BWMG 10-K
Brownie's Marine Group, Inc (BWMG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(MARK ONE)
| Annual Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 |
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TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs.
You should read thoroughly this Annual Report with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements including those made in Part I. Item 1A. Risk Factors appearing elsewhere in this Report. Other sections of this Report include additional factors, which could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, 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. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by applicable law.
PART I
| Item 1. | Business. |
Unless specifically set forth to the contrary, when used in this report references to the “Company,” “we,” “our,” “us,” and similar terms refers to Brownie’s Marine Group, Inc., a Florida corporation, and its wholly owned subsidiaries, Trebor Industries, Inc., a Florida corporation (“Trebor”) doing business as Brownie’s Third Lung, Brownie’s High Pressure Compressor Services, Inc. a Florida corporation (“BHP”) doing business as LW Americas (“LWA”), BLU3, Inc., a Florida corporation (“BLU3”), Submersible Systems, Inc., a Florida corporation (“SSI”), doing business as Spare Air and Live Blue, Inc. (“LBI”), a Florida corporation.
Overview
The Company, through its wholly owned subsidiaries, designs, tests, manufactures and distributes tankless dive systems, rescue air systems and yacht-based self-contained underwater breathing apparatus (“SCUBA”) air compressor and nitrox generation fill systems and acts as the exclusive distributor for North and South America for Lenhardt & Wagner GmbH (“L&W”) compressors in the high-pressure breathing air and industrial gas markets. The Company is also the exclusive United States and Caribbean distributor for Chrysalis Trading CC, a South African manufacturer of fitness and dive equipment, doing business as Bright Weights (“Bright Weights”), of a dive ballast system produced in South Africa.
On September 3, 2021, the Company, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Submersible Acquisition, Inc., a Florida corporation incorporated in 2017, and wholly owned subsidiary of the Company (“Acquisition Sub”), Submersible Systems, Inc., a Florida corporation (“Submersible” or “SSI”), and Summit Holdings V, LLC, a Florida limited liability company (“Summit”) and Tierra Vista Group, LLC, a Florida limited liability company (“Tierra Vista” and, together with Summit, the “Sellers”), the owners of all of the capital stock of Submersible, pursuant to which Acquisition Sub merged with and into Submersible (the “Merger”), and Submersible, the surviving corporation, became a wholly owned subsidiary of the Company.
Submersible is a manufacturer of high-pressure tanks and redundant air systems for the military and recreational diving industries, based in Huntington Beach, California and sells its products to governments, militaries, private companies and the dive industry throughout the world.
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On February 13, 2022 the Company formed LBI, which is being developed as a full retail, guided tour and training model utilizing the technology developed by BLU3 to provide new users and interested divers a guided tour experience, training, and the ability to purchase all of their diving and watersports needs.
On May 2, 2022, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Gold Coast Scuba, LLC, a Florida limited liability company (“Gold Coast Scuba”), Steven M. Gagas and William Frenier, the sole members of Gold Coast Scuba (together, the “LLC Members”) and LBI. Pursuant to the terms of the Asset Purchase Agreement, LBI acquired substantially all of Gold Coast Scuba’s assets and assumed certain non-material liabilities of the business associated with these assets. In addition, LBI assumed the lease for the premises for Gold Coast Scuba.
The Company has five subsidiaries focused on various sub-sectors of our industry as described below:
| ● | Brownie’s Third Lung | Surface Supplied Air (“SSA”) | |
| ● | BLU3, Inc. | Ultra-Portable Tankless Dive Systems | |
| ● | LW Americas | High Pressure Gas Systems | |
● ● |
Submersible Systems, Inc. | Redundant Air Tank Systems Live Blue, Inc. | Guided Tours |
Our wholly owned subsidiaries do business under their respective trade names on both a wholesale and retail basis from our headquarters and manufacturing facility in Pompano Beach, Florida, and a manufacturing facility in Huntington Beach, California.
Surface Supplied Air Products
Our Third Lung systems have been the market leader in gasoline powered, high-performance and more recently in the battery powered SSA diving systems. Taking full advantage of our proprietary compressor system, a series of traditional “fixed speed” electric compressors were developed for the built-in-boat market in 2005. In 2010, we introduced our variable-speed battery powered hookah system which provides divers with gasoline-free all day shallow diving experiences. These systems provide performance and runtimes for up to 3 hours by utilizing a variable speed technology that controls battery consumption based on diver demand.
In 2022, we continued to expand our dealer network and our marketing efforts with both the consumer and our network of dealers. The Company continues to pursue distributors and dealers outside of the United States in order to diversify the seasonality as well as geography risks. Additionally, we continue to pursue more aggressively the boat builder market to offer our SSA systems as an option on newly built boats, expanding our market beyond the traditional consumer markets for our products.
Our SSA products include:
● Tankless Dive Systems: The Company produces a line of tankless dive products, commonly called hookah or recreational SSA systems. These systems allow one to four divers to enjoy the marine environment up to a depth of 45 feet without the bulk and weight of conventional SCUBA gear. We believe that the removal of barriers to entry into the sport of diving and the reduction of complicated and bulky SCUBA gear invites a broader range of the general public to participate more actively and enjoyably at their own pace and schedule. Our product is designed to reduces the effort required for its transport and use while exploring, cruising or traveling.
A line of land-based systems is available for light-duty commercial applications that demand portability and performance. In addition to the gasoline-powered units and the variable speed battery powered units, a series of AC electric powered systems is also available for light to commercial use. Powered by battery for portability or household current for unlimited dive duration, these units are used primarily by businesses that work in aquatic maintenance and marine environments.
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● BIAS (Boat Integrated Air Systems): The Company developed several tankless products and complimentary accessories that it believes makes boat diving easier. The BIAS battery powered tankless kit allows boat builders, dealers and end users to seamlessly install a pre-packaged kit directly into the boat and our E-Reel, a level-winding battery powered hose reel system, provides compact storage of up to 150 feet of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. In addition to supplying air to divers, BIAS may be used for supporting air horns, inflating boat fenders/water toys and activating pneumatically operated doors.
Ultra-Portable Tankless Dive Systems
Through our wholly owned subsidiary BLU3, we develop and market a next generation electric, surface supplied air shallow dive system that is completely portable to the user. The BLU3 line currently consists of two models, NEMO and NOMAD, targeting specific performance levels and price points.
NEMO dive systems are currently sold in various countries through Amazon, and also through dealers worldwide. NEMO, designed to be the world’s smallest dive system is capable of taking a diver to 10 feet for 60 to 90 minutes on one charge of its lithium-ion battery. NEMO is portable and its batteries are FAA compliant for airline travel.
NOMAD dive system (“NOMAD”) began shipping in the third quarter of 2021 and is currently sold to consumers via our website, Amazon and through our network of dealers worldwide. The NOMAD is highly portable and expands dive capability to up to 30 feet. NOMAD has been marketed through BLU3’s internet presence and marketing campaigns as well as at industry and other trade shows across the country.
BLU3 continues to innovate in the SSA sector and currently expects to introduce a new product to its line-up in 2023.
We believe the BLU3 product lines are changing the way that people get into the water and explore the next atmosphere. The units are ultra-portable and can travel with the consumer to their adventures, wherever they may be.
High Pressure Gas Systems
Through our wholly-owned subsidiary LW Americas, we design, manufacture, sell and install SCUBA tank fill systems for on-board yacht use under the brand “Yacht-Pro™”. Our systems provide complete diving solutions for yachts, including nitrox systems which allow yacht owners to fill tanks with oxygen enriched air on board. The Yacht-Pro™ compressor systems offer a completely marine-prepared, variable frequency drive (“VFD”) driven, automated alternative to other compressors on the market. We also design complete dive lockers, mixed gas production and distribution systems, and the Nitrox Maker™. Nitrox is oxygen-enriched air, which reduces the effects of nitrogen on divers and is the industry standard for dive professionals. The Nitrox Maker™ continuously generates oxygen rich breathing gas directly from low-pressure air with no stored oxygen or other gases required onboard. Our light duty compressor, the new Yacht Pro Essential is specifically designed as a turn-key kit for the boat builders and is optimized to integrate to onboard power systems and withstand the marine environment with all components and hardware impervious to spray from the elements. The Yacht Pro™ series contains models for both medium-duty applications, such as recreational divers and small groups, and heavy-duty use as found on research vessels, commercial operations and live-aboard dive boats. All Yacht Pro™ models come with the variable speed frequency drive reducing the initial start-up power demand typically associated with high pressure compressor systems.
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In August 2017, we entered into a five-year exclusive distribution agreement with L&W, which agreement automatically renews for successive five-year terms unless terminated as provided for in the agreement. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean. We are conducting this business direct to end-users and establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries under the brand name “L&W Americas/LWA”.
We are exclusively developing a sales, distribution and service capability to assist L&W with completing a worldwide network of L&W’s agencies and service centers.
In addition to breathing air compressors and related peripheral equipment, L&W also offers compressors, storage and purification systems to meet the high-pressure requirements for natural gas filling stations, and high-pressure inert gases such as argon, helium and nitrogen for industrial applications including welding and laser cutting, and for general laboratory use.
We believe the product lines from L&W, will allow LW Americas to offer high quality, competitive products into the first responder and industrial market that utilize compressed air. Our goal will be to build a network of jobbers, dealers, installers and high-pressure compressor distributors by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product original equipment manufacturer (“OEM”) integration relationships.
Redundant Air Tank Systems
In September 2021, the Company acquired SSI to further expand its product offerings and manufacturing capabilities. SSI has been manufacturing redundant air systems for recreational divers, private companies and militaries throughout the world for more than 40 years. Their state-of-the-art manufacturing facility in Huntington Beach, California is equipped to add to the machining and product development capabilities of the Company.
The SSI acquisition gives the Company access to a world-wide base of in excess of 400 dealers and distributors, GSA contracting capability, as well as the direct source for the redundant air needs for our Brownie’s Third Lung and BLU3 diving equipment and expands warehousing capabilities, reducing freight costs for both sets of customers.
SSI continues to innovate their technologies to meet changing military and commercial needs and is in development of the next generation of their Helicopter Emergency Egress Device (“HEED”) product line, specifically designed for aircraft and military vehicle use. Additionally, SSI has found use for their products in the medical field and continues to develop customer relationships in that area to grow revenue and diversify its product and customer portfolio.
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In February 2022, the Company incorporated LBI to begin its expansion into the retail, training and guided tour market. The Company’s vision for LBI is to become a fully integrated retail experience where the Company’s unique products can be showcased, training can be offered, and a tourist model created. LBI will provide experienced based activities for the consumer in the various watersport activities it sells. In addition, LBI aims to provide training in those activities with the goal to have the consumer purchase the equipment, particularly the unique technologies provided by BLU3, from its retail stores. LBI looks to provide the full Live Blue experience for those consumers ready to enjoy all things watersports.
In May 2022, LBI acquired the assets of Gold Coast Scuba, a dive retail and training facility based in Lauderdale-By-The-Sea, Florida. This retail location is the base in which the Live Blue brand will be developed.
Diving and Snorkeling Industry
The Sports, Fitness Industry Association (“SFIA”) estimated there were 2.7 million participants in the U.S. scuba diving market in 2022. According to a report published by SFIA in early 2023. The study further stated that the participation rate by casual divers increased 22% in 2022.
In contrast, the SFIA study indicated that participation in snorkeling in 2022 was 7.7 million in the U.S.
The Company has entered the tourist market via a guided tour program within LBI that is currently intended to act as an incubator for a scalable franchise model. The Company believes that the guided tour model is an important building block in introducing its battery powered diving products to the consumer market. Additionally, this model will not only give consumers the opportunity to “try before you buy”, but also provide experiential training for the consumer to increase enjoyment and safety of our diving products.
Yachting Industry
The global luxury yacht market is estimated to be $8.91 billion in 2022 and expected to reach $9.38 billion in 2023 according to Allied Market Research and is poised to grow at a compound annual growth rate (“CAGR”) of 5.4% from 2022 to 2030 to reach $13.6 billion, according to Research and Markets.com, a market research firm, in their industry report dated April, 2022. The Company’s BIAS systems have been designed with this industry in mind. The Company markets directly to the yachting industry by leveraging its relationships with large yacht servicing companies, yacht builders and yacht brokerages.
The recreational sailing and boating market and yachting industries also continue to grow. Grandview Research estimates that the recreational boating market was valued at $44.5 billion in 2022 and is expected to grow at a CAGR of 5.4% through 2030.
High Pressure Compressor Line
According to Allied Market Research report published in February 2018, the North American high pressure compressor market is $880 million growing at an estimated CAGR of 3%.
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The Company expects to continue to distribute L&W compressors through its YachtPro, and BIAS systems, while continuing to focus on the expansion of its distribution into non-marine related distribution channels that the Company believes should positively impact its market reach.
Intellectual Property
Trade Names
The Company either owns or has licensed from entities in which Robert Carmichael, our Chairman, has an ownership interest, the following registered and unregistered trade names, trademarks and service marks: Brownie’s Third Lung™, browniedive.com, Brownie’s, Brownie’s Third Lung oval symbol, browniedive, YachtPro, NitroxMaker™, BLU3, diveBLU3.com, BLU3 Nemo, BLU3-Vent, Submersible Systems, Spare Air, HEED 3, Snorkelator, easy dive, spareair.com, HELO, RES, Gold Coast Scuba, fast float rescue harness, tankfill.com, browniestankfill, browniestankfill.com, browniespublicsafety.com, browniespublicsafety, Peleton Hose System, Twin-Trim, and Kayak Diving Hose Kit.
The Company owns the following patents:
| Patent number | Description | Issued Date | Expiration Date | Owned by | ||||
| 10,758,246 | Abdominal Aortic Tourniquet | 9/1/2020 | 3/17/2034 | Trebor Industries, Inc. | ||||
| 9,782,182 | Abdominal Aortic Tourniquet | 10/10/2021 | 10/26/2033 | Trebor Industries, Inc. | ||||
| 9,351,737 | Abdominal Aortic Tourniquet | 5/31/2016 | 3/2/2034 | Trebor Industries, Inc. | ||||
| 11,265,625 | Automated Self-Contained Hooka system with unobtrusive aquatic data recording | 3/1/2022 | 10/30/2039 | BLU3, Inc. | ||||
| 11,077,924 | System for adjusting pressure limits based on depth of diver(s) | 8/3/2021 | 3/20/2039 | Brownie’s Marine Group, Inc. |
| Application number | Description | Filed Date | Owned by | |||
| 17/683,502 | Automated Self-Contained Hooka system with unobtrusive aquatic data recording | 3/1/2022 | BLU3, Inc. | |||
| 17/389,648 | System for adjusting pressure limits based on depth of diver(s) | 7/30/2021 | Brownie’s Marine Group, Inc. |
License Agreements
On April 6, 2018, the Company entered into a patent license agreement (the “STS Agreement”) with Setaysha Technical Solutions, LLC (“STS”) pursuant to which the Company licensed certain intellectual property, including patent rights, non-patent rights and know-how from STS for use in our ultra-portable tankless dive system products. Under the STS Agreement, the Company paid an initial license fee in April 2018 through the issuance of 759,422 shares of common stock with a fair value of $30,000. The STS Agreement further provides for royalties based on annual net revenues. On December 31, 2019, the Company entered into Addendum No. 1 to the STS Agreement (“Addendum No. 1”) which amended the payments due upon the first commercial sale of Nemo. Upon entering into Addendum No. 1, $8,250 was paid to STS in cash and $8,250 was paid on January 10, 2020. On February 6, 2020, the Company issued 828,221 shares of common stock with a fair value of $18,635 in satisfaction of $13,500 for the first commercial sale of the Nemo dive system. On June 30, 2020, the Company entered into Addendum No. 2 to the STS Agreement concerning STS’s assistance related to designing and commercializing certain diving products. Addendum No. 2 provides for a minimum yearly royalty of $60,000, or $15,000 per fiscal quarter, beginning in December 2019 and increasing by 2.15% per year. With the introduction of the NOMAD in the last quarter of 2021, the Company is obligated to pay an additional annual minimum royalty of $60,000 per year for the years 2022, 2023 and 2024, which increased the quarterly minimum royalty by $15,000 per quarter. On November 1, 2022 the Company issued to the designees of STS 1,155,881 shares of common stock with a fair value of $30,000 in accordance with the STS Agreement.
