Twin Vee PowerCats, Co.: Form 10-Q for the period ended Jun 30, 2023

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q. This discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto. You should also review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and under Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 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 boats. We believe our company has been an innovator in the recreational and commercial power catamaran industry. We currently have 13 gas-powered models in production ranging in size from our 20-foot mono hull, single engine, center console to our newly designed 40-foot offshore 400 GFX catamaran, quad engines. While 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, our new mono hull line represents the largest portion of the overall market.

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 and AquaSport names; (ii) our electric-powered boat segment which is developing fully electric boats, through our majority owned subsidiary, Forza X1, Inc., a Delaware corporation (“Forza”) and (iii) our franchise segment which is developing a standard product offering and will be selling franchises across the United States through our wholly owned subsidiary, Fix My Boat, Inc., a Delaware corporation.

Our gas-powered boats allow consumers to use them for a wide range of recreational activities including fishing, diving and water skiing and commercial activities including transportation, eco tours, fishing and diving expeditions. We believe that the performance, quality and value of our boats position us to achieve our goal of increasing our market share and expanding the power catamaran boating market. We currently primarily sell our boats through a current network of 23 independent boat dealers in 37 locations across North America and the Caribbean who resell our boats to the end user Twin Vee and AquaSport 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, Forza, is designing and developing a line of electric-powered boats. Our electric boats are being designed as fully integrated electric boats including the hull, outboard motor and control system. To date, Forza X1 has built-out and tested multiple Forza company units, including: three offshore-style catamarans, two bay boat-style catamarans, one deck boat and three 22-foot center console (F22) monohulls. In addition, Forza has also electrified a pontoon boat for a major national pontoon manufacturer. We are in the process of an additional pontoon electrification project and are building an additional five monohulls. Each build cycle includes improvements and involves extensive duration and performance testing. The engine design and lower units and the control systems are continuously improved with each iteration. Cooling system improvements have also been prioritized and have yielded a myriad of benefits to runtime, speed, and range. We continue to iterate the engine design, including value engineering of parts and lightweighting of engine components. We are experimenting with our first 300 HP stacked motor design. We anticipate revenues from the sale of these fully integrated electric boats and motors to commence in late 2023. Forza will continue to build prototype engines and boats for the next six to nine months.

During the second quarter of 2023, we saw a small decrease in demand of our productions. 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 now added our monohull line, shipping our first model of the monohull, the 22 foot, in February of 2023. We have increased our sales by 18% for the first six months of 2023, compared to 2022, shipping 129 boats compared to 96 in 2022, a 33% increase. The average selling price of our units did decrease by 13%, in the first six month of 2023 down to approximately $132,000. This is due to the inclusion of our monohull boats which have an average selling price of approximately $60,000 per unit.

We are monitoring the overall market carefully, the addition of the monohull boat accounted for 17% of our total sales in the first six months. We anticipate that sales of the monohull will continue to increase,

As we move forward, we anticipate our operating income to be breakeven for our core gas-powered boat segment, as we bring our new Tennessee facility on line, 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

On April 20, 2023 we incorporated AquaSport Co., a wholly owned subsidiary, in the state of Florida in connection with our plan to lease the AQUASPORT™ boat brand and manufacturing facility in White Bluff Tennessee. On May 5, 2023, we and AquaSport Co. entered into an agreement with Ebbtide Corporation (“Ebbtide”) providing AquaSport Co. with the right to acquire assets, AQUASPORT™ boat brand, trademarks, 150,000-square-foot manufacturing facility situated on 18.5 acres in White Bluff Tennessee, related tooling, molds, and equipment to build five Aquasport models ranging in size from 21 to 25-foot boats (the “AquaSport Assets”).

Under the agreement, AquaSport Co. has the right to purchase the AquaSport assets from Ebbtide for $3,100,000 during the five-year term of the Agreement (or extension period), less credit for a $300,000.00 security deposit paid by us and $16,000 a month for any rent paid under the Agreement by AquaSport Co. to Ebbtide. AquaSport Co. will lease the AquaSport assets from Ebbtide under the agreement at a monthly rent of $22,000 pending AquaSport Co.’s acquisition of the AquaSport assets. The lease is for a term of five years, commencing June 1, 2023, with one option to renew the lease for an additional five years.

