UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
OR
For the transition period from to
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
| The
|
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐ No
As of November 12, 2024, there were shares of the Company’s common stock issued and outstanding.
TABLE OF CONTENTS
| i |
Unless otherwise stated in this Quarterly Report on Form 10-Q (this “Report”), references to “we,” “us,” “our,” “Company” or “our Company” are to Massimo Group, a Nevada corporation, and its subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements contained in this Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, projected costs and our objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “should,” “shall,” “intend,” “goal,” “objective,” “seek,” “expect,” and similar expressions or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including but not limited to:
| ● | our limited operating history on which to judge our performance and assess our prospects for future success; |
| ● | risks related to our reliance on a network of independent dealers and distributors to manage the retail distribution of many of our products; |
| ● | our reliance on third-party manufacturers and supplies for our products; |
| ● | risks related to the fact that the majority of the products we purchase are manufactured by suppliers in China and their operations are subject to risks associated with business operations in China; |
| ● | the inexperience of our principal shareholder and senior management in operating a publicly traded company; |
| ● | economic conditions that impact consumer spending may have a material adverse effect on our business; |
| ● | results of operations or financial condition; |
| ● | risks related to face intense competition in all product lines, including from some competitors that have greater financial and marketing resources; |
| ● | risks related to our ability to attract and retain key personnel; |
| ● | potential harm caused by misappropriation of our data and compromises in cybersecurity; |
| ● | changes in laws, regulatory requirements, governmental incentives and fuel and energy prices; |
| ● | litigation, regulatory proceedings, complaints, product liability claims and/or adverse publicity; |
| ● | the inability of our dealers, customers and distributors to secure adequate access to capital or financing; |
| ● | failure to develop brand name and reputation; |
| ● | the significant product repair and/or replacement due to product warranty claims or product recalls; |
| ● | the impact of health epidemics, including the COVID-19 pandemic, on our business; and |
| ● | other risks and uncertainties described in this Report, including those described in the “Risk Factors” section. |
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, we undertake no duty to update any of these forward-looking statements after the date of this Report or to conform these statements to actual results or revised expectations.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.
You should read this Report and the documents that we reference in this Report and have filed as exhibits to the registration statement, of which this Report is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this Report by these cautionary statements.
| ii |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MASSIMO GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | ||||||||
September 30, 2024 (Unaudited) | December 31, 2023 (Audited) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Advance to suppliers | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Property and equipment at cost, net | ||||||||
| Right of use operating lease assets, net | ||||||||
| Right of use financing lease assets, net | ||||||||
| Deferred offering assets | ||||||||
| Other non-current assets | ||||||||
| Deferred tax assets | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term loans | $ | $ | ||||||
| Accounts payable | ||||||||
| Other payable, accrued expenses and other current liabilities | ||||||||
| Accrued return liabilities | ||||||||
| Accrued warranty liabilities | ||||||||
| Contract liabilities | ||||||||
| Current portion of obligations under operating leases | ||||||||
| Current portion of obligations under financing leases | ||||||||
| Income tax payable | ||||||||
| Loan from a related party | ||||||||
| Total current liabilities | ||||||||
| NON-CURRENT LIABILITIES | ||||||||
| Obligations under operating leases, non-current | ||||||||
| Obligations under financing leases, non-current | ||||||||
| Loan from a related party | ||||||||
| Total non-current liabilities | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| Commitments and Contingencies | ||||||||
| EQUITY | ||||||||
| Common shares, $ par value, shares authorized, and issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | ||||||||
| Preferred shares, $ par value, preferred shares authorized, shares were issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | ||||||||
| Subscription receivable | ( | ) | ||||||
| Additional paid-in-capital | ||||||||
| Retained earnings | ||||||||
| Total equity | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-1 |
MASSIMO GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expense | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Impairment loss on supplier deposit | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Other income, net | ||||||||||||||||
| Loss on litigation | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other (expense) income, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) income before income taxes | ( | ) | ||||||||||||||
| (Recovery of ) provision for income taxes | ( | ) | ||||||||||||||
| Net (loss) income and comprehensive (loss) income | $ | ( | ) | $ | $ | $ | ||||||||||
| (Loss) Earnings per Share – basic | $ | ( | ) | $ | $ | $ | ||||||||||
| Weighted average shares outstanding – basic * | ||||||||||||||||
| (Loss) Earnings per Share –diluted | $ | ( | ) | $ | $ | $ | ||||||||||
| Weighted average shares outstanding –diluted* | ||||||||||||||||
| * |
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-2 |
MASSIMO GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(UNAUDITED)
| Common Share | Subscription | Additional Paid-in | Retained | |||||||||||||||||||||
| Shares* | Amount | Receivable | Capital | Earnings | Total | |||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Subscription received | – | |||||||||||||||||||||||
| Net income | – | |||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Issuance of common stock upon vesting of RSU | ( | ) | ||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Common Share | Subscription | Additional Paid-in | Retained | |||||||||||||||||||||
| Shares* | Amount | Receivable | Capital | Earnings | Total | |||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Subscription received | – | |||||||||||||||||||||||