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Marketing
Print Literature, Public Relations, and Advertising
We have in-house graphic design capability to create and maintain product support literature, catalogs, mailings, web-based advertising, newsletters, editorials, advertorials, and press releases. We also, from time-to-time, target specific markets by selectively advertising in journals and magazines that we believe reach our potential customers. In addition, we strive to issue press releases, newsletters, and social media postings periodically to keep the public informed of our latest products and related endeavors.
Tradeshows
In 2021, the Company was represented directly or indirectly at The Palm Beach Boat Show, The Annapolis Motor and Sailing Shows, The Fort Lauderdale Boat show, Diving Equipment and Manufacturing show. In 2022, the Company expanded its marketing reach via tradeshows by attending all shows attended in 2021, The Seattle Boat Show, The Dubai Boat Show, and the HAI Heli-Expo, along with various other trade and industry shows.
Websites
We sell our products online through our and our subsidiaries websites and many of our products are marketed on some of our customers’ websites. In addition to these websites, numerous other websites have quick links to the Company’s website. Our products are available both domestically and internationally. Internet sales and inquiries are also supported by the Company.
Product Research and Development
Research and development costs for the year ended December 31, 2022 and December 31, 2021 and were $18,393 and $75,439, respectively, none of which cost is borne directly by customers.
Government Regulation
The SCUBA industry is self-regulating; therefore, the Company is not subject to government industry specific regulation. However, SSI, our tank manufacturing company is subject to Department of Transportation (“DOT”) regulation and testing of each of their tanks. The Company strives to promote safe diving practices within the industry and believes it is at the forefront of self-regulation through responsible diving practices. The Company is subject to all regulations applicable to “for profit” companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its facility have been obtained.
Distribution/Customers
The Company has historically been predominantly a wholesale distributor to retail dive stores, marine stores, boat dealers, builders, and the US and international militaries. Currently, the Company generates a significant amount of direct-to-consumer sales via its websites and its relationship with Amazon via BLU3, BTL and SSI. Retail sales customers include boat owners, recreational divers, commercial divers and pilots. The Company sells products to three entities owned by the brother of Robert Carmichael, the Company’s Chairman, and two companies owned by Mr. Carmichael. Combined sales to these six entities for 2022 and 2021, represented 11.4% and 17.9%, respectively, of total net revenues.
The majority of L&W high pressure compressors and NitroxMaker™ systems have been sold to commercial dive stores, dive operators (resorts and liveaboard dive boats), yacht builders, yacht owners, and high-pressure compressor distributors.
Sales of YachtPro™ compressor systems have been split between retail sales directly to consumers and wholesale sales to OEM boat builders/resellers/brokers.
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Suppliers/Raw Materials
Principal raw materials for our business include machined parts such as rods, pistons, bearings, hoses, regulators, compressors, engines, high-pressure valves and fittings, sewn goods, and various plastic parts including pans, covers, intake staffs, and quick release connections which are typically purchased on a per order basis. Most materials are readily available from multiple vendors. Some materials require greater lead times than other materials. Accordingly, we strive to avoid out of stock situations through careful monitoring of these inventory lead times, and through avoiding single source vendors whenever possible. Principle suppliers include Lenhardt & Wagner GmbH, Xometry, Inc., Burgess Manufacturing Corp, Bix International, Inc., Carrol Stream Motor Company, Zhejiang Xiangyang Gear Electormechan, Co, Tian Li He Technology Co, Ltd, Xiamen Feipeng Insdustry Co. Ltd. and Catalina Cylinders, Inc.
Competition
We consider the most significant competitive factors in our business to be innovation, lifestyle, fair prices, shopping convenience, variety of available products, knowledgeable and prompt customer service and rapid and accurate order fulfillment. We currently have one significant competitor within the BTL business model, Airline by JSink, Inc. There are a variety of competitors, including Aqua Lung America, Coltri America and Bauer Compressors, Inc. in our redundant air tank systems and high-pressure compressor systems sales. In 2022 competition has surfaced in the BLU3 business segment from companies such as AirBuddy, and a few other very low-cost Chinese manufactured competitors.
Overall, we are operating in a moderately competitive environment. The price structure for all the products we distribute compares favorably with the majority of our competitors based on quality and available features. We believe that our key competitive advantage is our ability to create new products and, in some cases, new markets.
Employees
We currently have thirty-six full-time employees, and four part-time employees.
Seasonality
Our product lines have historically been seasonal in nature in the United States. The peak season for the diving related products, BTL, BLU3, SSI and LBI is the second and third quarters of the year. The peak season for high pressure products is typically the fourth and first quarters of the year. The Company continues to address the seasonality of the business by expanding its reach beyond the traditional markets in the U.S. to other areas of the world that may somewhat offset the seasonality.
| Item 1A. | Risk Factors. |
Investing in our common stock involves risks. In addition to the other information contained in this report, you should carefully consider the following risks before deciding to purchase our common stock. The occurrence of any of the following risks might cause you to lose all or a part of your investment. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to “Cautionary Statement Regarding Forward-Looking Statements” for more information regarding forward-looking statements.
FINANCIAL RISKS
We have a history of losses.
We incurred net losses of $1,892,891 and $1,588,467, respectively, for the year ended December 31, 2022 and 2021. On December 31, 2022 we had an accumulated deficit of $16,437,495. While our revenues increased 37.7% for the year ended December 31, 2022 from 2021, and our gross profit margin increased from 30.3% in 2021 to 32.6% in 2022, our gross profit is not sufficient to cover our operating expenses of $4,644,596 and $3,742,262 for the twelve months ending December 31, 2022 and 2021, respectively. Operating expenses include non-cash stock compensation expenses of $962,474 and $1,154,801 for the years ending December 31, 2022 and 2021, respectively. In the year ended December 31, 2022, our selling, general and administrative expenses, increased 19.8% from 2021. There are no assurances that we will be able to increase our revenues to a level which supports profitable operations and provide sufficient capital to pay our operating expenses and other obligations as they become due.
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Our auditors have raised substantial doubts as to our ability to continue as a going concern.
Our independent registered public accounting firm has included an explanatory paragraph expressing substantial doubt relating to our ability to continue as a going concern in its report on our audited consolidated financial statements for the year ended December 31, 2022. We have recurring losses from operations and had a net loss of approximately $1,732,000 and have used approximately $678,400 in net cash in our operations in the year ended December 31, 2022 as well as an accumulated deficit of approximately $16,437,000. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our principal sources of liquidity are sales of equity and debt securities. We do not have any firm commitments to raise additional working capital. As we are a small company who stock is quoted on the OTC Markets, we expect to encounter difficulty in raising working capital upon terms and conditions satisfactory to us, if at all. If we are unable to obtain sufficient funding or generate sufficient revenues, our business and results of operations will be adversely affected, and we may be unable to continue as a going concern.
We rely on revenues from related parties.
We generate revenues from sales to related parties, which accounted for 11.4% of our net revenues in 2022 and 17.9% of our net revenues in 2021. The loss of revenues from these related parties would have a material adverse impact on our business, results of operations and financial condition in future periods.
We depend on licenses with Robert Carmichael, our Chairman, who owns much of our intellectual property.
The Company has licensed from entities in which Robert Carmichael, our Chairman, has an ownership interest, the following registered and unregistered trade names, trademarks and service marks: Brownie’s Third Lung™, browniedive.com, Brownie’s, Brownie’s Third Lung oval symbol, browniedive, YachtPro. Failure to maintain such licenses with Mr. Carmichael would have a material adverse effect on the Company’s financial condition.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.
Our management has previously determined that we did not maintain effective internal controls over financial reporting. For a detailed description of these material weaknesses and our remediation efforts and plans, see Part II, Item 9A-Controls and Procedures of this Annual Report. If the result of our remediation of the identified material weaknesses is not successful, or if additional material weaknesses are identified in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further implement expensive and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness of our financial reports which could have an adverse effect on our stock price and potentially subject us to litigation.
The U.S. Consumer Products Safety Commission (“CPSC”) has issued a voluntary recall for one of our products.
On December 22, 2022, the CPSC issued a voluntary recall notice for the Nomad tankless dive system, which is distributed by BLU3, Inc. As part of the recall procedure, the CPSC has approved the Company’s proposed remedy for the recall and BLU3 will begin to receive units back from consumers to repair affected Nomad units. The Company has evaluated the costs of this recall and has deemed it necessary to set a reserve for those costs related to the recall of $160,500. However, the Company is unable to currently calculate the full financial impact to the Company over the long term, and whether it may have a material adverse impact on the financial condition of the Company in future periods.
BUSINESS AND OPERATIONAL RISKS
We are dependent upon certain key members of management and qualified employees and consultants.
Our success depends to a significant degree on the abilities and efforts of our senior management. and on our ability to attract, retain and motivate highly qualified marketing, technical, engineering and sales personnel and consultants. These people are in high demand and often have competing employment opportunities. The labor market for skilled employees is highly competitive and we may lose key employees or be forced to increase their compensation to retain these people. Employee turnover could significantly increase our recruitment, training and other related employee costs. The loss of key personnel, or the failure to attract qualified personnel, could result in delays in development or fulfillment of any current strategic and operational plans and have a material adverse effect on our business, financial condition or results of operations.
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Our failure to obtain and enforce intellectual property protection may have a material adverse effect on our business.
Our success depends in part on our ability, and the ability of our patent and trademark licensors, and entities owned and controlled by Robert Carmichael to obtain and defend our intellectual property, including patent protection for our products and processes, preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing the proprietary rights of third parties, both in the United States and in other countries. Despite our efforts to protect our intellectual proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection.
Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future.
Our intellectual property rights are valuable, and any inability to adequately protect, or uncertainty regarding validity, enforceability or scope of them could undermine our competitive position and reduce the value of our products and brand, and litigation to protect our intellectual property rights may be costly.
We attempt to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements. As a result, our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets to us. Various events outside of our control pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in countries in which our products are sold. Also, although we have registered our trademark in various jurisdictions, our efforts to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Litigation might be necessary to protect our intellectual property rights and any such litigation may be costly and may divert our management’s attention from our core business. An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation. Although we are not aware of any of such litigation, we have no insurance coverage against litigation costs, and we would be forced to bear all litigation costs if we cannot recover them from other parties. All foregoing factors could harm our business, financial condition, and results of operations. Any unauthorized use of our intellectual property could harm our operating results.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined against us, could adversely affect our business and subject us to significant liability to third parties.
Our success mainly depends on our ability to use and develop our technology and product designs without infringing upon the intellectual property rights of third parties. We may be subject to litigation involving claims of patent infringement or violations of other intellectual property rights of third parties. Holders of patents and other intellectual property rights potentially relevant to our product offerings may be unknown to us, which may make it difficult for us to acquire a license on commercially acceptable terms. There may also be technologies licensed to us and that we rely upon that are subject to infringement or other corresponding allegations or claims by third parties which may damage our ability to rely on such technologies. In addition, although we endeavor to ensure that companies that work with us possess appropriate intellectual property rights or licenses, we cannot fully avoid the risks of intellectual property rights infringement created by suppliers of components used in our products or by companies we work with in cooperative research and development activities. Our current or potential competitors may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products. The defense of intellectual property claims, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming, and may significantly divert the efforts and resources of our technical personnel and management. These factors could effectively prevent us from pursuing some or all of our business operations and result in our customers or potential customers deferring, canceling or limiting their purchase or use of our products, which may have a material adverse effect on our business, financial condition and results of operations.
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We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop the infringement or the misappropriation of our intellectual property rights. Many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
We rely on third party vendors and manufacturers.
We deal with suppliers on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued supply or pricing. In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production facility capacity. Historically, we have purchased enough inventories of products or their substitutes to satisfy demand. However, unanticipated failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us to curtail or cease operations. Certain of our product components are manufactured in China. Due to Covid, and the logistics challenges existing currently, we have experienced delays and may experience continued delays in our supply chain, including component products, which are manufactured in China. Our senior management will continue to monitor our situation on a daily basis; however, we expect that these factors and others we have yet to experience may materially adversely impact our company, its business and operations for the foreseeable future.
We are dependent on consumer discretionary spending.
The success of our business depends largely upon a number of factors related to consumer spending, including current and future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which effects demand for our products. Any significant deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect our financial results. The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher fuel prices; declines in the value of investments and residential real estate; and increases in federal and state taxation can all negatively affect our results. There can be no assurance that in this type of environment consumer spending will not decline, thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely affected by continuing or future downturns in the economy, boating industry, or dive industry. If declines in consumer spending on recreational marine accessories and dive gear are other than temporary, we could be forced to curtail or cease operations.
Government regulations may impact us.
The SCUBA industry is self-regulating, therefore, from an industry perspective the Company is not subject to government industry specific regulation. However, our tank manufacturing operation is required to comply with DOT, as well as being approved to sell in various countries outside of the United States. The Company strives to be a leader in promoting safe diving practices within the industry and is at the forefront of self-regulation through responsible diving practices. The Company is subject to all regulations applicable to “for profit” companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive regulations in the future, which could force us to curtail or cease operations.
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Our failure to adequately protect personal information that is collected on our website and our third-party payment platforms could have a material adverse effect on our business.
A wide variety of local, state, national, and international laws, directives and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data (including with respect to the European Union’s General Data Protection Regulation and U.S. state laws such as the California Consumer Privacy Act). These data protection and privacy-related laws and regulations continue to evolve and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions and increased costs of compliance. Our failure to comply with applicable laws and regulations, or to protect such data, could result in enforcement actions against us, including fines, imprisonment of company officials and public censure, claims for damages by end-customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing end-customers and prospective end-customers), any of which could have a material adverse effect on our operations, financial performance, and business. Changing definitions of personal data and personal information, within the European Union, the United States, and elsewhere may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. The evolving data protection regulatory environment may require significant management attention and financial resources to analyze and modify our information technology infrastructure to meet these changing requirements all of which could reduce our operating margins and impact our operating results and financial condition.
Bad weather could have an adverse effect on operating results.
Our business is significantly impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably rough surf, may decrease boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may not be indicative of results of any future period.
The manufacture and distribution of recreational diving equipment could result in product liability claims.
We, like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or side effects, if any. We do not obtain indemnification from parties supplying raw materials, manufacturing our products or marketing our products. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our operations and financial conditions, which could force us to curtail or cease our business operations.
The worldwide impact from the COVID-19 pandemic may negatively impact our business.
While we have been relatively successful in navigating such impact to date, we have previously been affected by temporary manufacturing closures, and employment and compensation adjustments. There are also ongoing related risks to our business depending on the progression of the pandemic, and recent trends in certain regions have indicated potential returns to limited or closed government functions, business activities and person-to-person interactions. Global trade conditions and consumer trends may further adversely impact us and our industries. For example, pandemic-related issues have exacerbated port congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to expedite delivery of critical parts. Similarly, increased demand for personal electronics has created a shortfall of microchip supply, and it is yet unknown how we may be impacted. We cannot predict the duration or direction of current global trends from this pandemic, the sustained impact of which is largely unknown, is rapidly evolving and has varied across geographic regions. Ultimately, we continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly.