Results of Operations

Comparison of the Three Months Ended June 30, 2023 and 2022

The following table provides certain selected financial information for the periods presented:

Net Sales and Cost Sales

Our net sales decreased $394,981, or 5% to $8,124,632 for the three months ended June 30, 2023 from $8,519,613 for the three months ended June 30, 2022. This decrease was due to an increase in the number of monohull boats sold and a decrease in the multi hull boats, with a much higher average price, during the three months ended June 30, 2023. The number of our boats sold during the three months ended June 30, 2023 increased 34% over the three months ended June 30, 2022. Additionally, we increased our discounts and rebates, to move the boats from the factory to retail customers.

Gross Profit

Gross profits decreased by $1,186,750 or 34% to $2,260,462 for the three months ended June 30, 2023 from $3,447,212 for the three months ended June 30, 2022. Gross profit as a percentage of sales, for the three months ended June 30, 2023 and 2022 as 28% and 40% respectively. The model mix has changed significantly in the second quarter, shifting from our traditional catamarans to our new 220 monohulls. This has put downward pressure on our gross profits for the quarter. The Company is just entering into the monohull market which is highly competitive. As the company moves forward the model mix between mono and catamarans will have an impact on our gross profit.

Total Operating Expenses

Our total operating expenses for the three months ended June 30, 2023 and 2022 were $5,304,689 and $3,919,191 respectively. Operating expenses as a percentage of sales were 65% compared to 46% in the prior year. Our total operating expenses, for our gas-powered boat segment, for the three months ended June 30, 2023 and 2022 were $3,692,199 and $3,356,381 respectively. Our total operating expenses for Forza, our electric powered boat and development segment, for the three months ended June 30, 2023 and 2022 were $1,578,722 and $555,087, respectively.

Selling, general and administrative expenses increased by approximately 43%, or $276,686 to $914,430 for the three months ended June 30, 2023, compared to $637,744 for the three months ended June 30, 2022. Increased costs in liability and workman’s compensation insurance, were $30,682. These insurance charges increase based on employment level and sales revenue, both of which have increased significantly quarter over quarter. Another $89,029 was due to Forza now carrying cost of being publicly traded. Our sales and marketing expenses for the quarter increased $111,835, this is due to the promotion of our products, and the hiring of our marketing team. The need for a strong sales and marketing team has increased due to the addition of Forza, AquaSport and new models for Twin Vee. Our travel expenses increased approximately $36,004 primarily due to Forza’s remote workforce being required to travel for development and testing, and travel to Italy to explore a battery partnership. Hiring expenses increased $42,188 primarily due to Forza’s utilization of a recruiting firm to hire specialized engineers. Lastly our dues and subscriptions increased $36,099, we have implemented a new ERP system that requires a monthly subscription fee, as well as engineering software that is being utilized by Forza. These increases were offset by decreased expenses related to Directors and Officers insurance of $227,632. The market has improved significantly for this insurance, and we are no longer a brand new publicly traded firm.

Salaries and wages related expenses increased by approximately 23%, or $633,638 to $3,426,919 for the three months ended June 30, 2023, compared to $2,793,281 for the three months ended June 30, 2022. The majority of the increase is due to Forza’s additional staff and benefits, this accounted for $567,975 of the increase. Included in salaries and wage related expenses for the three months ended June 30, 2023 was stock based compensation expense of $489,360, Forza’s portion of that expense was $341,817, which was an increase of $341,817. Twin Vee’s stock based compensation for the three months ended June 30, 2023 decreased $237,379 compared to the three months ended June 30, 2022. Forza now has a board of director and the fees associated with the board were $25,875 for the three months ended June 30, compared to $0, for the three months ended June 30, 2022. We have added a full package of benefits for our employees, in order to retain our quality employees, which resulted in an increase of $54,553. The remaining increase in salaries and wages during the three months ended June 30, 2023 is associated with taxes.