| Capital dividend declared | – | ( | ) | ( | ) | |||||||||||||||||||
| Net income | – | |||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Balance at December 31, 2023 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Additional Paid-in capital | – | |||||||||||||||||||||||
| Initial public offering, net of share issuance costs | ||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||
| Net income | – | |||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | $ | $ | |||||||||||||||||||
| * |
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-3 |
MASSIMO GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Non-cash operating lease expense | ||||||||
| Accretion of finance lease liabilities | ||||||||
| Amortization of finance lease right-of-use assets | ||||||||
| Written-off of account receivables | ||||||||
| Provision of (Reversal of) allowance for excepted credit loss, net | ( | ) | ||||||
| Gain on disposal of fixed asset | ( | ) | ||||||
| Impairment loss of asset | ||||||||
| Loss on litigation | ||||||||
| RSU compensation | ||||||||
| Share-based compensation for services | ||||||||
| Deferred tax assets | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Reversal of inventory impairment | ( | ) | ||||||
| Advance to suppliers | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Related party payable | ||||||||
| Accounts payables | ( | ) | ( | ) | ||||
| Other payable, accrued expense and other current liabilities | ( | ) | ||||||
| Tax payable | ( | ) | ||||||
| Accrued warranty liabilities | ( | ) | ||||||
| Accrued return liabilities | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ||||||
| Lease liabilities – operating lease | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Proceed from sales of property and equipment | ||||||||
| Acquisition of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of other loans | ( | ) | ( | ) | ||||
| Repayment of finance lease liabilities | ( | ) | ( | ) | ||||
| Proceed from common share issuances | ||||||||
| Deferred offering costs | ( | ) | ||||||
| Proceeds from initial public offering, net of share issuance costs | ||||||||
| Repayment of loan from a related party | ( | ) | ( | ) | ||||
| Proceeds from subscription deposits | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents, beginning of the period | ||||||||
| Cash and cash equivalents, end of the period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| NON-CASH ACTIVITIES | ||||||||
| Right of use assets obtained in exchange for operating lease obligations | $ | $ | ||||||
| Right of use assets obtained in exchange for finance lease | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-4 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 — ORGANIZATION AND BUSINESS DESCRIPTION
Massimo
Group (the “Company”), is a holding company established on October 10, 2022 under the laws of the State of Nevada. The Company,
through its subsidiaries, is primarily engaged in the manufacturing and sales of a wide selection of farm and ranch tested utility terrain
vehicles (“UTVs”), recreational all-terrain vehicles (“ATVs”), and pontoon and tritoon boats (“Pontoon
Boats”). On April 4, 2024, the Company closed its initial public offering (“IPO”) of shares of its common
stock at an IPO price of $ per share for aggregate gross proceeds of approximately $
Reorganization
On
June 1, 2023, the two shareholders transferred their % equity interest in Massimo Motor Sports, LLC (“Massimo Motor Sports”)
and % equity interest in Massimo Marine, LLC (“Massimo Marine”) to Massimo Group (the “Reorganization”). After
this Reorganization, Massimo Group ultimately owns
Before and after the Reorganization, the Company, together with its subsidiaries, is effectively controlled by the same controlling shareholders, and therefore the Reorganization is considered as a recapitalization of entities under common control in accordance with Accounting Standards Codification (“ASC”) 805-50-25. The consolidation of the Company and its 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.
Details of the Company and its subsidiaries are set out below upon the Reorganization:
| Subsidiaries | Date of Incorporation |
Jurisdiction of Formation |
Percentage of direct/indirect Economic Ownership |
Principal Activities | ||||||
| % | ||||||||||
| % | ||||||||||
On
June 1, 2023, the Company entered into two agreements with Asian International Securities Exchange Co., Ltd. (“AISE”) and
AISE agreed to invest $
| F-5 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual consolidated financial statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of September 30, 2024, and for the three and nine months ended September 30, 2024 and 2023. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the operating results for the full year ending December 31, 2024 or any other period. These unaudited condensed consolidated financial statements have been derived from the accounting records of the Company and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2024.
Uses of estimates and assumptions
In preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant accounting estimates required to be made by management include allowance for inventories, allowance for credit losses, sales return liabilities, warranty costs and the assessment and the disclosure of contingency liabilities. The Company evaluates its estimates and assumptions on an ongoing basis and its estimates on historical experience, current and expected future conditions and various other assumptions that management believes are reasonable under the circumstances based on the information available to management at the time these estimates and assumptions are made. Actual results and outcomes may differ significantly from these estimates and assumptions.
Cash and cash equivalents
Cash
and cash equivalents consist of cash on hand, the balances with banks and the liquid investments with maturities of three months or
less. The Company maintains all its bank accounts in the United States, maximum amounts of $
Accounts receivable, net
Accounts receivable represent trade receivable and are recognized initially at fair value and subsequently adjusted for any allowance for expected credit loss. The Company grants credit to customers, without collateral, under normal payment terms. The Company uses a loss rate method to estimate the allowance for credit losses. The Company evaluates the expected credit loss of accounts receivable based on customer financial condition and historical collection information adjusted for current market economic conditions and forecasts of future economic performance when appropriate. Loss-rate approach is based on the historical loss rates and expectations of future conditions. The Company writes off potentially uncollectible accounts receivable against the allowance for credit losses if it is determined that the amounts will not be collected.