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SHAREHOLDER RISKS
The issuance of shares of our common stock upon exercise of our outstanding options, warrants, convertible debt and Series A Convertible Preferred Stock may cause immediate and substantial dilution to our existing shareholders.
We presently have vested and unvested options, warrants, convertible debt and Series A Convertible Preferred Stock that if exercised would result in the issuance of an additional 266,722,242 shares of our common stock. The issuance of shares upon exercise of options will result in dilution to the interests of other shareholders.
Our common stock may be affected by limited trading volume and may fluctuate significantly.
Our common stock is quoted on the OTCQB tier of the OTC Markets. There is a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’ ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.
Our company is a voluntary filer with the SEC and in the event that we cease reporting under the Exchange Act, investors would have limited information available to them about the company.
While we voluntarily file reports with the SEC under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we do not have a class of securities registered under Section 12(g) of the Exchange Act. To the extent that our duty to file Exchange Act reports has automatically suspended under Section 15(d) of the Exchange Act, as a voluntary filer, we may elect to cease reporting under the Exchange Act at such time which would limit the information available to investors and shareholders about the company.
Our common stock is deemed to be “penny stock,” which may make it more difficult for investors to sell their shares due to suitability requirements.
Our common stock is deemed to be “penny stock” as that term is defined under the Exchange Act. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges. Our common stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.
Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
Our officers and directors are able to control the Company.
Our officers and directors and their affiliates own or have the right to vote a majority of the common stock of our company. As a result, they have significant influence over the management and affairs of the Company and control over matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets. Their interests may differ from the interests of other shareholders and thus result in corporate decisions that are disadvantageous to other shareholders. This concentration of ownership and influence in management and board decision-making could also harm the price of our capital stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our capital stock (whether by making a tender offer or otherwise) or otherwise attempting to obtain control of our company.
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| Item 1B. | Unresolved Staff Comments |
Not applicable to smaller reporting companies.
| Item 2. | Properties. |
Pompano Beach, FL
Our Pompano Beach, Florida facilities are comprised of two adjoining properties totaling approximately 16,566 square feet of leased space the bulk of which is factory and warehouse space. The initial 37-month lease covering approximately 8,541 square feet commenced on September 1, 2014. The lease provided for payment of a $5,367 security deposit, base rent of approximately $4,000 per month over the term of the lease plus sales tax, and payment of 10.76% of annual operating expenses for common areas maintenance, subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, which extended the term of the lease for an additional 84 months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term.
On November 11, 2018, the Company entered a new 69-month lease agreement for an additional 8,025 square feet adjoining its existing facility in Pompano Beach, Florida. The new lease provided for a $6,527 security deposit, an initial base rent of approximately $4,848 per month escalating at 3% per year during the term of the lease plus Florida state sales tax and payment of 10.11% of the building’s annual operating expenses for common area maintenance, subject to adjustment as provided in the lease.
Huntington Beach, California
Our Huntington Beach, California facility is comprised of a leased 13,000 square foot free standing building of which the bulk of the square footage is warehouse and manufacturing space. The initial lease, signed in January, 2013 was for five years with a base rent of $7,410.
On January 4, 2018, the Company entered into a sixty-one month term lease renewal for its facility in Huntington Beach, California, commencing on February 1, 2018. Base rent is approximately $9,300 per month for the first 12 months with a 2.5% annual escalation throughout the term. The Company paid a security deposit of $8,450 with the initial lease that the landlord continues to hold.
On September 14, 2022, SSI entered into a sixty-month lease renewal for its facility in Huntington Beach, California commencing on February 1, 2022. Base rent is approximately $17,550 per month for the first 24 months with an annual escalation clause of 3.0% thereafter. Obligations under the lease are guaranteed by the Company. The Company paid an additional security deposit of $10,727 upon entering into the lease.
On September 30, 2022, SSI entered into a sublease of its facility in Huntington Beach, California with Camburg Engineering, Inc.(“Tenant”) commencing October 1, 2022, The term of the sublease is through December 31, 2023 with a base monthly rent of $2,247 for the first twelve months with an 3% annual escalation thereafter. The Tenant also pays a monthly common area maintenance of $112. The Tenant provided a security deposit of $2,426 upon entering into the sublease.
Lauderdale-By-The-Sea, Florida
On May 2, 2022, LBI, entered into a lease assignment agreement with Gold Coast Scuba, LLC and Vicnsons Realty Group, LLC whereby LBI is the assignee to the remainder of the lease for approximately 1,600 square feet of retail space located at 259 Commercial Blvd., Suites 2 and 3 in Lauderdale-By-The Sea, Florida. The lease is in its third year of a three-year term and has a $2,816 per month base rent. The lease provides an option to renew for an additional term of two years with an increase of base rent by 3.5%
We believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.
| Item 3. | Legal Proceedings. |
There are no pending legal proceedings to which we are a party or in which any director, officer or affiliate of ours, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.
| Item 4. | Mine Safety Disclosure. |
Not applicable.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The Company’s common stock is quoted on the OTCQB tier of the OTC Markets under the symbol “BWMG”. On March 28, 2023, the closing sale price of our common stock was $0.02395 per share.
Holders of Common Stock
As of March 28, 2023, the Company had approximately 448 shareholders of record.
Dividends
We have not paid any dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings, if any, to finance the growth of the business. We cannot assure you that we will ever pay cash dividends. Whether we pay any cash dividends in the future will depend on our financial condition, results of operations and other factors that the board of directors will consider.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information regarding our equity compensation plans as of December 31, 2022:
Equity Compensation Plan Information
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans | |||||||||
| Plans approved by our shareholders (1) | 3,467,647 | .0400 | 21,532,353 | |||||||||
| Plans not approved by shareholders (2) | 234,971,520 | .0361 | - | |||||||||
(1) Represents stock options granted to employees under the Equity Compensation Plan as described in Item 10 of this Annual Report. 25,000,000 shares are reserved for issuance under the Plan.
(2) Represents (i) five-year options granted to each of Robert Carmichael, Mikkel Pitzner and Blake Carmichael to purchase an aggregate of 35,295,237 shares of common stock at $0.018 per share, (ii) a three-year option to purchase 2,000,000 shares of common stock at $0.0229 per share to Jeffrey Guzy, a former director, (iii) a three-year option to purchase 2,000,000 shares of common stock at $0.0229 per share to Biz Launch Advisors, LLC, a formal financial consultant, (iv) a three-year option to purchase an aggregate of 125,000,000 shares of common stock at $0.045 per share and a to Robert Carmichael, (v) a five-year option to purchase 5,434,783 shares of common stock at $0.0184 per share, a four-year option to purchase an aggregate of 30,000,000 shares of common stock at $0.0184 per share and a five year option to purchase 2,403,846 shares of common stock at $.0401 per share, and a five-year option to purchase 3,968,254 at $.0252 per share to Christopher Constable (vi) a five-year option to purchase an aggregate of 21,759,400 shares of common stock at $0.0399 per share to Blake Carmichael, (vii) a five-year option to purchase 7,110,000 shares of common stock at $0.0531 per share to Christeen Buban, President of SSI.
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Recent Sales of Unregistered Securities
Except as set forth below, there were no sales of equity securities during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K filed by the Company.
On November 1, 2022, the Company issued 1,155,881 shares of common stock as required by the STS agreement for relating milestones reached for sales of the Nemo and Nomad dive systems.
On December 13, 2022, the Company issued 5,714,285 units to Charles F. Hyatt, with each unit consisting of one share of common stock and a two-year common stock purchase warrant to purchase one share of common stock at an exercise price of $0.0175 per share in consideration of $100,000.
On December 31, 2022, the Company issued 198,204 shares of common stock to the holders of convertible notes for payment of interest for the three months ending December 31, 2022.
The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe are exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof and/or Regulation D promulgated thereunder.
| Item 6. | Reserved |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Annual Report. Actual future results may be materially different from what we expect. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by federal securities and any other applicable law.
The management’s discussion and analysis of our financial condition and results of operations are based upon our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Recent Developments
On December 22, 2022, the CPSC issued a recall notice for the Nomad tankless dive system, which is distributed by BLU3, Inc. As part of the recall procedure, the CPSC has approved the Company’s proposed remedy for the recall and BLU3 will begin to receive units back from consumers to repair affected Nomad units. Additionally, BLU3 will re-start its manufacturing process for the Nomad tankless dive system utilizing the material and design changes approved during the recall process, and immediately re-establish the product in all of its sales channels. The Company has set an allowance for expenses related to this recall of $160,500.
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Impact of COVID-19 Pandemic
The Company has previously been affected by temporary manufacturing closures, and employment and compensation adjustments. The market continues to suffer from the impacts of the pandemic via supply chain shortages and freight delays. The continued freight delays have and will likely continue to result in additional expenses to expedite delivery of critical parts. Additionally, increased demand for personal electronics has created a shortfall of microchip supply which are used in our battery powered products, and it is yet unknown how we may be impacted.
We continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly.
Results of Operations
Years Ended December 31, 2022 and 2021
Overall, our net revenues increased 37.7% in 2022 from 2021, which included an increase of 48.6% in net revenue from sales to third parties and a decrease of 12.0% in sales to related parties. Our cost of revenues in 2022 was 67.4% of our total net revenues as compared to 69.7% in 2021. Included in our cost of revenues are royalty expenses we pay to Robert Carmichael which decreased 18.4% in 2022 from 2021. We reported a gross profit margin of 32.6% in 2022 as compared to 30.3% in 2021.
Net Revenues
The following tables provide net revenues, costs of revenues, and gross profit margins for our segments for 2022 and 2021.
| Year Ended December 31, | ||||||||||||
| 2022 | 2021 | % change | ||||||||||
| Legacy SSA Products | $ | 2,601,622 | $ | 2,897,210 | (10.2 | )% | ||||||
| High Pressure Gas Systems | 1,118,081 | 616,039 | 81.5 | % | ||||||||
| Ultra-Portable Tankless Dive Systems | 3,052,192 | 2,241,359 | 36.2 | % | ||||||||
| Redundant Air Tank Systems | 1,592,601 | 472,771 | 236.9 | % | ||||||||
| Guided Tour Retail | 212,876 | - | 100.0 | % | ||||||||
| Total revenue | $ | 8,577,372 | $ | 6,227,379 | 37.7 | % | ||||||
Cost of revenues as a percentage of net revenues
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Legacy SSA Products | 74.6 | % | 74.6 | % | ||||
| High Pressure Gas Systems | 61.8 | % | 62.7 | % | ||||
| Ultra-Portable Tankless Dive Systems | 61.2 | % | 64.1 | % | ||||
| Redundant Air Tank Systems | 69.7 | % | 74.5 | % | ||||
| Guided Tour Retail | 82.2 | % | - | |||||
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Gross profit margins
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Legacy SSA Products | 25.4 | % | 25.4 | % | ||||
| High Pressure Gas Systems | 38.3 | % | 37.3 | % | ||||
| Ultra-Portable Tankless Dive Systems | 38.8 | % | 35.9 | % | ||||
| Redundant Air Tank Systems | 30.3 | % | 25.4 | % | ||||
| Guided Tour Retail | 17.8 | % | - | |||||
SSA Products segment
The decrease in net revenues of 10.2% from this segment for the year ended December 31, 2022 as compared to the year ended December 31, 2021 can be attributed to decrease in revenue to the dealer base in 2022. Related party dealer revenue decreased by 13.9% for the year ended December 31, 2022 which is demand that shifted from BTL to BLU3 according to the customer. Other parts of the dealer base chose to remain conservative on their inventory balances through the end of the third quarter of 2022 and all of fourth quarter of 2022 due to economic uncertainties. BTL also saw a decrease in affiliate sales as these customers were not as active in the marketplace in 2022 as they were in prior years. These decreases were offset by an increase of 4.0% in direct-to-consumer sales from our website and factory store, as compared to 2021. Other Customers increased 201.4% for 2022, from the year ended December 31, 2021, as sales through Amazon are included in Other Customers, and BTL experienced increased activity from Amazon with the Bright Weights line of products now available on that website.
Our aggregate costs of revenues as a percentage of net revenues in this segment remained stable at 74.6% for year ended December 31, 2022 and the year ended December 31, 2021. The Company was able to offset cost increases from 2021 to 2022 for the components in their finished goods with price increases at all levels. Additionally, the change is the customer mix also allowed the Company to retain more margin at a time of rising costs.
Revenue channels for this segment are set forth below. Direct to Consumer represents items sold via our website, trade shows and walk-ins to our factory store. Dealer revenue represents sales to customers that have dealer agreements that typically operate with the lowers margin. Affiliates are resellers of our products that do not have formal dealer agreements. Other represents all other sales, inclusive of Amazon sales, which do not fit in any of the categories.
| Net Revenue | % | Cost of Sales as a % of Net Revenue | Margin as a % of Net Revenue | |||||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Direct to Consumer (website included) | $ | 931,505 | $ | 895,348 | 4.0 | % | 71.9 | % | 62.5 | % | 28.1 | % | 37.5 | % | ||||||||||||||
| Dealers | 1,538,460 | 1,888,233 | (18.5 | )% | 77.3 | % | 79.9 | % | 22.7 | % | 20.1 | % | ||||||||||||||||
| Affiliates | 63,467 | 97,222 | (34.7 | )% | 35.1 | % | 61.6 | % | 64.9 | % | 38.4 | % | ||||||||||||||||
| Other | 68,190 | 16,407 | 315.6 | % | 89.0 | % | 201.4 | % | 11.0 | % | (101.4 | )% | ||||||||||||||||
| Total | $ | 2,601,622 | $ | 2,897,210 | (10.2 | )% | 74.6 | % | 74.6 | % | 25.4 | % | 25.4 | % | ||||||||||||||
High Pressure Gas Systems segment
Sales of high-pressure breathing air compressors had an 81.5% increase for the year ended December 31, 2022 as compared to the year ended December 31, 2021. All sectors showed improvement over the previous year. As a percentage of revenue, the direct-to-consumer sector, which included yacht owners and direct to dive stores, had the most significant increase year over year of 154.3%. The demand from dive stores in the Caribbean increased as the region has recovered from COVID and began to re-invest into new equipment for their facilities. The reseller sector improved 90.2% year over year from 2021 to 2022. This can be directly attributed to the addition of a new distribution customer in Mexico. The OEM sector also showed an increase of 23.3% for the year ended December 31, 2022, as compared to the year ended December 31, 2021, as the LWA continued to supply boat and yacht builders with their equipment.
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Our costs of revenues as a percentage of net revenues in this segment improved from 62.7% to 61.7% for the years ended December 31, 2022 and 2021. This can be attributed to the change is sales mix with increasing direct to consumer sales which tend to carry higher margins.
| Net Revenue | Cost of Goods Sold as a % of Net Revenue | Gross Margin as a % of Revenue | ||||||||||||||||||||||||||
| 2022 | 2021 | % change | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Resellers | $ | 660,178 | $ | 347,034 | 90.2 | % | 67.3 | % | 63.6 | % | 32.7 | % | 36.4 | % | ||||||||||||||
| Direct to Consumers | 245,097 | 96,380 | 154.3 | % | 53.1 | % | 68.9 | % | 46.9 | % | 31.1 | % | ||||||||||||||||
| Original Equipment Manufacturers | 212,806 | 172,625 | 23.3 | % | 54.4 | % | 57.3 | % | 45.6 | % | 42.7 | % | ||||||||||||||||
| Total | $ | 1,118,081 | $ | 616,039 | 81.5 | % | 61.7 | % | 62.7 | % | 38.3 | % | 37.3 | % | ||||||||||||||
Ultra-Portable Tankless Dive Systems
Net revenues in this segment increased 36.2% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. In early November 2022, BLU3 recognized a flaw in the Nomad dive system that could result in a loss of air for the diver and filed with the CSPC for a voluntary recall and stopped selling the Nomad dive system until a fix could be created. The recall application with the fix was approved by the CPSC in January 2023. Notwithstanding the foregoing recall, BLU3’s sales increased in the year ended December 31, 2022 from the year ended December 31, 2021. The increase in revenue can be attributed to the introduction of the Nomad dive system and the strong sales in all categories in 2022, as compared to 2021
The largest contribution to the revenue increases for the year ended December 31, 2022 as compared to the prior year, is the growth in direct to consumer revenues from the Company’s website and trade shows, accounting for 31.7% growth and sales via the Amazon channel accounting for 95.3% growth.