Research and development expenses increased by $86,666, or 50% to $261,473 for the three months ended June 30, 2023, from $174,807 for the three months ended June 30, 2022. Part of the use of proceeds from our initial public offering (“IPO”), was the development of an electric boat and an electric motor.

Professional fees increased by 116%, or $223,763 to $417,305 for the three months ended June 30, 2023, compared to $193,542 for the three months ended 2022. 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 and SEC legal counsel to fulfill our public company reporting obligations.

Depreciation and amortization expense increased by 137%, or $164,745 to $284,562 for the three months ended June 30, 2023, compared to $119,817 for the three months ended 2022. This increase is due to the addition of fixed assets, primarily molds, to increase our production levels and throughput.

Our other income increased by $1,207,287 to $1,140,484 for the three months ended June 30, 2023, compared to an expense of $66,803 for the three months ended, 2022. We received $937,482 of government grant income, due to the Employee Retention Credit. Our dividend income increased by $252,889.

Net Loss

Net loss for the three months ended June 30, 2023 was $1,903,743, compared to $538,782 for the three months ended June 30, 2022, and increase of $1,364,961. Our electric segment, which does not generate any revenue, at this time, incurred a loss of $1,483,653, for the three months ended June 30, 2023, related to research and development. Our gas-powered segment incurred a loss of $233,841 for the three months ended June 30, 2023, this was due to the addition of the AquaSport facility starting to incur expense but not yet generating revenue. Basic and dilutive loss per share of common stock for the three months ended June 30, 2023 was ($0.14) compared to ($0.08) for the three months ended June 30, 2022.

Comparison of the Six Months Ended June 30, 2023 and 2022

The following table provides certain selected financial information for the periods presented:

Net Sales and Cost Sales

Our net sales increased $2,596,234, or 18% to $17,001,847 for the six months ended June 30, 2023 from $14,405,613 for the six months ended June 30, 2022. This increase was due to an increase in the number of boats sold during the six months ended June 30, 2023. The number of our boats sold during the six months ended June 30, 2023 increased 34% over the six months ended June 30, 2022, due to our increased production plan, enabling us to produce more boats during the quarter. Additionally, we have increased discounts and rebates, to help move boats through to retail customers.

Gross Profit

Gross profits decreased by $399,274, or 7% to $5,482,292 for the six months ended June 30, 2023 from $5,881,566 for the six months ended June 30, 2022. Gross profit as a percentage of sales, for the six months ended June 30, 2023 and 2022 as 32% and 41% respectively. The model mix changed significantly in the second quarter, shifting from our traditional catamarans to our new 220 monohulls. This has put downward pressure on our gross profits for the quarter. The Company is just entering into the monohull market which is highly competitive. As the company moves forward the model mix between mono and catamarans will have an impact on our gross profit.

Total Operating Expenses

Our total operating expenses for the six months ended June 30, 2023 and 2022 were $10,896,042 and $7,401,698 respectively. Operating expenses as a percentage of net sales were 64% compared to 51% in the prior year. Our total operating expenses, for our gas-powered boat segment, for the six months ended June 30, 2023 and 2022 were $7,236,112 and $6,309,997 respectively. Our gas-powered segment, operating expenses as a percentage of net sales were 43% compared to 44% in the prior year. Our total operating expenses for Forza, our electric powered boat and development segment, for the six months ended June 30, 2023 and 2022 were $3,658,531 and $1,057,723, respectively.

Selling, general and administrative expenses increased by approximately 47%, or $617,055 to $1,937,120 for the six months ended June 30, 2023, compared to $1,320,065 for the six months ended June 30, 2022. Increased costs in liability and workman’s compensation insurance, were $98,371. These insurance charges increase based on your employment level and sales revenue, both of which have increased significantly for the six months ended June 30, 2023. Another $167,920 was due to Forza now carrying cost of being publicly traded. Our sales and marketing expenses for the period ended June 30, 2023, increased $221,947, this is due to the promotion of our products, to include our new AquaSport brand, as well as production of marketing material which include photo and video shoots. The need for a strong sales and marketing team has increased due to the addition of Forza, AquaSport and new models for Twin Vee. Our travel expenses increased approximately $117,477 primarily due to Forza’s remote workforce being required to travel for development and testing, Forza further had two international trips, one to promote their electric boat and one to explore a battery partnership. Hiring expenses increased $83,800 primarily due to Forza’s utilization of a recruiting firm to hire two specialized engineers. Lastly our dues and subscriptions increased $84,539, we have implemented a new ERP system that requires a monthly subscription fee, as well as engineering software that is being utilized by Forza. These increases were offset by decreased expenses related to Directors and Officers insurance for Twin Vee of $224,590. The market has improved significantly for this insurance, and we are no longer a brand new publicly traded firm.