| F-6 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories, net
Inventories
are stated at the lower of cost or net realizable value, using the first-in, first out (FIFO) method. Costs include the cost of raw materials,
freight and duty. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution
in the value of inventories. Net realizable value is estimated using selling price in the normal course of business less any costs to
complete and sell products. As of September 30, 2024 and December 31, 2023, the Company had inventory provision of $
Advances to suppliers
Advance
to suppliers consists of balances paid to suppliers for purchasing of products, parts and accessories that have not been provided or
received. Advances to suppliers are short-term in nature and are reviewed periodically to determine whether their carrying value has
become impaired. The Company evaluated the carrying value of individual advances based on specifics facts and circumstances for any impairment
at each reporting date. For the three-month period and nine-month period ended September 30, 2024 and 2023, the Company recorded the
impairment loss of $
Deferred offering cost
Deferred offering costs were expenses directly related to the Company’s planned IPO. These costs consisted of legal, accounting, printing, and filing fees that the Company capitalized, including fees incurred by the independent registered public accounting firm directly related to the offering. The deferred offering costs are reclassified to additional paid-in capital upon receipts of the capital raised at IPO closing date.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight-line method, as follows:
| Useful life | ||
| Furniture and fixtures | ||
| Machinery equipment | ||
| Electronic equipment | ||
| Transportation equipment | ||
| Leasehold improvement |
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gains or losses on disposals are determined by comparing proceeds with carrying amount and are recognized within “other income (expense)” in the unaudited condensed consolidated statements of operations and comprehensive income.
| F-7 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Leases
The Company adopted Accounting Standards Update (“ASU”) No. 2016-02—Leases (Topic 842) since January 1, 2020, using a modified retrospective transition method permitted under ASU No. 2018-11. This transition approach provides a method for recording existing leases only at the date of adoption and does not require previously reported balances to be adjusted. The Company evaluates the contracts it enters into to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee.
Operating Leases
For operating leases, the Company measures its lease liabilities based on the present value of the total lease payments not yet paid discounted based on the more readily determinable of the rate implicit in the lease or its incremental borrowing rate, which is the estimated rate the Company would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The Company measures right-of-use (“ROU”) assets based on the corresponding lease liability adjusted for payments made to the lessor at or before the commencement date, and initial direct costs it incurs under the lease. The Company begins recognizing lease expense when the lessor makes the underlying asset available to the Company.
Lease cost for operating leases includes the amortization of the ROU asset and interest expense related to the operating lease liability. For leases with lease term less than one year (short-term leases), the Company records operating lease expense in its consolidated statements of operations on a straight-line basis over the lease term and record variable lease payments as incurred.
Finance Leases
Lease cost for finance leases where the Company is the lessee includes the amortization of the ROU asset, which is amortized on a straight-line basis and recorded to “Depreciation of right-of-use finance asset” and interest expense on the finance lease liability, which is calculated using the interest method and recorded to “Interest expense, net.” Finance lease ROU assets are amortized over the shorter of their estimated useful lives or the terms of the respective leases, including periods covered by renewal options that the Company is reasonably certain of exercising.
Impairment of long-lived assets
Long-lived assets, primarily consist of property and equipment, are evaluated for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount may not be fully recoverable or that the useful life is shorter than the Company had originally estimated. When these events occur, the Company evaluates the impairment by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying value of the assets, the Company recognizes an impairment loss based on the excess of the carrying value of the assets over the fair value of the assets. No impairment charge was recognized for the three and nine months ended September 30, 2024 and 2023, respectively.
| F-8 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments
ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data. |
| ● | Level 3 — inputs to the valuation methodology are unobservable. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash and cash equivalents, accounts receivables, note receivable which was grouped in other current assets, loan from a related party, accounts payable, other payable, accrued expense and other liabilities, contract liabilities, approximates their recorded values due to their short-term maturities. The Company determined that the carrying value of the lease liabilities approximated their fair value as the interest rates used to discount the contracts approximate market rates. The Company noted no transfers between levels during any of the periods presented. The Company did not have any instruments that were measured at fair value on a recurring nor non-recurring basis as of September 30, 2024 and December 31, 2023.
Revenue recognition
The Company adopted ASC Topic 606, “Revenue from Contracts with Customers”. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the Company applies the following steps:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
The Company’s revenue is generated primarily by sales of UTVs, ATVs electric bikes (“e-bikes”), and Pontoon Boats. Revenue represented the amount of consideration to which the Company expects to be entitled in exchange for promised goods. Revenue is recorded when performance obligations are considered to be satisfied when control is transferred to our customers upon goods delivered to customers and acceptance by customers.