Our aggregate cost of revenue from this segment as a percentage of net revenues for the year ended December 31, 2022 decreased to 61.2% as compared to 64.1% for the year ended December 31 2021. The decrease can be attributed to efficiencies in both the product cost and labor cost in building the NOMAD.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin as a % of Net Revenue | ||||||||||||||||||||||||||
| 2022 | 2021 | % change | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Direct to Consumer | 1,244,030 | 944,493 | 31.7 | % | 78.6 | % | 54.3 | % | 21.4 | % | 45.7 | % | ||||||||||||||||
| Dealers | 799,369 | 780,388 | 2.4 | % | 40.4 | % | 64.5 | % | 59.6 | % | 35.5 | % | ||||||||||||||||
| Amazon | 1,008,794 | 516,478 | 95.3 | % | 56.1 | % | 81.4 | % | 43.9 | % | 18.6 | % | ||||||||||||||||
| Total | $ | 3,052,193 | $ | 2,241,359 | 36.2 | % | 61.2 | % | 64.1 | % | 38.8 | % | 35.9 | % | ||||||||||||||
Redundant Air Tank Systems
Net revenue in the Redundant Air Tank Systems System segment was $1,592,602 for the year ended December 31, 2022. Revenues for the twelve months ended December 31, 2021 includes only four months of activity as SSI was acquired in September, 2021. Dealers continue to be SSI’s largest customer sector accounting for 66% of total revenues. Except for profit margin for repairs, dealer margins continue to be the lowest margin sector as SSI sees this sector as the volume driver and sets prices to help enable dealers to generate profits. SSI has a worldwide customer base that includes (1) commercial accounts with aircraft requiring redundant air systems for their pilots and passengers, such as helicopters flying to oil rigs located in bodies of water (2) government accounts that are typically domestic and international military customers with egress systems (3) dealer accounts that are resellers including, international distributors to the military, commercial account or dive shops, and domestic and international dive shops that carry a spare air product (4) direct to consumer sales which are online sales and sales via trade shows direct to consumer and (5) Company provided repairs and warranty repairs to all sectors.
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| Net Revenue | Cost of Sales as a % of Net Revenue | Margin as a % of Net Revenue | ||||||||||||||||||||||||||
| 2022 | 2021 | % change | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Commercial | $ | 215,506 | 88,876 | 142.5 | % | 45.8 | % | 55.5 | % | 54.2 | % | 44.5 | % | |||||||||||||||
| Dealers | 1,051,046 | 287,877 | 265.1 | % | 73.2 | % | 89.0 | % | 26.8 | % | 11.0 | % | ||||||||||||||||
| Government | 130,832 | 42,875 | 205.1 | % | 43.1 | % | 25.6 | % | 56.9 | % | 74.4 | % | ||||||||||||||||
| Repairs | 29,493 | - | N/A | 271.2 | % | 0.0 | % | -171.2 | % | - | ||||||||||||||||||
| Direct to Consumers (Website) | 165,725 | 53,143 | 211.8 | % | 63.5 | % | 68.2 | % | 36.5 | % | 31.8 | % | ||||||||||||||||
| Total | $ | 1,592,602 | 472,771 | 236.9 | % | 69.7 | % | 74.6 | % | 30.3 | % | 23.2 | % | |||||||||||||||
Guided Tours and Retail
The guided tour and retail segment is a new segment as of May 2022 and is derived from retail revenues of LBI. Revenue in this segment currently primarily includes retail sales, and tours and lessons. Retail sales represent the sales of product at the retail facility, while tours and lessons represent revenue derived from diving excursions and lessons.
Margins for this segment are suppressed for the year ended December 31, 2022 as cost of goods sold include the amount overpaid for the inventory at acquisition, as well as a portion of the costs of closing the transaction.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin as a % of Net Revenue | ||||||||||||||||||||||||||
| 2022 | 2021 | % change | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Retail Sales | $ | 130,295 | - | N/A | 70.8 | % | - | 29.2 | % | - | ||||||||||||||||||
| Tours and Lessons | 82,581 | - | N/A | 100.3 | % | - | -0.3 | % | - | |||||||||||||||||||
| Total | $ | 212,876 | - | N/A | 82.2 | % | - | 17.8 | % | - | ||||||||||||||||||
Operating Expenses
Operating expenses, consisting of selling, general and administrative (“SG&A”) expenses and research and development costs, are reported on a consolidated basis for our operating segments. Aggregate operating expenses increased 24.1% for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Selling, General & Administrative Expenses (SG&A Expenses)
SG&A increased by 26.2% for the years ended December 31, 2022 as compared to the year ended December 31, 2021. SG&A during those years are as follows:
| Expense Item | 2022 | 2021 | % Change | |||||||||
| Payroll | $ | 1,946,985 | $ | 1,144,020 | 70.2 | % | ||||||
| Non-Cash Stock based compensation – options | 998,474 | 1,150,801 | (13.2 | )% | ||||||||
| Professional Fees | 340,221 | 469,206 | (27.5 | )% | ||||||||
| Advertising | 499,441 | 343,232 | 45.5 | % | ||||||||
| All Others | 841,081 | 559,564 | 50.3 | % | ||||||||
| Total SG&A | $ | 4,626,202 | $ | 3,666,823 | 26.2 | % | ||||||
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Payroll increases for the year ended December 31, 2022 can be attributed to an increase in the BLU3 payroll which contributed 29.4% of the increase. BLU3 added customer service and engineering staff as well as increased pay for key employees in 2022. The addition of a full year of SSI payroll comprised approximately 21.4% of the payroll increase. The balance of the increase can be attributed to the hiring of a social media/marketing manager, and several other operating and administrative personnel to support the growth in each of our divisions.
Non-Cash Stock compensation expenses decreased 13.2% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The decrease can be attributed to fewer options being issued during the year as well as certain vesting criteria not being met in 2022 that were met in 2021.
Professional fees, representing legal, accounting and other professional fees, which we paid in a combination of cash, common stock, or stock options, decreased 27.5% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. While accounting fees increased, 75.8% in 2022, the lack of acquisition in 2022 resulted in a reduction of legal fees of 43.2%. Additionally, other professional fees saw a decrease as two contract employees became salaried employees in 2022.
Advertising expense increased 45.5% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. 74.8%% of the increase can be directly attributed to an increase of direct, internet and Amazon marketing by BLU3. The addition of SSI attributed 19.9% of the increase in advertising expense for the year ended December 31, 2022. These increases are offset by decreases in Trebor advertising expenses associated with the agreement with the Company’s provider of marketing and advertising, which was entered into in the third quarter of 2020, and was not renewed as of July 31, 2021.
Other expenses increased 50.3% for the year ended December 31, 2022 as compared the year ended December 31, 2021. The primary driver to the increase in other expenses is the addition of a reserve for expenses related to the 2022 recall of the Nomad dive system. This reserve accounted for 57.0% of the overall increase in other expenses.
Research & Development Expenses (R&D Expenses)
R&D expenses for the year ended December 31, 2022 decreased 75.6% as compared to the year ended December 31, 2021. The decrease can be primarily attributed to the completion of the R&D for BLU3’s NOMAD in late 2021.
Other Income
For the year ended December 31, 2022 other income and expenses totaled approximately $42,500 in interest expense as compared to approximately $264,200 in other income for the year ended December 31, 2021. Interest expense for the year ended December 31, 2022 was approximately $42,500 as compared to approximately $21,500 for the year ended December 31, 2021. This increase can be attributed to the increase in convertible debt related to the SSI acquisition, as well as the financing of tools and dyes for both the SSI and BLU3 operations. Other income for the year ended December 31, 2021 included a gain on the forgiveness of Trebor and SSI PPP loans totaling approximately $275,800 and the forgiveness of a loan payable of $10,000.
Liquidity and Capital Resources
We had cash of $484,427 on December 31, 2022.The following table summarizes total current assets, total current liabilities and working capital at December 31, 2022 as compared to December 31, 2021.
| December 31, 2022 | December 31, 2021 | % of Change | ||||||||||
| Total Current Assets | $ | 3,265,714 | $ | 2,966,432 | 10.1 | % | ||||||
| Total Current Liabilities | $ | 1,792,151 | $ | 1,396,197 | 28.4 | % | ||||||
| Working Capital | $ | 1,473,563 | $ | 1,570,235 | (6.2 | )% | ||||||
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The increase in our current assets on December 31, 20221 from December 31, 2021 primarily reflects increases in inventory of approximately $527,000. The increase in inventory is offset by decreases in cash of approximately $158,700, accounts receivable of approximately $33,300 and prepaid assets of approximately $35,300 for the year ended December 31, 2022. The increase in inventory was due to inventory in BLU3 that was procured to continue to produce the Nomad dive system through the end of 2022, and to ensure enough inventory through the holidays, as well as the addition of the inventory in connection with the Gold Coast Scuba asset acquisition by LBI.
The increase in our total current liabilities for the year ended December 31, 2022 as compared to the year ended December 31, 2021 reflects an increase in accounts payable and accrued liabilities of approximately $85,100, an increase in customer deposits of approximately $23,600, an increase of approximately $185,000 in other liabilities, primarily attributed to the reserve for Nomad recall expenses of $160,500, and an increase of approximately $36,800 in operating lease liabilities with the signing of the SSI lease renewal, and an increase in related party demand note, net, related to funds lent to LBI.
Summary Cash Flows
Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (678,356 | ) | $ | (769,467 | ) | ||
| Net cash provided by (used in) investing activities | $ | (62,164 | ) | $ | 517,701 | |||
| Net cash provided by financing activities | $ | 581,805 | $ | 549,722 | ||||
Net cash used in operating activities for 2022 was primarily the result of a net loss of $1,892,891, an additional cash used to fund inventory of $443,421, as well as the change in long term lease liability of $242,690 for the year ended December 31, 2022 as compared to December 31, 2021. The cash used related to net loss was offset by $998,474 in non-cash stock related compensation expenses and $47,501 non-cash expenses for shares issued for professional fees during the year ended December 31, 2022.
Net cash used in investing activities for the year ended December 31, 2022 of $67,466 reflects primarily the cash used to acquire the assets of Gold Coast Scuba of $30,000 as well as the cash used to purchase fixed assets, net of debt totaling approximately $21,125, and fixed asset purchases of $16,341. This compares to cash provided by the purchase of SSI of $541,378 and cash used for the purchase of fixed assets of $23,677 for the year ended December 31, 2021.
Net cash provided by financing activities for the year ended December 31, 2022 reflects $305,000 in proceeds related to the sale of the Company’s common stock and units comprised of stock and warrants and $265,000 in proceeds from the exercise of warrants. The increase in net cash was offset by repayments of notes payable and other debt of $54,976. This is compared to cash provided from the sale of common stock and units of $640,000 and the repayment of debt and notes payable totaling $90,278 for the year ended December 31, 2021.
Going Concern
Our audited consolidated financial statements included in this Annual Report were prepared assuming we will continue as a going concern, and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. The report of our independent registered public accounting firm on our audited consolidated financial statements for the year ended December 31, 2022 includes an explanatory paragraph stating the Company has net losses and an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. If the Company is unable to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back, delay or cease operations, liquidate assets and possibly seek bankruptcy protection. We have a history of losses, and an accumulated deficit of $16,437,495 as of December 31, 2022. Despite a working capital surplus of $1,473,563 at December 31, 2022, the continued losses and cash used in operations raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to continue to increase revenues, control expenses, raise capital, and to continue to sustain adequate working capital to finance its operations. The failure to achieve the necessary levels of profitability and cash flows would be detrimental to the Company. We are continuing to engage in discussions with potential sources for additional capital, however, our ability to raise capital is somewhat limited based upon our revenue levels, net losses and limited market for our common stock. If we fail to raise additional funds when needed, or if we do not have sufficient cash flows from operations, we may be required to scale back or cease certain of our operations.
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Critical Accounting Estimates
The Company’s management discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales and expenses, and related footnote disclosures. On an on-going basis, the Company evaluates its estimates for product returns, bad debts, inventories, income taxes, warranty obligations, litigation and other subjective matters impacting the financial statements. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are estimated based on estimates of losses related to customer accounts receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required allownace balances.
Inventories
The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the allowance for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory allowances are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required allownace balances.
Deferred Taxes
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.
Warranties
The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.
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Off balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Not required for smaller reporting companies.
| Item 8. | Financial Statements and Supplementary Data. |
Our consolidated financial statements appear beginning at page F-1.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under Exchange Act. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. The design of any disclosure controls and procedures also is based in part upon 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. Based on their evaluations as of the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of continuing material weaknesses in our internal control over financial reporting described below. A material weakness is a deficiency, or combination of deficiencies, which results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected.
Our management, including our Principal Executive Officer and Principal Financial Officer, have evaluated the effectiveness of the design and operations of our disclosure controls and procedures (defined in Exchange Act Rules 13a-15(c) and 15d-15(e)) as of December 31, 2022 and based upon the such evaluation, have concluded that the disclosure controls and procedures as of December 31, 2022 were not effective due to the material weaknesses identified below.
To address these material weaknesses, management performed additional procedures to ensure the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. The framework used by management in making that assessment was the criteria set forth in the documents entitled “2013 Internal Controls – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, during the period covered by this report, such internal controls and procedures were not effective as of December 31, 2022 and that material weaknesses in internal controls over financial reporting described below existed.
A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCOAB”) Audit Standard No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses:
| ● | There are an insufficient number and lack of qualified accounting department and administrative personnel and support; | |
| ● | There are insufficient written policies and procedures to ensure the correct application of accounting and financial reporting with respect to GAAP and SEC disclosure requirements; | |
| ● | Insufficient segregation of duties, oversight of work performed and lack of controls in our finance and accounting functions due to limited personnel; | |
| ● | The Company’s systems that impact financial information and disclosures have ineffective information technology controls; | |
| ● | Inadequate controls surrounding revenue recognition, to ensure that all material transactions and developments impacting the financial statements are reflected and properly recorded; and | |
| ● | Evaluation of disclosure controls and procedures was not sufficiently comprehensive due to limited personnel. |
Internal Control Remediation Efforts.
Subject to sufficient resources, management expects to remediate the material weaknesses identified above as follows:
| ● | Management has leveraged and will continue to leverage experienced consultants to assist with ongoing GAAP and SEC compliance requirements. We intend to expand our finance department through the hiring of a certified public accountant to strengthen the segregation of duties, internal controls and enhance our current staff. | |
| ● | Segregation of duties will be analyzed and adjusted Company-wide, where possible. The Company is in the process of hiring additional personnel in the accounting department as part of the internal controls implementation and documentation of those controls and procedures. | |
| ● | The Company plans on evaluating various accounting systems to enhance our system controls. |
We will continue to monitor and evaluate the effectiveness of our internal control over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow. We do not, however, expect that the material weaknesses in our disclosure controls will be remediated until such time as we have added to our accounting and administrative staff allowing improved internal control over financial reporting.