Salaries and wages related expenses increased by approximately 34%, or $1,729,850 to $6,776,941 for the six months ended June 30, 2023, compared to $5,047,091 for the six months ended June 30, 2022. Salaries and wages related expenses related to Forza increase $1,248,453. Included in salaries and wage related expenses for the six months ended June 30, 2023 was stock based compensation expense of $972,325, which was an increase of $445,601 compared to the six months ended June 30, 2022, $682,980 of the stock based compensation is attributed to Forza. Forza now has a board of director and the fees associated with the board were $51,750 for the six months ended June 30, 2023, compared to $0, for the six months ended June 30, 2022. We have added a full package of benefits for our employees, in order to retain our quality employees, which resulted in an increase of $132,027. The remaining increase in salaries and wages during the six months ended June 30, 2023 is associated with taxes.

Research and development expenses increased by $567,769, or 143% to $964,121 for the six months ended June 30, 2023, from $396,352 for the six months ended June 30, 2022. Part of the use of proceeds from our IPO, was the development of an electric boat and an electric motor.

Professional fees increased by 63%, or $272,741 to $715,022 for the six months ended June 30, 2023, compared to $438,281 for the six months ended 2022. 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,for quarterly reporting and SEC legal counsel and our audit firm to fulfill our public company reporting obligations.

Depreciation and amortization expense increased by 152%, or $302,929 to $502,838 for the six months ended June 30, 2023, compared to $199,909 for the six months ended 2022. This increase is due to the addition of fixed assets, primarily molds, to increase our production levels and throughput.

Our other income increased by $1,891,509 to $1,681,542 for the six months ended June 30, 2023, compared to an expense of $209,967 for the six months ended, 2022. We received $1,267,055 of government grant income, due to the Employee Retention Credit. Our dividend income increased by $487,399.

Net Loss

Net loss for the six months ended June 30, 202 was $3,732,208, compared to $1,730,099 for the six months ended June 30, 2022, an increase of $2,002,109. Our electric segment, which does not generate any revenue, at this time, incurred a loss of $3,488,786, for the six months ended June 30, 2023, related to research and development. Our gas-powered segment incurred a loss of $233,841 for the six months ended June 30, 2023, this was due to the addition of the AquaSport facility starting to incur expense but not yet generating revenue. Basic and dilutive loss per share of common stock for the six months ended June 30, 2023 was ($0.26) compared to ($0.25) for the six months ended June 30, 2022.

Liquidity and Capital Resources

A primary source of funds for the year ended December 31, 2022 and through June 30, 2023 was net cash received from our secondary offering, as well as Forza’s initial public and secondary offering and revenue generated from operations. Our primary use of cash was related to funding the expansion of our operations through capital improvements, adding staff and increasing inventory levels to meet the increase in demand for our products. With uncertainty on component availability, prolonged lead time and rising prices, we have been adding to our inventory far earlier than in previous years.

The following table provides selected financial data about us as of June 30, 2023 and December 31, 2022.

As of June 30, 2023, we had $26,337,127 of cash, cash equivalents and restricted cash and $1,947,397 of marketable securities, total current assets of $33,938,100, and total assets of $45,528,480. Our total liabilities were $8,391,922. Our total liabilities were comprised of current liabilities of $4,511,968 which included accounts payable and accrued liabilities of $3,657,890, current portion of operating leases right of use liability of $493,056, finance leases liability of $178,687, contract liability of $182,335 and long-term liabilities of $3,879,954. As of December 31, 2022, we had $26,428,525 of cash, cash equivalents, restricted cash and marketable securities, total current assets of $29,887,529 and total assets of $38,231,480. Our total current liabilities were $3,791,063 and total liabilities of $5,210,591 which included long-term operating leases liabilities for the lease of our facility.