| F-9 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Sales returns
The
Company provides a refund policy to accept returns from end customers, which varies and depends on 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.” The factors affecting the Company’s sales return liabilities include the number of
products currently within the return period, historical and anticipated rates of sales returns claimed on those products, and the
estimated amount of returns that may be claimed within this period. If actual results differ from the estimates, the Company revises
its estimated sales returns liability accordingly. Each quarter, the Company reviews and reassesses the adequacy of its recorded
sales returns liabilities and adjusts the amounts as necessary. As of September 30, 2024 and December 31, 2023, $
Products warranty
The
Company generally provides 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 customers 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 factors affecting the Company’s warranty include the number of products currently under warranty, historical and
anticipated rates of warranty claim on those products, and the estimates of repair and replacement costs to satisfy the Company’s warranty obligation. The anticipated rate of warranty claims is the primary estimate used in determining the warranty liability and is
relatively predictable using historical experience of failure rates. The average remaining aggregate warranty period of the products sold
is calculated, repair parts are generally already in stock or available at pre-determined prices, and labor rates are generally arranged
at pre-established amount with service providers. If actual results differ from the estimates, the Company revises its estimated warranty
liability. Each quarter, the Company reevaluates its estimates and assess the adequacy of its recorded warranty liabilities and adjust the
amounts as necessary. As of September 30, 2024 and December 31, 2023, $
Contract liabilities
The
contract liabilities of the Company are primarily related to advances received from customer. The contract liabilities are reported
in a net position on a customer-by-customer basis at the end of each reporting period. Contract liabilities are recognized when the
Company receives prepayment from customers resulting from purchase order. Contract liabilities will be recognized as revenue when
the products are delivered. As of September 30, 2024 and December 31, 2023, the Company records contract liabilities of $
Disaggregation of revenues
The Company disaggregates its revenue from contracts by products, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the three and nine months ended September 30, 2024 and 2023 is disclosed in Note 19 of these unaudited condensed consolidated financial statements.
| F-10 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost of revenues
Cost of revenues includes all of the costs and expenses directly related to the production of goods and services included in revenues. Cost of revenues primarily consists of cost of products, freight and duty allocated and warehouse related overhead, such as salaries and benefits, rent, warehouse supplies and depreciation expenses.
The
freights and duty costs incurred when shipping raw materials from suppliers to the Company are included in cost of revenues, amounting
to $
Shipping and handling costs
Shipping
and handling costs, which include costs related to the selection of products and their delivery to customers, are presented in selling expenses. The shipping and freight expense incurred upon goods delivery to customers are included in selling expenses,
amounting to $
Advertising costs
The
Company expenses all advertising costs as incurred. Advertising costs presented in selling expenses were $95,509 and $$
401(k) benefit plan
The
401(k) benefit plan covers substantially all employees and allows voluntary employee contributions up to the annually adjusted Internal
Revenue Service dollar limit. These voluntary contributions are matched equal to
Income taxes
Before
the Reorganization, the Company elected to be taxed as an S Corporation for federal and state income tax purposes. As an S Corporation,
the Company is not subject to federal income tax and state tax in Texas. As such, shareholders are taxed on their pro rata share of earnings
and deductions of the Company, regardless of the amount of distributions received. After the Reorganization, the Company is subjected
to U.S. federal income tax at
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
| F-11 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes (continued)
The Company accounts for uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic No. 740, “Accounting for Uncertainty in Income Taxes.” A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
Significant judgment is also required in evaluating the Company’s uncertain income tax positions and provisions for income taxes. Liabilities for uncertain income tax positions are recognized based on a two-step approach. The first step is to evaluate whether an income tax position has met the recognition threshold by determining if the weight of available evidence indicates that it is more likely than not to be sustained upon examination. The second step is to measure the income tax position that has met the recognition threshold as the largest amount that is more than 50% likely of being realized upon settlement. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provisions, income taxes payable and deferred income taxes in the period in which the facts that give rise to a revision become known. The Company recognizes interest and penalties related to uncertain income tax positions as interest expense.
The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the three and nine months ended September 30, 2024 , a total of and unvested Restricted Stock Units (“RSU”) were included in the computation of weighted average number of common shares for the calculation of diluted EPS. For the three and nine months ended September 30, 2023, there were dilutive shares.
Stock Based compensation
The Company follows the provisions of ASC 718, “Compensation - Stock Compensation” (“ASC 260”), which establishes the accounting for employee share-based awards. For employee share-based awards, stock based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight-line basis over the requisite service period for the entire award.
Segment reporting
The
Company follows ASC 280, “Segment Reporting.” The Company’s Chief Executive Officer or chief operating decision-maker
reviews the consolidated financial results when making decisions about allocating resources and assessing the performance of the Company
as a whole and hence, the Company has only
| F-12 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration and risks
a. Concentration of credit risk
Assets
that potentially subject the Company to a significant concentration of credit risk primarily consist of cash and cash equivalents,
accounts receivable and other receivable included in other current assets. The maximum exposure of such assets to credit risk is
their carrying amounts at the balance sheet dates. The Company maintains all the bank accounts at financial institutions in the
United States, where there is $
To limit the exposure to credit risk relating to deposits, the Company primarily places cash deposits with large financial institutions in the United States. The Company conducts credit evaluations of its customers and generally does not require collateral or other security from them. The Company establishes an accounting policy to provide for current expected credit losses based on the individual customer’s financial condition, credit history, and the current economic conditions.
b. Foreign Exchange Risk
Most of our raw materials are imported from China. The value of the Chinese Yuan against the U.S. dollar is affected by the changes in China and United States economic conditions. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk.
c. Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. Our exposure to interest rate risk primarily relates to the interest rates from our lessors and our borrowings with banks. The shareholder loans bear no interest. Our leasing obligations’ interest rates are fixed at the commencement date of the leases. We have not been exposed to material risks due to the fact that our borrowing from the bank is not significant. And we have not used any derivative financial instruments to manage our interest risk exposure. However, we cannot provide assurance that we will not be exposed to material risks due to changes in market interest rate in the future.