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Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our fourth quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information. |
None.
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. |
Not applicable.
PART III
| Item 10. | Directors, Executive Officers, and Corporate Governance. |
The following are the names, ages and positions of our current executive officers and directors.
| Name | Age | Position | ||
| Robert M. Carmichael | 61 | Chairman, President, and Chief Financial Officer and Director | ||
| Christopher H. Constable | 56 | Chief Executive Officer and Director | ||
| Charles F. Hyatt | 54 | Director | ||
| Key Employee | ||||
| Blake Carmichael | 28 | Chief Executive Officer and President of BLU3 |
Our directors are elected for a term of one year and serve until such director’s successor is duly elected and qualified. Each executive officer serves at the pleasure of the Board.
Robert M. Carmichael. Since April 2004, Mr. Carmichael has served as our Chairman and President, and from April 2004 until November 2020 served as our Chief Executive Officer. Mr. Carmichael has served as our Chief Financial Officer since 2017 and a director since 2005. Mr. Carmichael was selected to serve as a director for his general business management experience with specific experience in the diving industry.
Christopher H. Constable. Mr. Constable as served as our Chief Executive Officer and a director since November 2020. Mr. Constable sat on the board of directors of Bon Natural Life, Ltd. (NASDAQ: BON), and served as the Chairman of the audit committee until March, 2022. Prior to joining our company, from August 2020 through the November 2020, Mr. Constable provided business and financial consulting services. From 2003 through February 2020 Mr. Constable served as Chief Financial Officer of John Keeler & Co., Inc., d/b/a Blue Star Foods, a privately held international seafood company which in 2018 merged into Blue Star Foods Corp., a Miami, Florida-based sustainable seafood company (NASDAQ: BSFC). Mr. Constable served as Chief Financial Officer and a director of Blue Star Foods Corp until February 2020. Prior thereto, from 1999 to 2003, Mr. Constable was a consultant at Gateway Capital Corp., a business consulting firm, where he analyzed the financial and reporting capabilities of prospective lending customers with revenues from $10 to $100 million. Additionally, Mr. Constable was involved with loan workouts of facilities that required either liquidation or restructuring to ensure collectability for the financial institutions. From 1990 to 1999, Mr. Constable was a commercial banker at Mercantile Bankshares in Baltimore, Maryland, Finova Capital Corporation and Capital Bank, both in south Florida. Mr. Constable received his B.S. in Finance with an Accounting Minor from the Merrick School of Business at the University of Baltimore in 1989. Mr. Constable was selected to serve as a director for his experience with public companies and over 30 years background in finance and accounting.
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Charles F. Hyatt. Mr. Hyatt has served as a director since March 2019. Mr. Hyatt is involved in the automotive industry and present owner of several franchise car dealerships in Myrtle Beach, South Carolina, including Myrtle Beach Hyundai (since 1999). In the past his ownerships also included Hyatt Buick & GMC (from 2001 to 2022), Myrtle Beach Suzuki (from 2004 until 2012), Sun Coast Mazda and Mitsubishi (from 2001 until 2009), Stone Mountain Chevrolet (from 2001 until 2009. From 1994 to 1997, Mr. Hyatt served as Wholesale Purchase Director with Lamar Ferrel Chevrolet, and from 1991 to 1994 as General Manager of Bob Harris Ford. From 1988 to 1990, Mr. Hyatt was the Demonstration Director of Auto Dialysis, and from 1986 to 1998, the General Manager/Operational Partner of Ken Hyatt Dodge, Chrysler and Plymouth. Since 2013, Mr. Hyatt has owned and operates the Gilligan Island Funland Golf amusement park. Mr. Hyatt sits on the American Cross Heroes committee and is the winner of the Jefferson Award (2017) for his community involvement. Mr. Hyatt was selected to serve on the board of directors for his general business management experience.
Key Employee
Blake Carmichael. Since December 2017, Mr. Carmichael has served as Chief Executive Officer of BLU3. He joined our company in May 2017 as an electrical engineer with a primary focus to develop new battery powered hookah diving products. Mr. Carmichael graduated from Florida Atlantic University in May 2017 with a Bachelor of Science in Electrical Engineering. During college, he worked in 2014 and 2015 as a participant in the University of Central Florida / Lockheed Martin College Work Experience Program as a systems engineer with a focus on testing for infrared imaging systems used in military aircraft. In the summer of 2016, he participated in the Naval Surface Warfare Center’s Naval Research Enterprise Intern Program with a focus on integrating underwater vehicles for survey and recovery at the South Florida Ocean Measurement Facility.
There are no family relationships between any of the executive officers and directors.
Committees of the Board of Directors
We have not established an Audit Committee, Compensation Committee or a Nominating Committee The entire Board participates in the nomination and audit oversight processes and considers executive and director compensation. Given the size of the Company, the entire Board is involved in such decision-making processes. Thus, there is a potential conflict of interest in that our directors and officers have the authority to determine issues concerning management compensation, nominations, and audit issues that may affect management decisions. We are not aware of any other conflicts of interest with any of our executive officers or directors.
We are not a “listed company” under SEC rules and therefore are not required to have an audit committee comprised of independent directors.
Christopher Constable is an “financial expert” within the meaning of the rules and regulations of the SEC.
Compensation of Directors
The following table provides information concerning the compensation paid to our Company’s non-employee director for services rendered as a director during the year ended December 31, 2022.
| Name | Fees
earned or paid in cash ($) |
Stock awards ($) |
Option awards ($) |
Non-equity
incentive plan compensation ($) |
Nonqualified deferred compensation earnings ($) |
All
other compensation ($) |
Total
($) |
|||||||||||||||||||||
| Charles Hyatt | 18,000 | - | - | - | - | - | 18,000 | |||||||||||||||||||||
Delinquent Section 16(a) Reports
Not applicable.
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Code of Ethics
The Company has not as yet adopted a code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions as required by the Sarbanes-Oxley Act of 2002 due to our small size and limited resources and because management’s attention has been focused on matters pertaining to business operations.
Shareholder Communications
Although we do not have a formal policy regarding communications with our Board, shareholders may communicate with the Board by writing to us at Brownie’s Marine Group, Inc., 3001 NW 25th Avenue, Suite 1, Pompano Beach, Florida 33069, Attention: Mr. Christopher H. Constable. Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.
| Item 11. | Executive Compensation |
The following table provides certain information regarding compensation awarded to, earned by or paid to our Chief Executive Officer and the other executive officer with compensation exceeding $100,000 during the year ended December 31, 2022 (each a “Named Executive Officer”).
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($)(1) | Option Awards ($) (1) | No equity incentive plan compensation ($) | Non-qualified deferred compensation earnings ($) | All other compensation ($) | Total ($) | |||||||||||||||||||||||||||
| Robert Carmichael | 2021 | 120,000 | - | - | - | - | 105,474 | (2) | 225,474 | |||||||||||||||||||||||||||
| Chairmen, President and CFO | 2022 | 120,000 | - | - | - | 84,994 | (3) | 204,994 | ||||||||||||||||||||||||||||
| Christopher Constable, | 2021 | 199,474 | - | 98,976 | (4) | - | - | 2,661 | (5) | 301,111 | ||||||||||||||||||||||||||
| CEO | 2022 | 199,255 | 95,969 | (6) | - | - | 5,756 | (5) | 300,980 | |||||||||||||||||||||||||||
| (1) | Represents the aggregate grant date fair value of the shares of our common stock, computed in accordance with ASC Topic 718. The assumptions made in the valuations of the stock awards are included in Note 13 of the notes to our consolidated financial statements. |
| (2) | Represents (i) $18,000 in director compensation (ii) $12,313 in health insurance premiums paid on behalf of Mr. Carmichael, and (iii) an aggregate of $75,161 in royalties paid to an entity controlled by Mr. Carmichael under the terms of a license agreement with the Company. |
| (3) | Represents (i) $18,000 in director compensation (ii) $5,686 in health insurance premiums paid on behalf of Mr. Carmichael, and (iii) an aggregate of $61,308 in royalties paid to an entity controlled by Mr. Carmichael under the terms of a license agreement with the Company. |
| (4) | Represents a five-year option to purchase 2,403,846 shares of common stock. |
| (5) | Represents health insurance premiums paid by the Company on behalf of Mr. Constable. |
| (6) | Represents a five-year option to purchase 3,968,254 shares of common stock. |
| 30 |
Equity Plan
On May 26, 2021, the Company adopted the Company’s Equity Compensation Plan (the “Plan”). The Plan provides for the award of stock options (incentive and non-qualified), stock awards and stock appreciation rights to officers, directors, employees and consultants who provide services to the Company. The terms of awards under the Plan are made by the Administrator of the Plan appointed by the Company’s Board of Directors, or in the absence of an Administrator, by the Board. The Company has reserved 25,000,000 for issuance under the Plan. The term of the Plan is ten years.
Outstanding Equity Awards at December 31, 2022
The table below reflects all equity awards made to each Named Executive Officer that were outstanding on December 31, 2022.
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | |||||||||||||
| Robert Carmichael | 20,761,904 | (1) | - | - | 0.018 | 7/29/2024 | ||||||||||||
| 25,000,000 | (2) | 100,000,000 | - | 0.045 | 4/30/2023 | |||||||||||||
| Christopher | 5,434,783 | (3) | - | - | 0.0184 | 11/5/2025 | ||||||||||||
| Constable | 5,000,000 | (4) | 25,000,000 | - | 0.0184 | 11/5/2024 | ||||||||||||
| 2,403,846 | (5) | - | - | 0.0401 | 11/5/2026 | |||||||||||||
| 3,968,254 | (6) | - | - | 0.0252 | 11/5/2027 | |||||||||||||
| (1) | Options fully vested in January 2020 | |
| (2) | Options vest based upon certain corporate milestones as discussed in Note 13 of the financial statements included in this Annual Report. | |
| (3) | Options fully vested in November 2020 | |
| (4) | Options vest based upon certain corporate milestones as discussed in Note 13 of the financial statements included in this Annual Report. | |
| (5) | Options fully vested in November 2021 | |
| (6) | Options fully vested in November 2022 |
| 31 |
Christopher Constable Employment Agreement
On November 5, 2020, we entered into a three-year employment agreement (the “Constable Employment Agreement”), which agreement will automatically renew for one-year successive terms unless either party notifies the other of its desire to terminate the agreement at least 60 days prior to the then current term. Pursuant to the Agreement, Mr. Constable will serve as our Chief Executive Officer and a director. In consideration for his services, Mr. Constable is entitled to an annual base salary of $200,000, payable in accordance with the customary payroll practices of the Company, and upon execution of the Constable Employment Agreement and on each anniversary thereof, a non-qualified immediately exercisable five-year stock option to purchase that number of shares equal to $100,000 of the value of the Company’s common stock at an exercise price equal to the market price of the common stock on the date of issuance. Pursuant to the Agreement, on November 5, 2020, we issued Mr. Constable an option to purchase 5,434,783 shares of common stock at an exercise price of $0.0184 per share pursuant to an option award agreement and upon the first anniversary we issued Mr. Constable an option to purchase 2,403,846 shares of common stock at an exercise price of $0.0401.
In addition, Mr. Constable is entitled to receive four-year stock options to purchase shares of common stock at an exercise price equal to $0.0184 per share in the amounts listed below based upon the following performance milestones during the term of the Constable Employment Agreement: (i) 2,000,000 shares - if the Company’s total net revenues, as reported in its statement of operations in its financial statements in its filings with the SEC, including as a result of a stock or asset acquisition of a third party (“Net Revenues”) are in excess of $5,000,000, in the aggregate, for four consecutive fiscal quarters; (ii) 3,000,000 shares - if the Net Revenues are in excess of $7,500,000, in the aggregate, for four consecutive fiscal quarters; (iii) 5,000,000 shares - if the Net Revenues are in excess of $10,000,000, in the aggregate, for four consecutive fiscal quarters; and (iv) 20,000,000 shares - if the Company’s common stock is listed on the on NASDAQ or New York Stock Exchange. Mr. Constable is also entitled to participate in all benefit programs the Company offers to its executives, reimbursement for business expenses and three weeks of annual paid vacation.
The agreement may be terminated for “cause” (as defined in the Agreement), upon his death or disability, or by the Company without cause. Furthermore, Mr. Constable may terminate the Agreement for “good reason” (as defined in the agreement). If the Company terminates the agreement for cause, or if it terminates upon Mr. Constable’s death or disability, or if he voluntarily terminates the Agreement, neither Mr. Constable nor his estate (as the case may be) is entitled to any severance or other benefits following the date of termination. If the Company terminates the Agreement without cause or Mr. Constable terminates the Agreement for good reason, the Company is obligated to continue to pay Mr. Constable’s base salary for a period of six months. The Agreement also contains customary confidentiality, non-disclosure and indemnification provisions.
Blake Carmichael Employment Agreement
On August 1, 2021, we entered into a three-year employment agreement with Blake Carmichael (the “Blake Carmichael Employment Agreement”) pursuant to which Mr. Carmichael will continue to serve as Chief Executive Officer of BLU3. In consideration for his services, Blake Carmichael will receive (i) an annual base salary of $120,000, payable in accordance with the customary payroll practices of the Company, and (ii) a cash bonus equal to 5% of the net income of BLU3 payable quarterly, beginning with the first full calendar quarter after the execution of the agreement, and (iii) a non-qualified five-year stock option to purchase 3,759,400 shares of common stock at an exercise price $0.0399, 33.3% of which stock subject to the option vested immediately upon grant, 33.3% vests on the second anniversary and 33.3% vests on the third anniversary of the agreement. In addition, Blake Carmichael was granted a five-year stock option to purchase up to 18,000,000 shares of common stock at an exercise price of $0.0399 per share which vests upon the achievement of certain annual financial metrics as set forth in the Agreement.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Our voting securities consist of our common stock and preferred stock, par value $0.001 per share, designated Series A Convertible Preferred Stock (the “Series A Stock”). Each share of Series A Stock is convertible into one share of our common stock at any time at the option of the holder at a conversion price of $18.23 per share. Holders of our common stock are entitled to one vote for each share held, and holders of our Series A Stock are entitled to 250 votes for each share held. Our common stock and Series A Stock vote together as on any matters submitted to our shareholders for a vote.
| 32 |
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 30, 2023, the number of shares of common stock and Series A Stock beneficially owned by (i) each person, entity or group (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) known to the Company to be the beneficial owner of more than 5% of the outstanding common stock; (ii) each of the Company’s directors (iii) each Named Executive Officer and (iv) all officers and directors as a group. Information relating to beneficial ownership of common stock by our principal stockholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the SEC. Under these rules, a person is deemed to be a beneficial owner of a security if that person directly or indirectly has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to dispose or direct the disposition of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the SEC rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary interest. Except as noted below, each person has sole voting and investment power with respect to the shares beneficially owned and each stockholder’s address is c/o Brownie’s Marine Group, Inc., 3001 NW 25th Avenue, Suite 1, Pompano Beach, Florida 33069. The percentages below are calculated based on 436,949,252 issued and outstanding shares of common stock and 425,000 shares of Series A Stock outstanding as of March 30, 2023.