The accumulated deficit was $9,622,733 as of June 30, 2023 compared to accumulated deficit of $7,154,808 as of December 31, 2022.

Our working capital increased by $3,329,666 to $29,426,132 as of June 30, 2023, compared to $26,096,466 on December 31, 2022, this is attributable to the public offering the Forza completed in June of 2023.

We believe that our cash and cash equivalents will provide sufficient resources to finance operations for the next 12 months from the date of the filing of this Quarterly Report on Form 10-Q. 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. We do anticipate Forza’s expenses to increase during the next two years as it constructs its planned manufacturing facility in McDowell, North Carolina, the cost of which we expect will be paid for through the proceeds of Forza’s public offerings, and certain grant funding, provided the conditions to receipt of the grant funding are met, of which there can be no assurance.

Cash Flow

30

Cash Flow from Operating Activities

For the six months ended June 30, 2023, net cash flows used in operating activities was $3,430,097 compared to $1,196,245 during the six months ended June 30, 2022. We have increased inventory levels by $1,568,148, due to opening the AquaSport production facility and adding two additional engine suppliers, this is further emphasized by our production ramp up, and added models. Accounts receivable increased by $555,966. Accounts payable increased $399,720. Our accrued liabilities increased $48,279 and prepaid expenses decreased $427,666. Our net loss from operation was $3,732,208, was decreased by non-cash expenses of $1,675,308, primarily due to stock-based compensation of $972,325, change of right-of-use asset and leases liabilities of $236,712, net change in fair value of marketable securities of $3,077 and depreciation of $502,840.

Cash Flow from Investing Activities

During the six months ended June 30, 2023, we used $655,669 in investment activities, compared to $273,105 provided by investment activities during the six months ended June 30, 2022. We invested $1,597,208 in the purchase of property and equipment, primarily for new model boat molds of approximately $379,000, leasehold improvements of approximately $90,000, new production equipment of approximately $338,000, new vehicles of approximately $49,000, new computers, software and furniture of approximately $156,000, and assets under construction of approximately $585,000. We had proceeds from the sale of investments of approximately $983,198, and we paid $15,000 in security deposits for the new AquaSport facility.

Cash Flows from Financing Activities

For the six months ended June 30, 2023, net cash provided by financing activities was approximately $6,921,886 compared to net cash used in financing activities of $141,629 for the six months ended June 30, 2022. The cash flow from financing activities for the six months ended June 30, 2023 included net proceeds of $6,996,015 and deferred offering cost of $66,463 from a follow on underwritten public offering in June 2023. Additional cash used for financing activities of $7,666 was due from equipment financing. Cash used in financing for the six months ended June 30,2022, was $141,629 for deferred offering costs.

CRITICAL ACCOUNTING ESTIMATES

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results.

Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which management believes to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The notes to our condensed consolidated financial statements contained herein contain a summary of our significant accounting policies. We consider the following accounting policies critical to the understanding of the results of our operations:

Revenue Recognition

The Company’s revenue is derived primarily from the sale of boats, motors and trailers to its independent dealers. The Company recognizes revenue when obligations under the terms of a contract are satisfied and control over promised goods is transferred to the dealer. For the majority of sales, this occurs when the product is released to the carrier responsible for transporting it to a dealer. The Company typically receives payment within five business days of shipment. Revenue is measured as the amount of consideration it expects to receive in exchange for a product. The Company offers dealer incentives that include wholesale rebates, retail rebates and promotions, floor plan reimbursement or cash discounts, and other allowances that are recorded as reductions of revenues in net sales in the statements of operations. The consideration recognized represents the amount specified in a contract with a customer, net of estimated incentives the Company reasonably expects to pay. The estimated liability and reduction in revenue for dealer incentives is recorded at the time of sale. Subsequent adjustments to incentive estimates are possible because actual results may differ from these estimates if conditions dictate the need to enhance or reduce sales promotion and incentive programs or if dealer achievement or other items vary from historical trends. Accrued dealer incentives are included in accrued liabilities in the accompanying consolidated balance sheets.