d. Liquidity Risk
Liquidity risk arises through the excess of financial obligations over available financial assets due at any point in time. Our objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet our liquidity requirements at any point in time. We achieve this by maintaining sufficient cash and banking facilities.
e. Significant customers
For the three months ended September 30, 2024 and 2023, one and one customer accounted for more than % of the Company’s total revenues, respectively. For the nine months ended September 30, 2024 and 2023, one and one customer accounted for more than % of the Company’s total revenues, respectively. As of September 30, 2024 and December 31, 2023, two and one customers accounted for more than % of the Company’s accounts receivable, respectively.
| F-13 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration and risks (continued)
f. Significant suppliers
For the three months ended September 30, 2024 and 2023, two and two suppliers each accounted for more than 10% of the Company’s total purchases respectively. For the nine months ended September 30, 2024 and 2023, two and two suppliers each accounted for more than 10% of the Company’s total purchases respectively. As of September 30, 2024 and December 31, 2023, four and three suppliers each accounted for more than % of the Company’s total accounts payable, respectively.
Recent accounting pronouncements
The Company considers the applicability and impact of all ASUs. Management periodically reviews new accounting standards that are issued.
The Jumpstart Our Business Startups Act provides that an emerging growth company (“EGC”) as defined therein can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an EGC to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has adopted the extended transition period.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. This ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. The new standard will become effective for us beginning January 1, 2024, using either a modified retrospective or a fully retrospective method of transition, and early adoption is permitted. Management is currently evaluating the impact of the new standard on our financial statements.
In November 2023, the FASB issued ASU No. 2023-07, “Improvements to Reportable Segment Disclosures” (Topic 280). This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment’s profit or loss. This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. This ASU will likely result in us including the additional required disclosures when adopted. Management is currently evaluating the provisions of this ASU and expect to adopt them for the year ending December 31, 2024.
In December 2023, the FASB issued ASU No. 2023-09, “Improvements to Income Tax Disclosures” (Topic 740). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income tax paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This ASU will likely result in the required additional disclosures being included in the Company’s consolidated financial statements, once adopted.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
| F-14 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 — ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Accounts receivable – third parties | $ | $ | ||||||
| Less: allowance for credit loss | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
The
Company recorded a reversal of allowance for credit loss of $
The movement of allowance for credit loss are as follow:
| September 30, 2024 | December 31, 2023 | |||||||
| Balance as of beginning | $ | $ | ||||||
| Written off | (64,584 | ) | - | |||||
| Additional of provision | ||||||||
| Ending balance | $ | $ | ||||||
The Company’s accounts receivable balances as of September 30, 2024 and December 31, 2023 are pledged for its line of credit facility at Midfirst Bank and Cathay Bank (See Note 12).
NOTE 4 — INVENTORIES
Inventories consist of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Products | $ | $ | ||||||
| Parts and accessories | ||||||||
| Inventories in transit | ||||||||
| Freight and duty | ||||||||
| Less: inventory allowance | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
A
reversal of impairment provision of inventories recorded for lower of cost or net realizable value adjustments were $
The
inventories which are pledged for the Company’s line of credit facility at Cathay Bank/Midfirst Bank are $
| F-15 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 — ADVANCE TO SUPPLIERS
Advance to suppliers consist of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Advance to suppliers | $ | $ | ||||||
| Less: impairment loss allowance due to irrecoverable prepayment | ||||||||
| Advance to suppliers, net | $ | $ | ||||||
An
impairment loss allowance of advances to suppliers of $
In
June 2024, we reached a tentative agreement regarding general settlement terms with one supplier who would use approximately $
NOTE 6 — OTHER NON-CURRENT AND CURRENT ASSETS
Other current assets consist of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Prepayment | $ | $ | ||||||
| Note receivable (Note 5) | ||||||||
| Other receivables | ||||||||
| Less: Other non-current assets | ( | ) | ||||||
| Other current assets | $ | $ | ||||||
NOTE 7 — PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Furniture and Fixtures | $ | $ | ||||||
| Machinery equipment | ||||||||
| Vehicles | ||||||||
| Electronic equipment | ||||||||
| Leasehold improvement | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
There
was an addition of $
| F-16 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8 — LEASES
On
August 1, 2018, the Company signed a lease agreement with Miller Creek Holding LLC, a related party owned by the controlling shareholder,
to rent the warehouse and office space of total
Total
operating lease expense for the three months ended September 30, 2024 and 2023 amounted to $