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class | ||||||
| Named Executive Officers and Directors | ||||||||
| Robert M. Carmichael | 110,006,047 | (1) | 21.7 | % | ||||
| Christopher H. Constable | 16,806,833 | (2) | 3.7 | % | ||||
| Charles F. Hyatt | 164,285,713 | (3) | 36.2 | % | ||||
| All directors and executive officers as a group (three persons) | 228,781,648 | (1)(2)(3) | 53.7 | % | ||||
| 5% or Greater Shareholder | ||||||||
| Joseph Perez 135 Weston Road, Suite 328, Weston, Florida 33326 | 50,000,000 | 11.4 | % | |||||
| Summit Holdings V, LLC 3427 Bannerman Road, Suite D208 Tallahassee, Florida 32312 | 27,032,388 | 6.4 | % | |||||
| Series A Convertible Preferred Stock | ||||||||
| Robert M. Carmichael | 425,000 | 100 | % | |||||
| All directors and executive officers as a group (one person) | 425,000 | 100 | % | |||||
| (1) | Includes: (i) 14,587,190 shares held by 940A Associates, Inc., a corporation over which Mr. Carmichael is the sole owner and has voting and dispositive power; (ii) an aggregate of 23,320 shares issuable upon conversion of 425,000 shares of Series A Stock (iii) options to purchase an aggregate of 20,761,904 shares of common stock at an exercise price of $0.018 per share and (iv) options to purchase an aggregate of 50,000,000 shares of common stock at an exercise price of $0.045. Does not include the voting power over 106,250,000 shares of common stock by virtue of Mr. Carmichael’s beneficial ownership of 425,000 shares of Series A Stock. |
| (2) | Includes (i) options to purchase an aggregate of 10,434,783 shares of common stock at an exercise price of $0.0184 per share, (ii) options to purchase 2,403,846 shares of common stock at an exercise price of $0.0401 per share and (iii) options to purchase 3,968,254 shares of common stock at an exercise price of $.0252 per share. |
| (3) | Includes warrants to purchase an aggregate of 17,142,858 shares of common at an exercise price of $.0175 per share. |
| 33 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
We sell products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, companies owned by the brother of Robert Carmichael. Combined net revenues from these entities for the years December 31, 2022 and 2021, totaled $977,145 and $1,116,085, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2022, were $16,875, $6,773 and $15,532, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2021, were $50,818, $7,195 and $17,779, respectively.
We also sell products to Brownie’s Global Logistics, LLC (“BGL”) and 940 Associates, Inc. (“940 A”), entities wholly-owned by Robert Carmichael. Combined net revenues from these three entities for the years ended December 31, 2022 and 2021 were $4,646 and $245, respectively. In addition, from time to time Mr. Carmichael purchases products from us for his personal use. Accounts receivable from BGL, 940 A and Mr. Carmichael totaled $2,408 at December 31,2022 and $897 at December 31, 2021.
We owed BGL $2,980 and $32,267 at December 31, 2022 and 2021, respectively, which represents purchase of inventory including batteries for Sea Lion (battery operated unit) and Honda engines for our regular gasoline powered units. As of December 31, 2022, the Company also had an amount due of $5,000 to Mr. Carmichael for an advance to BLU3,Inc.
We are a party to an exclusive license agreement, dated February 22, 2005, with 940 A to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. The agreement provides for a royalty to be paid equal to the greater of 2.5% on all sales of Trebor or $15,000 per quarter. Total royalty fees paid to 940 A in the years ended December 31, 2022 and 2021 totaled $61,308 and $75,161, respectively. The Company had accrued royalties of $2,845 and $7,735 for the years ended December 31, 2022 and 2021, respectively.
On September 30, 2022, the Company issued a convertible demand 8% promissory note in the principal amount of $66,793 to Robert Carmichael for funds to meet the working capital needs of LBI. Interest on the note is payable in shares of common stock of the Company at a conversion price equal to the 90 day value weighted average price (“VWAP”) of the Company’s stock prior to the quarterly interest payment date. The note holder may demand payment or convert the outstanding principal at a conversion rate of $0.021 per share at any time. The conversion rate was calculated at a 35% discount to the 90 day VWAP of the Company’s stock as of the date of the note.
On March 25, 2021, the Company issued 27,500,000 shares of common stock to Charles Hyatt, a director, in a private offering for proceeds of $275,000.
On August 1, 2021, we entered into the Blake Carmichael Employment Agreement with Blake Carmichael, Chief Executive Officer of BLU3, and son of Robert Carmichael, the Company’s Chairman, President and a director.
On September 1, 2021, the Company issued 10,000,000 units, each unit (“Unit”) consists of one share of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $0.025 per share to Charles Hyatt a director, in a private offering for proceeds of $250,000.
On September 1, 2021, the Company issued 600,000 Units to Grace Hyatt, the adult child of Charles Hyatt, in a private offering for proceeds of $15,000.
On February 2, 2022, the Company issued Charles Hyatt, a director, 10,000,000 shares upon the exercise of a warrant at $0.025 per share in consideration of $250,000.
On February 2, 2022, the Company issued Grace Hyatt, the adult child of Charles Hyatt, a director, 600,000 shares upon the exercise of a warrant at $0.025 per share in consideration of $15,000.
On March 14, 2022, the Company issued 10,000,000 shares of common stock to Charles Hyatt, a director, upon exercise of a warrant at an exercise price of $0.04 per share for proceeds of $250,000.
On March 14, 2022, the Company issued 600,000 shares of common stock to Grace Hyatt, the adult daughter of Charles Hyatt, a director, upon exercise of a warrant at an exercise price of $0.04 per share for proceeds of $15,000.
On December 13, 2022, the Company issued 5,714,286 shares of common stock and a two-year warrant to purchase 5,714,286 shares of common stock at an exercise price of $0.0175 per share to Charles Hyatt a director, in a private offering for proceeds of $100,000.
Blake Carmichael, the Chief Executive Officer of BLU3 is the son of Robert Carmichael, the Company’s Chairman, President and a director.
Director Independence
The Company has one independent director, Charles Hyatt, who is considered “independent” as defined under Rule 5605 of the Nasdaq Marketplace Rules.
| 34 |
| Item 14. | Principal Accounting Fees and Services. |
The following table shows the fees that were billed for the audit and other services provided by Liggett & Webb, PA for 2022 (until October 10, 2022) and 2021. As of October 10, 2022, Liggett & Webb, P.A. resigned as the independent registered public accounting firm engaged to audit the financial statements of the Company. Also on such date, the Company’s Board of Directors engaged Assurance Dimensions, Inc. to serve as its independent registered public accounting firm to review its Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 and year ended December 31, 2022 year end audit.
| 2022 | 2021 | |||||||
| Audit Fees | $ | 90,040 | $ | 72,900 | ||||
| Audit-Related Fees | - | - | ||||||
| Tax Fees | 2,700 | 2,200 | ||||||
| Other | - | 37,500 | ||||||
| Total | $ | 92,740 | $ | 112,600 | ||||
Audit Fees
Audit fees consist of fees for professional services rendered for the audit of the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K and the review of financial statements included in the Company’s Quarterly Reports on Form 10-Q.
The other fees in 2021 of $37,500 consist of expenses associated with the audit of the Company’s acquisition in September, 2021. Additionally, we incurred tax related fees of $2,700 and $2,200 for the years ended December 31, 2022 and 2021, respectively.
Administration of the Engagement; Pre-Approval of Audit and Permissible Non-Audit Services
We have not yet established an audit committee. Until then, there are no formal pre-approval policies and procedures. The audit and tax fees paid to the auditors with respect to 2022 and 2021 were pre-approved by the entire board of directors.
The
percentage of hours expended on
| 35 |
PART IV
| Item 15. | Exhibits, Financial Statements Schedules |
| 36 |
* Filed herewith
+ Management Contract
| Item 16. | Form 10-K Summary |
None.
| 37 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| Date: March 30, 2023 | Brownie’s marine group, Inc. | |
| By: | /s/ Christopher H. Constable | |
| Christopher H. Constable | ||
| Chief Executive Officer, | ||
| (Principal Executive Officer) | ||
| By: | /s/ Robert M. Carmichael | |
| Robert M. Carmichael | ||
| Chief Financial Officer, | ||
| (Principal Financial and Accounting Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ Robert M. Carmichael | |
| Robert M. Carmichael | |
| Chairman of the Board, President and Chief Financial Officer (Principal Executive Officer) | |
| Date: March 30, 2023 | |
| /s/ Christopher H. Constable | |
| Christopher H. Constable | |
Chief Executive Officer and Director (Principal Executive Officer) | |
| Date: March 30, 2023 | |
| /s/ Charles F. Hyatt | |
| Charles F. Hyatt | |
| Director | |
| Date: March 30, 2023 |
| 38 |
Financial Statements and Supplementary Data
Brownie’s Marine Group, Inc.
Index to Audited Financial Statements
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and Board of Directors of
Brownie’s Marine Group, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Brownie’s Marine Group, Inc. and Subsidiaries (the Company) as of December 31, 2022, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended, and the related consolidated notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company had a net loss of approximately $1,893,000 and cash used in operating activities of approximately $678,000 for the year ended December 31, 2022 as well as an accumulated deficit of approximately $16,437,000 as of December 31, 2022. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of Impairment
The Company is required to test the carrying amount of goodwill at least annually, or more frequently upon the occurrence of certain events. The Company is also required to assess the recoverability of its long-lived assets, including its amortizable intangible assets, whenever certain events occur or circumstances change that may be indicators of impairment. We identified this area as a critical audit matter because the annual goodwill impairment test and the evaluation of recovery of long-lived assets requires significant judgment regarding the evaluation of qualitative factors. Additionally, these assessments also require appropriate determination of reporting units and asset groups, including the allocation of acquired tangible and intangible assets to such groupings. The evaluation of a certain asset group also required comparison of future non-discounted cash flows to the carrying value of the asset group, which required estimates of future cash flows associated with that asset group, including growth rates, profitability rates and estimates of other sources and uses of cash such as changes in working capital and capital expenditures. The Company engaged a third-party valuation specialist to assist with its assessment.
Our audit procedures to address the risk of material misstatement relating to goodwill and intangible assets included, among others, evaluating the appropriateness of asset groupings at the reporting unit level and asset group level. We also evaluated management’s assessment of qualitative factors associated with the reporting unit containing goodwill and associated with all relevant asset groups. Our procedures also included evaluating management’s forecast of non-discounted cash flows associated with a certain asset group where a qualitative factor required such further analysis. We also assessed the competence, independence, qualifications, experience, and capabilities of the third-party valuation specialist, and evaluated the appropriateness and reasonableness of the methodology and assumptions used by comparing them to external and historical data; testing the calculation and forecast model for mathematical accuracy; validating the appropriateness and reliability of inputs and amounts used; and evaluating the adequacy of the financial statement disclosures relating to goodwill, intangible assets and other long-lived assets, including disclosure of key assumptions and judgments. As a result of our testing we did not take exception to management’s conclusion that no impairment should be recognized related to goodwill or long-lived assets for the year ended December 31, 2022.
| We have served as the Company’s auditor since 2023 |
| March 30, 2023 |
| PCAOB No.: |
| F-2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of:
Brownie’s Marine Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Brownie’s Marine Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced net losses and has an accumulated deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures including examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also include evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| F-3 |
Valuation of Stock Options
As described in Note 13 to the consolidated financial statements, the Company measures fair value of stock options at fair value using level three inputs. To determine fair value of stock options, the Company determines the appropriate valuation methodology and assumptions, including unobservable inputs. Stock options are measured at fair value using a Black-Scholes valuation model that uses significant assumptions, including the Company’s stock price, volatility, risk-free interest rate, probability of vesting and probability of exercise occurrence through expiration date.
Auditing management’s estimate for the fair value of stock options was highly judgmental as it involved our assessment of the significant assumptions used by the Company because the fair value calculations were sensitive to changes in assumptions described above, and certain inputs used in the determination of fair values were based on unobservable data, including, but not limited to, the volatility, probability of vesting and probability of exercise.
To test the fair value of stock options, we performed audit procedures that included, among others, evaluating the methodologies used in the valuation model and the significant assumptions used by the Company.
Merger with Submersible Systems, Inc.
As described in Note 11 to the consolidated financial statements, on September 3, 2021, the Company completed its merger with Submersible Systems, Inc. The Company recognizes separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values under ASC 805, Business Combinations. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. The Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and actual results may differ from expectations. The Company may record measurement period adjustments during the measurement period (one year from the acquisition date) that result from obtaining additional information about the facts and circumstances that existed as of the acquisition date. If this additional information had been known, it would have affected the accounting for the business combination as of the acquisition date.
Auditing management’s estimate for the fair value of the consideration paid, identifiable assets acquired, and liabilities assumed including an amount for goodwill was highly judgmental as it involved our assessment of the significant assumptions used by the Company regarding certain future expected cash flows and the valuation methodologies used by the valuation specialist engaged by the Company in determining the fair values of these assets.
To test the fair value of consideration paid, identifiable assets acquired, and liabilities assumed including an amount for goodwill, we performed audit procedures that included, among others, evaluating the methodologies used in the valuation model and the significant assumptions used by the Company and the valuation specialist.
/s/
We have served as the Company’s auditor since 2018
April 22, 2022
PCAOB
No.:
| F-4 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable - net | ||||||||
| Accounts receivable - related parties | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, equipment and leasehold improvements, net | ||||||||
| Operating lease assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Accounts payable - related parties | ||||||||
| Customer deposits and unearned revenue | ||||||||
| Other liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Related party convertible demand note, net | ||||||||
| Current maturities loans payable | ||||||||
| Total current liabilities | ||||||||
| Loans payable, net of current portion | ||||||||
| Convertible notes, net of current portion | ||||||||
| Operating lease liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingent liabilities (see note 15) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock; $ par value: shares authorized; issued and outstanding as of December 31, 2022 and December 31, 2021, respectively. | ||||||||
| Common stock; $ par value; shares authorized; shares issued and outstanding at December 31, 2022 and shares issued and outstanding at December 31, 2021. | ||||||||
| Common stock payable shares and shares, respectively as of December 31, 2022 and December 31, 2021. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | $ | $ | ||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
| 2022 | 2021 | |||||||
| Revenues | ||||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Selling, general and administrative | ||||||||
| Research and development costs | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other (income) expense, net | ||||||||
| Gain on settlement of debt | ||||||||
| Gain on the forgiveness of PPP loan | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Total other (income) expense - net | ( | ) | ||||||
| Loss income before provision for income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic loss per common share | $ | ( | ) | $ | ( | ) | ||
| Diluted loss per common share | $ | ( | ) | $ | ( | ) | ||
| Basic weighted average common shares outstanding | ||||||||
| Diluted weighted average common shares outstanding | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Preferred Stock | Common Stock | Common Stock Payable | Additional | Total | ||||||||||||||||||||||||||||||||
| Shares Outstanding | Par | Shares Outstanding | Par | Shares | Amount | Paid-in Capital | Accumulated Deficit | Stockholders’ Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Units issued for cash | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for cash | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for acquisition | - | - | ||||||||||||||||||||||||||||||||||
| Debt Discount on sellers note | - | - | - | |||||||||||||||||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||
| Debentures and accrued interest | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for exclusivity | - | - | ||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Shares issued for the purchase of units | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for exercise of warrants | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for Asset Purchase | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for Royalty Agreement | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for accrued interest in convertible notes | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for employee bonus | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | - | - | - | |||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
| 2022 | 2021 | |||||||
| Cash flows provided by operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of right-of-use asset | ||||||||
| Common stock issued for services | ||||||||
| Shares issued for royalty | ||||||||
| Allowance (recovery) for bad debt | ||||||||
| Allowance for slow moving inventory | ||||||||
| Allowance for Nomad recall | ||||||||
| Shares issued for exclusivity | ||||||||
| Stock Based Compensation - options | ||||||||
| Shares issued for employee bonus | ||||||||
| Shares issued for accrued interest in convertible notes | ||||||||
| Gain on settlement of debt | ( | ) | ||||||
| Gain on forgiveness of PPP loan | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Change in accounts receivable, net | ( | ) | ||||||
| Change in accounts receivable - related parties | ( | ) | ||||||
| Change in inventory | ( | ) | ( | ) | ||||
| Change in prepaid expenses and other current assets | ( | ) | ||||||
| Change in other assets | ( | ) | ||||||
| Change in accounts payable and accrued liabilities | ||||||||
| Change in customer deposits and unearned revenue | ||||||||
| Change in long term lease liability | ( | ) | ( | ) | ||||
| Change in other liabilities | ||||||||
| Change in accounts payable - related parties | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows used in investing activities: | ||||||||
| Cash used in asset acquisition | ( | ) | ||||||
| Cash acquired in business acquisition | ||||||||
| Cash used in purchase of fixed assets, net of debt | ( | ) | ||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Proceeds from issuance of units | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds of convertible note | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) Increase in cash | ( | ) | ||||||
| Cash, beginning balance | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash Paid for Interest | $ | |||||||
| Cash Paid for Income Taxes | $ | |||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Operating lease obtained for operating lease liability | $ | $ | ||||||
| Shares issued for asset acquisition | $ | $ | ||||||
| Convertible notes issued for acquisition | $ | $ | ||||||
| Beneficial conversion feature on notes issued for acquisition | $ | $ | ||||||
| Shares issued for payment of convertible note interest | $ | $ | ||||||
| Fixed asset purchase through the issuance of debt | $ | $ | ||||||
| Prepayment for equipment through financing | $ | $ | ||||||
| Shares issued for the conversion of convertible notes and accrued interest | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-8 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of business and summary of significant accounting policies
Description of business – Brownie’s Marine Group, Inc., a Florida corporation (the “Company,” or “BWMG”), (1) designs, tests, manufactures and distributes recreational hookah diving, scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc., a Florida corporation organized in 1981 (“Trebor” or “BTL”), (2) manufactures and sells high pressure air and industrial compressor packages, yacht based scuba air compressor and nitrox generation systems through its wholly owned subsidiary Brownie’s High Pressure Compressor Services, Inc., a Florida corporation organized in 2017 (“BHP”), doing business as LW Americas (“LWA”) and (3) develops and markets portable battery powered surface supplied air dive systems through its wholly owned subsidiary BLU3, Inc., a Florida corporation (“BLU3”). On September 3, 2021, the Company, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Submersible Acquisition, Inc., a Florida corporation and wholly owned subsidiary of the Company (“Acquisition Sub”), Submersible Systems, Inc., a Florida corporation (“Submersible” or “SSI”), and Summit Holdings V, LLC, a Florida limited liability company (“Summit”) and Tierra Vista Group, LLC, a Florida limited liability company (“Tierra Vista” and, together with Summit, the “Sellers”), the owners of all of the capital stock of Submersible organized in 2017, pursuant to which Acquisition Sub merged with and into Submersible (the “Merger”), and Submersible, the surviving corporation, became a wholly owned subsidiary of the Company.