Payment received for the future sale of a boat to a customer is recognized as a customer deposit. Customer deposits are recognized as revenue when control over promised goods is transferred to the customer.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States “U.S. GAAP” requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Included in those estimates are assumptions about allowances for inventory obsolescence, useful life of fixed assets, warranty reserves and bad-debt reserves.

Inventories

Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Net realizable value is defined as sales price less cost of completion, disposable and transportation and a normal profit margin. Production costs, consisting of labor and overhead, are applied to ending finished goods inventories at a rate based on estimated production capacity. Excess production costs are charged to cost of products sold. Provisions are made when necessary 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.

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 SEC rules.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15I and 15d-15I under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under 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 by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. We have adopted and maintain disclosure controls and procedures (as defined Rules 13a-15I and 15d-15I under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized, and reported within the time periods specified in the rules of the SEC. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such a date, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting, related to not yet having retained sufficient staff or engaged sufficient outside consultants with appropriate experience in GAAP presentation, especially of complex instruments.

Remediation Plan

Management has developed and is executing a remediation plan to address the previously disclosed material weaknesses, due to inadequate staffing levels. We have retained a full-time Controller and a Staff Accountant; we have selected and have recently implemented a robust operating system, and we are utilizing the assistance of outside advisors where appropriate.

To remediate the existing material weaknesses, additional time is required to demonstrate the effectiveness of the remediation efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As of June 30, 2023, controls and procedures have been implemented to remediate the material weakness, however testing of controls continues.

Changes in Internal Control over Financial Reporting

During the six months ended June 30, 2023, we hired replacement staff in our finance department and are developing and refining our controls and other producers that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC are recorded, processed, summarized and reported within the time periods specified in SEC rules and in accordance with GAAP.

Investing in our securities involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and notes thereto. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, ”Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2022. Except as disclosed below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

We have incurred losses for the quarter ended June 30, 2023 and the year ended December 31, 2022 and could continue to incur losses in the future.

For the year ended December 31, 2022, we incurred a loss from operations of $6,021,707 and a net loss of $5,793,414. For the six months ended June 30, 2023, we incurred a loss from operations of $5,380,260 and a net loss of $3,698,718. As of June 30, 2023, we had an accumulated deficit of approximately $9.7 million. There can be no assurance that expenses will not continue to increase in future periods or that the cash generated from operations in future periods will be sufficient to satisfy our operating needs and to generate income from operations and net income.

The capacity of the manufacturing facility that we and Forza utilize will not be sufficient to support our future growth and business plans.

We are currently operating close to full capacity at our current manufacturing facility in Fort Pierce. Forza plans to manufacture its electric boats at a new state of the art carbon neutral factory that it plans to build in McDowell County, North Carolina. Until we are able to expand our manufacturing capacity and Forza is able to build the planned manufacturing facility, we will continue to share our current manufacturing facility with Forza, which has a limited capacity and may not be able to satisfy our and their manufacturing needs. Any facility that we build will require a significant capital investment and is expected to take at least one to two years to build and become fully operational. As a result of limited capacity at our facility, Forza’s ability to produce any boats will be limited to the available capacity of our facility until Forza’s future manufacturing facility is operational. If capacity is not available, Forza will not be able to produce its electric boats as planned.

In addition. Forza intends to utilize grant funding to pay for certain costs associated with the building of its manufacturing facility. On July 28, 2022, we received notice that the North Carolina Economic investment committee has approved a Job Development Investment Grant (“JDIG”) providing for reimbursement to us of up to $1,367,100 over a twelve-year period to establish a new manufacturing plant in McDowell County, North Carolina. The receipt of grant funding is conditioned upon Forza investing over $10.5 million in land, buildings and fixtures, infrastructure and machinery and equipment by the end of 2025 and Forza creating as many as 170 jobs. There can be no assurance that Forza will meet the conditions necessary to receive the grant funding.