Total
operating lease expense for the nine months ended September 30, 2024 and 2023 amounted to $
Total
accretion of finance lease liabilities for the three months ended September 30, 2024 and 2023 amounted to $
Total
accretion of finance lease liabilities for the nine months ended September 30, 2024 and 2023 amounted to $
Supplemental balance sheet information related to operating and financing leases was as follows:
Operating leases
| September 30, 2024 | December 31, 2023 | |||||||
| Operating lease liabilities - current | $ | $ | ||||||
| Operating lease liabilities - non-current | ||||||||
| Total | $ | $ | ||||||
Financing leases
| September 30, 2024 | December 31, 2023 | |||||||
| Finance lease liabilities - current | $ | $ | ||||||
| Finance lease liabilities - non-current | ||||||||
| Total | $ | $ | ||||||
| F-17 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8 — LEASES (continued)
The following table includes supplemental cash flow and non-cash information related to leases:
| September 30, 2024 | December 31, 2023 | |||||||
| Cash paid of amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows used in operating leases | $ | $ | ||||||
| Financing cash flows used in finance leases | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Finance lease liabilities | $ | $ | ||||||
| Operating lease liabilities | $ | $ | ||||||
The weighted average remaining lease terms and discount rates for all of operating lease and finance leases were as follows:
| September 30, 2024 | December 31, 2023 | |||||||
| Weighted-average remaining lease term (years): | ||||||||
| Finance lease | ||||||||
| Operating leases | ||||||||
| Weighted average discount rate: | ||||||||
| Finance leases | % | % | ||||||
| Operating leases | % | % | ||||||
The following is a schedule of maturities of operating and finance lease liabilities as of September 30, 2024:
Operating leases
| Twelve months ending September 30, | ||||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Total future minimum lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of operating lease liabilities | $ |
Finance leases
| Twelve months ending September 30, | ||||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total future minimum lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of finance lease liabilities | $ |
| F-18 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9 — ACCRUED RETURN LIABILITIES
The following table shows changes in the Company’s accrued return:
| September 30, 2024 | December 31, 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Actual recognized products return | ( | ) | ( | ) | ||||
| Accruals for product return liabilities | ||||||||
| Ending balance | $ | $ | ||||||
NOTE 10 — ACCRUED WARRANTY EXPENSES
The following table shows changes in the Company’s accrued warranties and related costs:
| September 30, 2024 | December 31, 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Cost of warranty claims | ( | ) | ( | ) | ||||
| Accruals for product warranty | ||||||||
| Ending balance | $ | $ | ||||||
NOTE 11 — OTHER PAYABLE, ACCRUED EXPENSE AND OTHER CURRENT LIABILITY
The following table shows breakdown of Company’s other payable, accrued expense and other current liabilities:
| September 30, 2024 | December 31, 2023 | |||||||
| Credit card liabilities | $ | $ | ||||||
| Sales Tax payable | ||||||||
| Other current liabilities | ||||||||
| Additional accrual on litigation (Note 18) | ||||||||
| Total | $ | $ | ||||||
| F-19 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12 —LOANS
Loan balance consists of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Bank loan – Cathay Bank (1)/Midfirst (4) | $ | $ | ||||||
| Other loans - Northpoint (2) | ||||||||
| Other loans – BAC (3) | ||||||||
| Total | $ | $ | ||||||
| (1) |
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) |
|
| (3) | |
| (4) | |
| 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. |
NOTE 13 — RELATED PARTY TRANSACTIONS
The relationship of related parties is summarized as follow:
| Name of Related Party | Relationship to the Company | |
| David Shan | ||
| Custom Van Living | ||
| Miller Creek Holdings LLC | ||
| SUNL Technology LLC | ||
| Asia International Securities Exchange Co Ltd |
| F-20 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 13 — RELATED PARTY TRANSACTIONS (continued)
(a) Loan from a related party
Loan from a related party consists of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Loan from David Shan, opening balance | $ | $ | ||||||
| Repayment | ( | ) | ( | ) | ||||
| Capital dividend declared | ||||||||
| Loan from David Shan, ending balance | ||||||||
| Non-current | ( | ) | ||||||
| Current | $ | $ | ||||||
On January 3, 2024, the Company entered into an unsecured loan agreement with Mr. David Shan, the Chairman of the Board and CEO, to change the payment term from due on demand to due on January 3, 2029. This unsecured loan was required by MidFirst Bank when the Company renewed the line of credit on January 3, 2024. On May 13, 2024, the line of credit with MdFirst Bank was closed and the Company obtained a new line of credit with Cathay Bank, which did not have no such requirement. As a result, the Company made repayment totaling $ towards this loan during the nine months ended September 30, 2024. The Company intends to continue repayments over of the loan from Mr. Shan for the next twelve months. Consequently, the outstanding balance has been reclassified from non-current liabilities to current liabilities as of September 30, 2024.
(b) Loan guarantee provided by related parties
In connection with the Company’s bank borrowing, Mr. David Shan, the controlling shareholder, Miller Creek Holdings LLC and Massimo Group, the holding company of Massimo Motor provided unlimited guarantee to the Company’s loan (See Note 12).