Submersible is a manufacturer of high-pressure tanks and redundant air systems for the military and recreational diving industries, based in Huntington Beach, California and sells its products to governments, militaries, private companies and the dive industry throughout the world.
On February 13, 2022 the Company filed with the Florida Department of State, articles of incorporation for a new wholly owned subsidiary, Live Blue, Inc. (“LBI”). LBI utilizes technology developed by BLU3 to provide new users and interested divers a guided tour experience. On May 2, 2022, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Gold Coast Scuba, LLC, a Florida limited liability company (“Gold Coast Scuba”), Steven M. Gagas and William Frenier, the sole members of Gold Coast Scuba (together, the “LLC Members”) and LBI. Pursuant to the terms of the Asset Purchase Agreement, LBI acquired substantially all of Gold Coast Scuba’s assets and assumed certain non-material liabilities of the business associated with these assets. In addition, LBI assumed the lease for the premises for Gold Coast Scuba as part of this asset acquisition.
Basis of Presentation – The consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”).
Definition of fiscal year – The Company’s fiscal year end is December 31.
Principles of Consolidation -The consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor, BHP, BLU3, SSI and LBI. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Going
Concern – The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going
concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month
period following the date of issuance of these financial statements. We incurred net losses for the years ended December 31, 2022 and
2021 of $
The Company believes that existing operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern for the twelve months after the date that the financial statements were issued. Therefore, the Company will seek to continue to raise additional funds as needed and is currently exploring alternative sources of financing including commercial banks and other lending institutions. The Company has issued common stock and has historically issued convertible notes to finance working capital needs and may continue to seek to raise additional capital through sale of common stock or other securities or obtaining short term loans. The Company has no firm commitment for any additional capital and there are no assurances it will be successful in obtaining additional funds.
If the Company fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
Cash and equivalents – Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents.
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $
| F-9 |
Accounts
receivable – Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers.
The allowance for doubtful accounts are estimates that are developed by using standard quantitative measures based on historical losses,
adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment
of allowances requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company
considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any
specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.
The allowances for doubtful accounts totaled $
Inventory – The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the allowances for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory allowances are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. Though the Company considers these allowance balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required allowance balances.
Property
and equipment and leasehold improvements – Property and equipment and leasehold improvement is stated at cost less accumulated
depreciation or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated useful
lives of the assets or term of the lease, which are primarily
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Goodwill
The
Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets
acquired, including related tax effects. Goodwill is not amortized; instead, goodwill is tested for impairment on an annual basis,
or more frequently if the Company believes indicators of impairment exist. The Company first assesses qualitative factors such as
macro-economic conditions, industry and market conditions, cost factors as well as other relevant events, to determine whether it is
more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If the Company determines that the
fair value is less than the carrying value, the Company will recognize an impairment charge based on the excess of a reporting
unit’s carrying value over its fair value. As of December 31, 2022 and 2021, there was
Intangible assets
Intangible assets are comprised of customer relationships, trademarks and non-compete agreements acquired in a business combination. The Company amortizes intangible assets with a definitive life over their respective useful lives. Assets with indefinite lives are tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist.
Unlike goodwill and indefinite-lived intangible assets, the accounting
rules do not provide for an annual impairment test in determining whether fixed assets (e.g., property, plant, and equipment) and finite-lived
intangible assets (e.g., customer lists) are impaired. Instead, they require that a triggering event occur before testing an asset for
impairment. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for
continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test involves a comparison
of undiscounted cash flows against the carrying value of the asset as an initial test. If the carrying value of such asset exceeds the
undiscounted cash flow, the asset would be deemed to be impaired. Impairment would then be measured as the difference between the fair
value of the fixed or amortizing intangible asset and the carrying value to determine the amount of the impairment. As of December 31,
2022 and 2021, there was
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers. The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. The Company typically satisfies its performance obligations in contracts with customers upon shipment of the goods. Generally, payment is due upon receipt of the invoice and the contracts do not have significant financing components. Product sales occur once control or title is transferred based on the commercial terms. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Product sales are recorded net of variable consideration, such as provisions for returns, discounts and promotional allowances. Such provisions are calculated based on the actual allowances given. Management believes that adequate provision has been made for cash discounts, returns, spoilage and promotional allowances based on the Company’s historical experience.
A breakdown of the total revenue between related party and non-related party revenue is as follows:
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Revenues - related parties | ||||||||
| Total Revenues | $ | $ | ||||||
See further disaggregate revenue disclosures by segment and product type in Note 16.
Cost of Sales
Cost of sales consists of the cost of the components of finished goods, the costs of raw materials utilized in the manufacture of products, in-bound and out-bound freight charges, direct manufacturing labor as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacture of the Company’s finished products, inventory allowance for excess and obsolete products, and royalties paid on licensing agreements. Components account for the largest portion of the cost of sales. Components include plastic molded parts, gas powered engines, aluminum pressure bottles, electronic parts, batteries and packaging materials.
The breakdown of cost of sales to include cost of sales for related party and non-related party as well as the related party and non-related party royalty expense is as follows:
| 2022 | 2021 | |||||||
| Cost of revenues | $ | $ | ||||||
| Cost of revenues - related parties | ||||||||
| Royalty expense - related parties | ||||||||
| Royalty expense | ||||||||
| Total cost of revenues | $ | $ | ||||||
Operating Expenses
Operating expenses include selling expenses such as warehousing expenses after manufacture, as well as expenses for advertising, and other marketing expenses. Operating expenses also include such costs as payroll costs, travel costs, professional service fees (including legal fees), depreciation and other general and administrative costs.
Lease Accounting
We account for leases in accordance with ASC 842.
The lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts entered into prior to adoption are leases or contain leases.
We categorize leases with contractual terms longer than twelve months as either operating or finance leases. Finance leases are generally those leases that would allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in property and equipment, net. All other leases are categorized as operating leases. We did not have any finance leases as of December 31, 2022 and 2021. Our leases generally have terms that range from three years for equipment and three to six years for property. We elected the accounting policy to include both the lease and non-lease components of our agreements as a single component and account for them as a lease.
| F-10 |
Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.
Supplemental balance sheet information related to leases was as follows:
| Operating Leases | Classification | December 31, 2022 | December 31, 2021 | |||||||
| Right-of-use assets | Operating lease assets | $ | $ | |||||||
| Current lease liabilities | Current operating lease liabilities | $ | $ | |||||||
| Non-current lease liabilities | Long-term operating lease liabilities | |||||||||
| Total lease liabilities | $ | $ | ||||||||
Lease term and discount rate were as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
The components of lease costs were as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Operating lease cost | $ | $ | ||||||
| Variable lease cost | ||||||||
| Total lease costs | $ | $ | ||||||
Supplemental disclosures of cash flow information related to leases were as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Cash paid for operating lease liabilities | $ | $ | ||||||
| Operating right of use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| F-11 |
Maturities of lease liabilities were as follows as of December 31, 2022:
Trebor Industries Office Lease | BMG Office Lease |
Submersible Systems Lease | Live Blue, Inc. | Total lease payments |
||||||||||||||||
| 2023 | ||||||||||||||||||||
| 2024 | ||||||||||||||||||||
| 2025 | ||||||||||||||||||||
| 2026 | ||||||||||||||||||||
| Thereafter | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| Less: Imputed interest | ( | ) | ( |
( | ) | ( | ( |
) | ||||||||||||
| Present value of lease liabilities | $ | $ | $ | $ | ||||||||||||||||
Detailed information on leases can be found in Note 15.
Product development costs – Product development expenditures are charged to expenses as incurred.
Advertising
and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production
occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which they occur. Advertising
and trade show expense incurred for the years ended December 31, 2022 and 2021, totaled $
Research
and development costs – The Company accounts for research and development costs in accordance with the Accounting Standards
Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development
costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party
research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. During
the years ended December 31, 2022 and 2021, the Company incurred research and development costs of $
Customer
deposits and unearned revenue and returns policy – The Company typically takes a minimum
Warranty
policy – Under the provisions of the Financial Accounting Standards Board (“FASB”) ASC 460, Guarantor’s
Guarantees, the Company accrues a liability for estimated warranty policy costs based on standard quantitative measures based on
criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation
of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs
associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product
quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.
The Company provides its customers with an industry standard one year warranty on systems sold and recognizes a warranty reserve based
on gross sales multiplied by the historical warranty expense return rate. The warranty reserve charged to cost of net revenues and is
included in accrued expenses and is deemed sufficient to absorb any material or labor costs that might be incurred on sales recorded
during the period. The Company recorded a reserve for warranty work of $
Income taxes – The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
| F-12 |
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
During the years ended December 31, 2022 and 2021, the Company recognized share based compensation with a fair value of $ and $, respectively.
Usage of Authorized but Unissued Shares of Common Stock - The Company has issued options, warrants and convertible promissory notes which are convertible into shares of common stock in certain situations the total of which exceeds the current authorization. The Company has adopted a policy for the sequence of usage of remaining authorized but unissued shares of common stock (the “Sequencing Policy”) which outlines the order in which the conversion of these equity-linked instruments may be settled in shares. Under the Company’s Sequencing Policy, the most recently issued equity-linked securities, including stock options, warrants, and convertible promissory notes, are settled in shares first.
Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.
At December 31, 2022, and 2021, the carrying amount of cash, accounts receivable, accounts receivable – related parties, accounts payable and accrued liabilities, accounts payable-related parties, customer deposits and unearned revenue, other liabilities, lease liabilities, loans payable and convertible debentures, approximate fair value because of the short maturity of these instruments.
| F-13 |
New accounting pronouncements
ASU 2016-13 Current Expected Credit Loss (ASC326)
In December 2021, the FASB issued and update to ASU No. 2016-13 the Current Expected Credit Losses (CECL) standard (ASC 326), which is designed to provide greater transparency and understanding of credit risk by incorporating estimated, forward-looking data when measuring lifetime Estimated Credit Losses (ECL) and requires enhanced financial statement disclosures. This guidance is effective January 1, 2023. The Company is evaluating the changes from this standard to determine the impact on its consolidated financial statements and related disclosures.
ASU 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 on an Entity’s Own Equity.
In August 2020, the FASB issued ASU 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 on an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exceptions. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption or are not applicable.
| F-14 |
Note 2. Inventory
Inventory consists of the following as of:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| In-Transit Inventory | ||||||||
| Raw materials | ||||||||
| Work In Process | ||||||||
| Finished goods | ||||||||
| Rental Equipment | ||||||||
| Total Inventory, net | $ | $ | ||||||
As
of December 31, 2022 and 2021, the Company recorded allowances for obsolete or slow moving inventory of approximately $
Note 3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Prepaid inventory | $ | $ | ||||||
| Prepaid expenses and other current assets | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
Note 4. Property and Equipment, Net
Property and equipment consist of the following as of:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Tooling and equipment | $ | $ | ||||||
| Computer equipment and software | ||||||||
| Vehicles | ||||||||
| Leasehold improvements | ||||||||
| Total property and equipment | ||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation
and amortization expense totaled $
Note 5. Other Assets
Other
assets at December 31, 2022 of $
Note 6. Customer Credit and Vendor Concentrations
The
Company sells to three entities owned by the brother of Robert M. Carmichael and three companies owned by Robert M. Carmichael as further
discussed in note 7 - Related Parties Transactions. Combined sales to these six entities for the years ended December 31, 2022 and 2021,
represented
Brownie’s
Southport Divers, Inc. represented concentration in outstanding accounts receivable of
| F-15 |
Additionally,
the Company has a non-related party customer, Amazon, that represented
Revenue
from Amazon accounted for
The
Company has two vendors that for the year ended December 31, 2022 supplied more than 10% each of the Company’s overall
purchases. Tian Li He Technology supplied
Note 7. Related Party Transactions
We
sell products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, companies
owned by the brother of Robert Carmichael. Combined net revenues from these entities for the years December 31, 2022 and 2021, totaled
$
We
also sell products to Brownie’s Global Logistics, LLC (“BGL”) and 940 Associates, Inc. (“940 A”), entities
wholly-owned by Robert Carmichael. Combined net revenues from these three entities for the years ended December 31, 2022 and 2021 were
$
We
owed BGL $
We
are a party to an exclusive license agreement, dated February 22, 2005, with 940 A to license the trademark “Brownies Third Lung”,
“Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. The agreement
provides for a royalty to be paid equal to the greater of
On
September 30, 2022, the Company issued a convertible demand
Effective
July 29, 2019 the Company agreed to pay the members of the Company’s Board of Directors, including Mr. Carmichael, a management
director, an annual fee of $
| F-16 |
On April 14, 2020 the Company entered into a Non-Qualified Stock Option Agreement with Mr. Carmichael. Under the terms of the option agreement, as additional compensation the Company granted Mr. Carmichael an option to purchase up to an aggregate of shares of the Company’s common stock at an exercise price of $ per share. During the years ended December 31, 2022 and December 31, 2021 the Company expensed $ and $ in relation to this option agreement, respectively. As of December 31, 2022, there were shares vested from this option.