Changes in general economic conditions, geopolitical conditions, domestic and foreign trade policies, monetary policies and other factors beyond our control may adversely impact our business and operating results.

Our operations and performance depend on global, regional and U.S. economic and geopolitical conditions. General worldwide economic conditions have experienced significant instability in recent years including the recent global economic uncertainty and financial market conditions. Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from U.S. and European leaders and financial markets around the world experienced volatility following the invasion of Ukraine by Russia in February 2022. Resulting changes in U.S. trade policy could trigger retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a “trade war.” Furthermore, if other countries, including the U.S., become further involved in the conflict, we could face significant adverse effects to our business and financial condition.

The uncertain financial markets, disruptions in supply chains, mobility restraints, and changing priorities as well as volatile asset values could impact our business in the future. The COVID-19 outbreak and government measures taken in response to the pandemic have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, have spiked, while demand for other goods and services, such as travel, have fallen. The future progression of the pandemic and its effects on our business and operations are uncertain. In addition, the outbreak of a pandemic could disrupt our operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in our office or laboratory facilities, or due to quarantines. Pandemics could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors, and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs.

Further, due to increasing inflation, operating costs for many businesses including ours have increased and, in the future, could impact demand or pricing manufacturing of our drug candidates or services providers, foreign exchange rates or employee wages. Inflation rates, particularly in the United States, have increased recently to levels not seen in years, and increased inflation may result in increases in our operating costs (including our labor costs), reduced liquidity and limits on our ability to access credit or otherwise raise capital. In addition, the Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation, which coupled with reduced government spending and volatility in financial markets may have the effect of further increasing economic uncertainty and heightening these risks.

Actual events involving reduced or limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank, was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver. Although we did not have any cash or cash equivalent balances on deposit with Silicon Valley Bank, uncertainty and liquidity concerns in the broader financial services industry remain and the failure of Silicon Valley Bank and its potential near- and long-term effects on the biotechnology industry and its participants such as our vendors, suppliers, and investors, may also adversely affect our operations and stock price.

We are actively monitoring the effects these disruptions and increasing inflation could have on our operations.

These conditions make it extremely difficult for us to accurately forecast and plan future business activities.

We depend on our network of independent dealers for our gas-powered boats, face increasing competition for dealers, and have little control over their activities.

A significant portion of our sales of our gas-powered boats are derived from our network of independent dealers. We typically manufacture our gas-powered boats based upon indications of interest received from dealers who are not contractually obligated to purchase any boats. While our dealers typically have purchased all of the boats for which they have provided us with indications of interest, it is possible that a dealer could choose not to purchase boats for which it has provided an indication of interest (e.g., if it were to have reached the credit limit on its floor plan), and as a result we once experienced, and in the future could experience, excess inventory and costs. For the six months ended June 30, 2023, our top three dealers accounted for approximately 36% of our consolidated revenues. During the six months ended June 30, 2023, one individual dealer had sales of over 10% of our total sales, that dealer represented 20% of total sales. The loss of a significant dealer could have a material adverse effect on our financial condition and results of operations. The number of dealers supporting our products and the quality of their marketing and servicing efforts are essential to our ability to generate sales. Competition for dealers among other boat manufacturers continues to increase based on the quality, price, value, and availability of the manufacturers’ products, the manufacturers’ attention to customer service, and the marketing support that the manufacturer provides to the dealers. We face intense competition from other boat manufacturers in attracting and retaining dealers, affecting our ability to attract or retain relationships with qualified and successful dealers. Although our management believes that the quality of our products in the performance sport boat industry should permit us to maintain our relationships with our dealers and our market share position, there can be no assurance that we will be able to maintain or improve our relationships with our dealers or our market share position. In addition, independent dealers in the boating industry have experienced significant consolidation in recent years, which could result in the loss of one or more of our dealers in the future if the surviving entity in any such consolidation purchases similar products from a competitor. A substantial deterioration in the number of dealers or the quality of our network of dealers would have a material adverse effect on our business, financial condition, and results of operations.

