost of product sales in the period in which the related revenue is recognized. The determination of the Company’s warranty accrual is based on actual historical experience with the product, estimates of repair and replacement costs and any product warranty problems that are identified after shipment. The Company estimates and adjusts these accruals at each balance sheet date in accordance with changes in these factors. As of September 30, 2024 and December 31, 2023, $608,644 and $619,113 of product warranty were recorded in the unaudited condensed consolidated balance sheet, respectively. During the three-month period ended September 30, 2024 and 2023, the Company recorded warranty expenses of $234,314 and $576,602, respectively. During the nine-month period ended September 30, 2024 and 2023, the Company recorded warranty expenses of $1,102,494 and $1,521,902, respectively.

### Allowance for credit loss

We considered various factors, including nature, historical collection experience, the age of the accounts receivable balances and the contract assets, credit quality and specific risk characteristics of its customers, current economic conditions, forecasts of future economic conditions, reversion period, and qualitative and quantitative adjustments to develop an estimate of credit losses. We have adopted loss rate method to calculate the credit loss and considered the relevant factors of the historical and future conditions of the Company to make reasonable estimation of the risk rate. For accounts receivable aged less than one year and non-overdue contract assets, we use the loss rate method, which is a combination of historical rate method and adjustment rate method, to estimate the credit loss. For accounts receivable aged over one year and overdue retainage receivable, we use the individual specific valuation method to estimate the credit loss.

We wrote off potentially uncollectible accounts receivable against the allowance for credit losses if it is determined that the amounts will not be collected. As of September 30, 2024 and December 31, 2023, we recorded allowance for credit loss of $0.7 million and $0.6 million in the unaudited condensed consolidated balance sheet, respectively.

### Inventory provision

We assessed the net realizable value of each item of inventories and compared to the cost on the book, which include the cost of raw materials, freight and duty for raw materials, direct labor costs, and the overhead costs for finished goods at the end of each reporting period. In addition, we assessed all slow-moving or obsolete items for inventory valuation purposes. As of September 30, 2024 and December 31, 2023, the Company had inventory provision of $329,900 and $439,900, included in inventories, net in the unaudited condensed consolidated balance sheet. Reversal of impairment provision of inventories were $110,000, $110,000, $nil and $nil for the three and nine months ended September 30, 2024 and 2023, respectively, included in cost of revenues in the unaudited condensed consolidated statement of operations and comprehensive income.

### Contingencies

We may be involved in various legal proceedings, claims and other disputes arising from the commercial operations, projects and other matters which, in general, are subject to uncertainties and in which the outcome are not predictable. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Although we can give no assurances about the resolution of pending claims, litigation or other disputes and the effect such outcomes may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided or covered by insurance, will not have a material adverse effect on the our unaudited condensed consolidated financial position or results of operations or liquidity as at September 30, 2024 and December 31, 2023, except one litigation discussed below.

### Litigation

On July 8, 2024, the Company received a final judgment from the trial court in the lawsuit filed by Taizhou Nebula Power Co, Ltd. (“Nebula”) on September 15, 2020. The final judgment awarded Nebula $3,334,542 in damages, $1,436,809 in attorneys’ fees and other court costs, and $1,146,169 in interest on balances from September 15, 2020. In connection with this judgment, the Company recorded an additional accrual of $3,573,651 as of September 30, 2024, bringing the total accrual related to this lawsuit to approximately $5.9 million. The Company filed an appeal in August 2024.

Although our significant accounting policies are elaborated upon in Note 2 – Summary of Significant Accounting Policies in our consolidated financial statements, we maintain that there were no critical accounting policies.

## Controls and procedures

As filed, 4,418 characters.

### Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer (together, the “Certifying Officers”), or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Certifying Officers, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, we concluded that our controls over the classification of related party payables, and accounting for related party notes payable was not effectively designed or maintained. Our management performed additional analysis as deemed necessary to ensure that our unaudited financial statements included in this Report were prepared in accordance with U.S. GAAP. Accordingly, management believes that the unaudited financial statements included in this Report present fairly, in all material respects, our financial position, results of operations and cash flows of the periods presented.

In light of the material weakness described above, our management team has performed additional accounting and financial analyses and other post-closing procedures. We have enhanced, and will continue to enhance, internal controls and procedures, including access to accounting literature, identification and consideration of third-party professionals with whom to consult regarding complex accounting applications and implementing additional layers of reviews in the financial close process. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we plan to continue to improve these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

### Changes in Internal Control over Financial Reporting

Other than as discussed above, there have been no changes to our internal control over financial reporting during the quarterly period ended September 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 568 characters.

As of the date of this Report, there have been no material changes with respect to those risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on April 15, 2024. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risks could arise that may also affect our business. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

Filed Nov 14, 2024.
Source: SEC EDGAR, the filing index for accession 0001493152-24-045987. Last ingested by Listed: Nov 3, 2026, 08:27 ET. No prices; not investment advice.