| F-21 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 14 — TAXES
Corporate Income Taxes
Massimo
Motor and Massimo Marine both terminated their status as a Subchapter S Corporation as of June 1, 2023, in connection with the Reorganization
and became a taxable C Corporation. Prior to that date, as an S Corporation, the Company had no U.S. federal income tax expense. As such,
any periods prior to June 1, 2023 will only reflect a margin tax for the state of Texas and corresponding tax expense. As a C Corporation,
the Company combined effective tax rate for federal income taxes of
As
of September 30, 2024 and December 31, 2023, the Company did not have an accrued liability for uncertain tax positions and does not anticipate
recognition of any significant liabilities for uncertain tax positions during the next 12 months. For the three and nine months ended
September 30, 2024 and 2023, no amounts were incurred for income tax uncertainties or interest and penalties. The Company is currently
not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position. The
Company’s tax years since its formation remain subject to possible income tax examination by its major taxing authorities for all
periods. The Company’s effective tax rate for the three months ended September 30, 2024 and 2023 are
The provision for income tax consists of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Income tax provision – current | $ | $ | $ | $ | ||||||||||||
| Income tax (recovery) provision - deferred | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax (recovery) provision | $ | ( | ) | $ | $ | $ | ||||||||||
The following table reconciles the statutory tax rate to the Company’s effective tax:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net (loss) income before income taxes | $ | ( | ) | $ | $ | $ | ||||||||||
| Income tax at the federal statutory rate | % | % | % | % | ||||||||||||
| Statutory U.S. federal income tax (recovery) provision | ( | ) | ||||||||||||||
| S Corporation benefits | ( | ) | ||||||||||||||
| State margin tax | ||||||||||||||||
| Non-deductible expense | ||||||||||||||||
| Other adjustments | ||||||||||||||||
| Total | $ | ( | ) | $ | $ | $ | ||||||||||
| F-22 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 14 — TAXES (continued)
Corporate Income Taxes (continued)
The Company’s deferred tax assets and liabilities consist of the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for credit loss | $ | $ | ||||||
| Property and equipment | ||||||||
| Lease liability – operating | ||||||||
| Lease liability – financing | ||||||||
| Other temporary difference | ||||||||
| Warranty liabilities | ||||||||
| Return liabilities | ||||||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities: | ||||||||
| Right of use assets – operating | ( | ) | ( | ) | ||||
| Right of use assets – financing | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Deferred tax assets, net | $ | $ | ||||||
NOTE 15 — SHAREHOLDERS’ EQUITY
Common Shares
Massimo Group is a company that was established on October 10, 2022 under the laws of the State of Nevada. Based on the Company’s Articles of Incorporation, the authorized number of common stock was shares of common stock with par value of $, and common shares were issued on June 1, 2023. The authorized number of preferred stock was shares of preferred stock with par value of $, and preferred shares were issued. All share information included in these consolidated financial statements have been retroactively adjusted for the Reorganization as if such reduce par value and common shares issuance occurred on the first day of the first period presented. During the three and nine months ended September 30, 2024 , the Company issued and shares of its common stock with par value of $.
As of September 30, 2024 and December 31, 2023, and common shares were outstanding, respectively, with par value of $.
| F-23 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 15 — SHAREHOLDERS’ EQUITY (continued)
Initial Public Offering
On
April 4, 2024, the Company closed its IPO of shares of its common stock at an IPO price of $ per share for aggregate gross
proceeds of approximately $
Common Shares Issued for Service
On
June 18, 2024, the Company signed a consulting agreement (the “Consulting Agreement”) with TJCM Asset Management LLC
(“TJCM”) to provide strategic consulting and financial advisory services to the Company for twelve months from June 18,
2024. As partial of consideration for the services, TJCM is entitled to receive shares of the Company’s common stock
equivalent to a value of $
calculated by the valuation price defined as average closing price of the Company’s shares of common stock for the five
consecutive trading days immediately preceding the effective date of the Consulting Agreement. On June 21, 2024, the Company issued
shares of common stock to TJCM as the prepayment of $
Representative’s Warrants
Pursuant
to the Underwriting Agreement, the Company issued to the Representative and its designee warrants (the “Representative’s
Warrants”) to purchase
Management
determined that these warrants meet the requirements for equity classification under ASC 815-40 because they are indexed to their own
shares and meet the requirements for equity classification. The warrants were recorded at their fair value on the date of grant as a
component of shareholders’ equity. The fair value of these warrants was $
As
of September 30, 2024,
For the three and nine months ended September 30, 2024, the effect of potential shares of common stock from the unexercised options, unexercised warrants, and unvested Restricted Stock Units (“RSU”) are included in the computation of diluted net earnings per share. As a result, a total of unvested RSU were included in the computation of weighted average number of common shares for the nine months ended September 30, 2024, and the computation of diluted loss per share does not assume the exercise of the Company’s outstanding unvested RSU impact due to loss position for the three months ended September 30, 2024.
For the three and nine months ended September 30, 2023, the Company has no stock options, warrants or RSU issued and no impact on diluted earnings per share.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net (loss) income attributable to the Company | $ | ( | ) | $ | $ | $ | ||||||||||
| Weighted average number of common shares outstanding – basic | ||||||||||||||||
| Dilutive securities – unvested RSU | ||||||||||||||||
| Weighted average number of common shares outstanding – diluted | ||||||||||||||||
| (Loss) earnings per share – basic | $ | ) | $ | $ | $ | |||||||||||
| (Loss) earnings per share – diluted | $ | ) | $ | $ | $ | |||||||||||
| F-24 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 — EMPLOYEE STOCK PLANS
Equity Incentive Plans
On May 22, 2024, the Company’s Board approved the 2024 Equity Inventive Plan (“2024 Plan”) and Restricted Stock Units (“RSUs”) Award Agreements. The 2024 Plan and RSUs Adward Agreement authorized the award of stock options, RSUs to employees and directors. As of September 30, 2024 , approximately RSUs were granted, RSUs were forfeited and RSUs were exercised under the 2024 Plan.