The loss of one or a few dealers could have a material adverse effect on us.

A few dealers have in the past, and may in the future, account for a significant portion of our revenues in any one year or over a period of several consecutive years. For example, during the six months ended June 30, 2023, one individual dealers had sales of over 10% of our total sales, and that dealers represented 20% of total sales. During the six months ended June 30, 2022, three dealers represented 36% of our sales. The loss of business from a significant dealer could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Forza’s planned fully electric sport boat has not yet been developed, and even if developed, interest in it may not develop.

Forza has completed the design and is testing it first monohull sport boat. There can be no assurance that Forza will be able to complete testing of their product when anticipated, if at all, that we will be able to mass produce the electric boats or that the anticipated features or services to be included in the electric boat will create substantial interest or a market, and therefore Forza’s anticipated product, its sales and growth for our product may not develop as expected, or at all. For example, in May 2021 we experienced a small fire in connection with the sea trial of a prototype of our electric boat which resulted in a six-month delay in our design timetable as we implemented changes to the design for outboard electric motor system as a result of the fire. We cannot guarantee that similar events will not occur in the future, or that we will be able to contain such events without damage or delay. Even if such a market for the electric sport boat develops, there can be no assurance that Forza would be able to maintain that market.

Forza’s operations to date have been primarily limited to finalizing the design and engineering of its electric sport boat as well as organizing and staffing Forza in preparation for launching the electric boat. As such, Forza has not yet demonstrated, and the success of Forza is wholly dependent upon, its ability to commercialize its products. The successful commercialization of any products will require us to perform a variety of functions, including:

• completing the design and testing for the electric sport boat and Forza’s proprietary outboard electric motor;
• manufacturing the electric sport boats;
• developing a vertically integrated direct-to-consumer distribution system; and
• conducting sales and marketing activities.

Forza cannot be certain that its business strategy for its electric-powered boats will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected, and Forza may not have the resources to continue or expand the business operations of its electric-powered boats business.

Forza may not receive the anticipated grant funding.

On July 28, 2022, Forza received notice that the North Carolina Economic investment committee has approved the JDIG providing for reimbursement to us of up to $1,367,100 over a twelve-year period to establish a new manufacturing plant in McDowell County, North Carolina. The receipt of grant funding is conditioned upon us investing over $10.5 million in land, buildings and fixtures, infrastructure and machinery and equipment by the end of 2025 and us creating as many as 170 jobs. Forza is currently in negotiations for a new site to build the Forza factory in North Carolina. There can be no assurance that the negotiations will be successful. If unsuccessful, it will not meet the conditions necessary to receive the grant funding and will be subject to the limited capacity at the Twin Vee factory that Twin Vee allows Forza, in its discretion, to use. There can be no assurance that Forza will meet the conditions necessary to receive the grant funding. Forza is currently in negotiations for a new site to build the Forza factory in North Carolina. There can be no assurance that the negotiations will be successful.

We have identified weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future.

As a public company, we will be subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures, and internal control over financial reporting.

As of June 30, 2023, we do not yet have effective disclosure controls and procedures, or internal controls over all aspects of our financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and in accordance with GAAP. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. We will be required to expend time and resources to further improve our internal controls over financial reporting, including by expanding our staff. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.

We will be required to expend time and resources to further improve our internal controls over financial reporting, including by expanding our staff. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.

We are in the process of hiring additional staff and providing them with the required training, we continue to engage outside consultants with appropriate experience in GAAP presentation, especially of complex instruments, to devise and implement effective disclosure controls and procedures, or internal controls. We will be required to spend time and resources hiring and engaging additional staff and outside consultants with the appropriate experience to remedy these weaknesses. We cannot assure you that management will be successful in locating and retaining appropriate candidates; that newly engaged staff or outside consultants will be successful in remedying material weaknesses thus far identified or identifying material weaknesses in the future; or that appropriate candidates will be located and retained prior to these deficiencies resulting in material and adverse effects on our business.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business, including increased complexity resulting from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures, and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock.

Our independent registered public accounting firm is not required to audit the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results and cause a decline in the market price of our common stock.