The Company recorded $, $, $ and $ stock-based compensation expense in connection with RSUs for three and nine months ended September 30, 2024 and 2023, respectively.
Number of RSUs | Weighted Average Grant Date Fair Value | |||||||
| Granted | ||||||||
| Cancelled | ( | ) | ||||||
| Exercised | ( | ) | ||||||
| Outstanding September 30, 2024 | $ | |||||||
| Exercisable, September 30, 2024 | $ | |||||||
Options
On May 22, 2024, the Company signed a stock option agreement with Mr. David Shan, the Chief Executive Officer and two other executives of the Company, in connection with the 2024 Plan.
As part of the compensation, the Company agrees to grant Mr. Shan options to purchase up to common shares under Incentive Stock Option (“ISO”) plan, at an exercise price of $ per share. . The aggregate fair value of the options granted to Mr. Shan was $. The fair value has been estimated using the Black-Scholes pricing model with the following weighted-average assumptions: market value of underlying common shares at time of grant of $; risk free rate of % and %; expected term of years; exercise price of the options of $; volatility of %; and expected future dividends of $. These options will expire on .
The Company also granted Mr. Shan options to purchase up to common shares, at an exercise price of $per share under Nonqualified Stock Option (“NSO”) plan. The aggregate fair value of the options granted to Mr. Shan was $. The fair value has been estimated using the Black-Scholes pricing model with the following weighted-average assumptions: market value of underlying common shares at time of grant of $; risk free rate of % and %; expected term of years; exercise price of the options of $; volatility of %; and expected future dividends of $. These options will expire on .
The Company also granted two executives options to purchase up to common shares, at an exercise price of $ per share under ISO and NSO plans. . The aggregate fair value of the options granted to these two executives was $. The fair value has been estimated using the Black-Scholes pricing model with the following weighted-average assumptions: market value of underlying common shares of $; risk free rate of % and %; expected term of years; exercise price of the options of $; volatility of %; and expected future dividends of $. These options will expire on .
The Company recorded $, $, $ and $ stock-based compensation expense in connection with options for three and nine months ended September 30, 2024 and 2023, respectively.
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Life in Years | ||||||||||
| Granted | ||||||||||||
| Cancelled | - | |||||||||||
| Exercised | - | |||||||||||
| Outstanding September 30, 2024 | $ | |||||||||||
| Exercisable, September 30, 2024 | $ | - | ||||||||||
NOTE 18 — COMMITMENTS AND CONTINGENCIES
Contingencies
The Company may be involved in certain legal proceedings, claims and disputes arising from the commercial operations, which, in general, are subject to uncertainties and in which the outcomes are not predictable. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Although the Company can give no assurances about the resolution of pending claims, litigation or other disputes and the effect such outcomes may have on the Company, the Company believes 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 Company’s consolidated balance sheets or results of operations or liquidity as at September 30, 2024 and December 31, 2023, except the one 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 $
| F-25 |
MASSIMO GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 19 — SEGMENT REPORTING
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, and is identified on the basis of the internal financial reports that are provided to and regularly reviewed by the Company’s chief operating decision maker in order to allocate resources and assess performance of the segment.
Management
of the Company concludes that it has only
The Company’s CEO reviews consolidated results when making decisions about allocating resources and assessing performance of the Company, rather than by product types or geographic area; hence the Company concluded it has only one reporting segment.
The following table presents sales by product categories for the three and nine months ended September 30, 2024 and 2023, respectively:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| UTVs, ATVs and e-bikes | $ | $ | $ | $ | ||||||||||||
| Pontoon Boats | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
NOTE 20 — SUBSEQUENT EVENTS
The Company evaluated all events and transactions that occurred after September 30, 2024 up through the date the Company issued these condensed consolidated financial statements, and unless disclosed below, there are not any material subsequent events that require disclosure in these condensed consolidated financial statements.
| F-26 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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. |
| 1 |
| ● | 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 | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 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 | 2023 | |||||||||||||||||||||||
| Amount | As % of Sales | 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.
| 3 |
Revenue by Type
| For the three months ended September 30, | ||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||
| Revenue category | Revenue | % of total Revenue | 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:
For the three months ended September 30, 2024 | For the three months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Category | Cost of revenue | Gross profit | Gross profit % | 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.
| 4 |
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.
| 5 |
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
| For the nine months ended September 30, | ||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||
| Amount | As % of Sales | 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
| For the nine months ended September 30, | ||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||
| Revenue category | Revenue | % of total Revenue | 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.
| 6 |
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:
For the Nine Months Ended September 30, 2024 | For the Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Category | Cost of revenue | Gross profit | Gross profit % | 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.
| 7 |
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.
| 8 |
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.
| 10 |
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.
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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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this item.
Item 4. Controls and Procedures.
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or any of our officers or directors in their corporate capacity.
Item 1A. Risk Factors
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities.
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits, Financial Statement Schedules.
The following documents are filed as exhibits to this Report.
EXHIBIT INDEX
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Massimo Group | ||
| Date: November 14, 2024 | /s/ David Shan | |
David Shan Chief Executive Officer | ||
| (principal executive officer) | ||
| Date: November 14, 2024 | By: | /s/ Yunhao Chen |
| Yunhao Chen | ||
| Chief Financial Officer | ||
| (principal financial and accounting officer) |
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