Also, on November 5, 2020 the Company entered into a Non-Qualified Option Agreement with Mr. Constable. Under the terms of this option agreement, as additional compensations, the Company granted an option (the “Bonus Option”) to purchase up to an aggregate of shares of the Company’s common stock at an exercise price of $ per share. During the years ended December 31, 2022 and December 31, 2021, the Company expensed $ and $, respectively. As of December 31, 2022, there were shares vested from this option.
On
March 25, 2021, the Company issued shares of common stock to Charles. Hyatt, a member of our Board of Directors in consideration
of $
On
August 1, 2021 as part of the Blake Carmichael Agreement (see Note 15) the Company entered into a Non-Qualified Stock Option
agreement with Blake Carmichael. Under the terms of the Blake Carmichael agreement, Blake Carmichael is entitled to (i) a five-year
option to purchase
shares of the Company’s common stock at an exercise price of $
(the “BC Compensation Options”), and (ii)(ii) a -year
option to purchase up to
shares to vest annually on a contract year basis, based upon the achievement of certain financial metrics tied to revenue and
EBITDA, which for the years ended December 31, 2022 and December 31, 2021 the Company expensed $
On
September 1, 2021, the Company issued Charles Hyatt, a member of the Company’s Board of Directors,
units, with each unit consisting of one share of common stock and a two-year warrant to purchase one share of common stock at an exercise
price of $
On
September 1, 2021, the Company issued Grace Hyatt, the adult child of Charles Hyatt,
units of the securities of the Company, with each unit consisting of one share of common stock and a two-year warrant to purchase
one share of common stock at an exercisable at $
On
November 5, 2021 the Company entered into a Non-Qualified Stock Option agreement with Christopher Constable as part of his
employment agreement as the Company’s Chief Executive Officer. Under the terms of the option agreement, the Company granted
Mr. Constable a -year
option to purchase
shares of the Company’s common stock at an exercise price of $,
the “Compensation Options”. The Compensation Options were immediately vested. The fair value of the options on the date
of the grant was $
using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of %,
(ii) expected life of
years, (iii) dividend yield of %,
and (iv) expected volatility of %.
Stock option expense recognized during the year ended December 31, 2021 for this option was $
On
February 2, 2022, the Company issued Charles Hyatt, a director, shares upon the exercise of a warrant at $
On
February 2, 2022, the Company issued Grace Hyatt, the adult child of Charles Hyatt, a director, shares upon the exercise of a
warrant at $
On
November 5, 2022 the Company entered into a Non-Qualified Stock Option agreement with Christopher Constable as part of his
employment agreement as the Company’s Chief Executive Officer. Under the terms of the option agreement, the Company granted
Mr. Constable a -year
option to purchase
shares of the Company’s common stock at an exercise price of $
the “Compensation Options”. The Compensation Options were immediately vested. The fair value of the options on the date
of the grant was $
using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of .%,
(ii) expected life of
years, (iii) dividend yield of %
and (iv) expected volatility of %.
Stock option expense recognized during the year ended December 31, 2022 for this option was $
| F-17 |
On
December 13, 2022, the Company issued
units, each unit consists of one share of common stock and a two-year warrant to purchase one share of common stock at an exercise
price of $
Note 8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists of the following as of:
| December 31, 2022 | December 31, 2021 | |||||||
| Accounts payable trade and other | $ | $ | ||||||
| Accrued payroll and fringe benefits | ||||||||
| Accrued warranty expense | ||||||||
| Accrued payroll taxes and withholding | ||||||||
| Accrued Sales Tax | ||||||||
| Accrued interest | ||||||||
| $ | $ | |||||||
Balances due certain vendors are in arrears to varying degrees. The Company is handling all delinquent accounts on a case-by-case basis.
Note 9. Other Liabilities
Other liabilities consist of the following as of:
| December 31, 2022 | December 31, 2021 | |||||||
| Accrued expenses | $ | $ | ||||||
| Accrued recall reserve fee | ||||||||
| Accrued Board of Directors fees | ||||||||
| $ | $ | |||||||
Further information regarding the recall reserve fee can be found in note 15.
Note 10. Convertible Promissory Notes and Loans Payable
Convertible Promissory Notes
Convertible Promissory Notes consist of the following at December 31, 2022:
| Origination Date | Maturity Date | Interest Rate | Origination Principal Balance | Original Discount Balance | Period End Principal Balance | Period End Discount Balance | Period End Balance, Net | Accrued Interest Balance | Reg. | |||||||||||||||||||||||||
| | % | $ | $ | ( | ) | $ | $ | ( | ) | $ | (4 | ) | ||||||||||||||||||||||
| % | $ | $ | ( | ) | ( | ) | (5 | ) | ||||||||||||||||||||||||||
| % | $ | $ | ( | ) | ( | ) | (6 | ) | ||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||
| F-18 |
Convertible debentures consist of the following at December 31, 2021:
| Origination Date | Maturity Date | Interest Rate | Origination Principal Balance | Original Discount Balance | Period End Principal Balance | Period End Discount Balance | Period End Balance, Net | Accrued Interest Balance | Reg. | |||||||||||||||||||||||||
| | % | ( | ) | $ | $ | $ | $ | (1 | ) | |||||||||||||||||||||||||
| % | ( | ) | (2 | ) | ||||||||||||||||||||||||||||||
| % | ( | ) | - | - | - | (3 | ) | |||||||||||||||||||||||||||
| % | ( | ) | ( | ) | (4 | ) | ||||||||||||||||||||||||||||
| % | ( | ) | ( | ) | (5 | ) | ||||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||
| (1) | |
| (2) | |
| The conversion price under
the note initially ranged from $ |
| (3) | |
| The conversion price under
the note initially ranged from $ | |
| (4) |
| Payment Amortization | ||||
| 2023 | $ | |||
| 2024 | ||||
| Total Note Payments | $ | |||
| Current portion of note payable | ||||
| Non-Current Portion of Notes Payable | $ | |||
| F-19 |
| (5) |
| Payment Amortization | ||||
| 2023 | $ | |||
| 2024 | ||||
| Total Note Payments | $ | |||
| Current portion of note payable | ||||
| Non-Current Portion of Notes Payable | $ | |||
| (6) |
Loans Payable
| Marlin Capital BLU3 (1) | Mercedes BMG (2) | Navitas 1 BLU3 (3) | PPP Loan BMG (4) | PPP loan SSI (5) | NFS SSI (6) | Navitas 2 BLU3 (7) | Total | |||||||||||||||||||||||||
| 2023 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 2024 | ||||||||||||||||||||||||||||||||
| 2025 | ||||||||||||||||||||||||||||||||
| 2026 | ||||||||||||||||||||||||||||||||
| Total Loan Payments | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current Portion of Loan Payable | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Non-Current Portion of Loan Payable | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| (1) | |
| (2) | |
| (3) |
| F-20 |
| (4) |
The
term of the note is
The
note balance as of December 31, 2022 and December 31, 2021 was $ |
| (5) |
The
term of the note is
The
note balance as of December 31, 2022 and December 31, 2021 was $ |
| (6) | |
| (7) |
| F-21 |
Note 11. Business Combinations
Merger with Submersible Systems, Inc.
On
September 3, 2021, the Company completed its merger with Submersible Systems, Inc. Under the terms of the Merger Agreement, the Company
paid $
| Holding Period from Closing Date | Percentage of shares eligible to be sold or transferred | |||
| Up to | % | |||
| Up to | % | |||
| Up to | % | |||
| Up to | % |
The Leak-Out provision may be waived by the Company, upon written request by the holder of the common stock, if the Company is trading on either the NYSE American or Nasdaq, and has a rolling 30-day average trading volume of shares per day; provided, however, that (i) only up to 5% of the previous days total volume can be sold in one day by a holder; and (ii) the holder can only sell through executing trades “On the Offer.”
The
transaction costs associated with the Merger were $
Fair Value of Consideration Transferred and Recording of Assets Acquired
The following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired, and liabilities assumed including an amount for goodwill:
| Common stock, shares at fair market value | $ | |||
| 8% Unsecured, Convertible promissory note payable to seller | ||||
| Total purchase price | $ | |||
| Tangible assets acquired | $ | |||
| Liabilities assumed | ( | ) | ||
| Net tangible assets acquired | ||||
| Identified Intangible Assets | ||||
| Customer Relationships | $ | |||
| Trademarks | ||||
| Non-compete agreements | ||||
| Total Intangible Assets | ||||
| Goodwill | $ | |||
| Total purchase price | $ |
| F-22 |
In
determining the number of shares of the common stock issued, the Company considered the value of the stock as defined the Merger
Agreement to be the calculated based on the volume weighted average price (“VWAP”) of a share of the Company’s
common stock on the OTC Markets for (i) 180 days prior to the date of the parties’ execution and delivery
of the binding term sheet for the Merger or (ii) 180 days prior to the closing date of the Merger, whichever results in a lower
VWAP. Based on this calculation, the Company utilized calculation (i) resulting in a conversion price of $
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition is attributable to the value of the potential expanded market opportunity with new customers. The goodwill is not expected to be deductible for tax purposes.
Pro Forma Information
The following unaudited pro forma information assumes all business combinations occurred on January 1, 2021. For all of the business acquisitions depreciation and amortization have been included in the calculation of the below pro forma information based upon the actual acquisition costs.
| Year ended December 31, 2021 (unaudited) |
||||
| Revenue | $ | |||
| Net Loss | $ | ( |
) | |
| Basic and Diluted Loss per Share | $ | ( |
) | |
| Basic and Diluted Weighted Average Common Shares Outstanding | ||||
The information included in the pro forma amounts is derived from historical information obtained from the sellers of the businesses. The pro forma amounts above for basic and diluted weighted average common shares outstanding have been adjusted to include the stock issued in connection with the acquisition of SSI.
Gold Coast Scuba, LLC Asset Acquisition
On May 2, 2022, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Gold Coast Scuba, LLC, a Florida limited liability company (“Gold Coast Scuba”), Steven M. Gagas and William Frenier, the sole members of Gold Coast Scuba (together, the “LLC Members”) and Live Blue, Inc. Pursuant to the terms of the Asset Purchase Agreement, Live Blue acquired substantially all of Gold Coast Scuba’s assets and assumed certain non-material liabilities of the business associated with these assets. In addition, LBI assumed the lease for the premises for Gold Coast Scuba as part of this asset acquisition.
In
consideration for the assets purchased, the Company paid $
| Holding Period from Closing Date | Percentage of shares eligible to be sold or transferred | |||
| Up to | % | |||
| Up to | % | |||
| Up to | % |
The
transaction costs associated with the acquisition were $
| F-23 |
While the
agreement was structured as an asset purchase agreement, we also assumed the operations of Gulf Coast Scuba resulting in the recognition
of a business combination. During 2022 we recognized revenue of $
| Fair Value | ||||
| Rental Inventory | $ | |||
| Fixed Assets | ||||
| Retail Inventory | ||||
| Right of use asset | ||||
| Lease liability | ( | ) | ||
Net Assets Acquired | $ | |||
Note 12. Goodwill and Intangible Assets, Net
The following table sets forth the changes in the carrying amount of the Company’ Goodwill for the years ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||||
| Balance, January 1 | $ | $ | ||||||
| Acquisitions of Submersible Systems, Inc. | ||||||||
| Balance, December 31 | $ | $ | ||||||
The following table sets forth the components of the Company’s intangible assets at December 31, 2022:
| Amortization Period (Years) | Cost | Accumulated Amortization | Net Book Value | |||||||||||||
| Intangible Assets Subject to amortization | ||||||||||||||||
| Trademarks | $ | $ | ( | ) | $ | |||||||||||
| Customer Relationships | ( | ) | ||||||||||||||
| Non-Compete Agreements | | ( | ) | |||||||||||||
| Total | $ | $ | ( | ) | $ | |||||||||||
The aggregate amortization remaining on the intangible assets as of December 31, 2022 is a follows:
| Intangible Amortization | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
Note 13. Stockholders’ Equity
Common Stock
On
February 22, 2021, the Company issued shares of common stock related to the conversion of a convertible note and accrued
interest of $
On
March 1, 2021, the Company issued a consultant shares of its common stock related to investor relation services at a fair value
of $
On
March 25, 2021, the Company issued shares of common stock to Charles F. Hyatt, a member of our Board of Directors, in
consideration of $
On
February 28, 2021, the Company issued shares of common stock to a consultant with a fair value of $
| F-24 |
On
June 10, 2021, the Company issued shares of common stock related to the conversion of a convertible note and accrued interest
of $
On
August 18, 2021, the Company issued shares of common stock related to the conversion of a convertible note and accrued
interest of $
On September 1, 2021, the Company issued Charles Hyatt, a member of our Board of Directors, units of the Company, with the unit consisting of one share of
common stock and a two- year warrant to purchase one share of common stock at an exercise price of $
On
September 1, 2021, the Company issued Grace Hyatt, the adult child Charles Hyatt,
units of the Company, with each unit consisting of one share of common stock and a two- year warrant to purchase one share of
common stock at an exercise price of $
In
September, 2021, the Company issued
units of the Company to three accredited investors, with each unit consisting of one share of common stock and a two-year warrant to
purchase one share of common stock at an exercise price of $
On
September 3, 2021, the Company issued shares of common stock to Tierra Vesta Group as part of the purchase agreement of Submersible
Systems, Inc. with a fair value of $
On
September 3, 2021, the Company issued shares of common stock to Summit Holdings V, LLC. as part of the purchase agreement
of Submersible Systems, Inc. with a fair value of $
On
September 22, 2021, the Company issued a law firm shares of common stock with a fair value of $
In
November and December, 2021 the Company issued shares of its common stock with a fair value of $
On
December 31, 2021 the Company issued shares of its common stock with a fair market value of $
On January 17, 2022, the Company issued a law firm shares of common stock with a fair value of $ as part of the agreed upon compensation for a representation agreement.
On
January 31, 2022, the Company issued a consultant shares of common stock with a fair value of $
On
February 2, 2022, the Company issued Charles Hyatt, a director, shares from the exercise of a warrant at $
On
February 2, 2022, the Company issued Grace Hyatt, the adult child of Charles Hyatt, a director, shares from the exercise of a
warrant at $
On
February 28, 2022, the Company issued a consultant, shares of common stock with a fair value of $
On
May 3, 2022, the Company issued shares of common stock pursuant to the asset purchase agreement with Gold Coast Scuba, LLC
with a fair value of $
| F-25 |
On
May 31, 2022, the Company issued a consultant, shares of common stock with a fair value of $
On
June 17, 2022, the Company issued shares of common stock to an employee as a retirement gift. The fair value of this stock was
$
On
June 30, 2022, the Company issued shares of common stock to the holders of convertible notes for payment of interest through
June 30, 2022. The fair value of these shares was $
On
September 7, 2022, the Company issued to two accredited investors, units of the Company, with each unit consisting of one share
of common stock and a two-year common stock purchase warrant to purchase one share of common stock at an exercise price of $
On
September 30, 2022, the Company issued shares of common stock to the holders of convertible notes for payment of interest for
the three months ending September 30, 2022. The fair value of these shares was $
On November 1, 2022, the Company issued an aggregate
of shares to the designated shareholders in accordance with the amended STS Agreement. The fair value of these shares was $
On
December 13, 2022, the Company issued units,
On December 31, 2022, the Company issued shares
of common stock to the holders of convertible notes for payment of interest for the three months ending December 31, 2022. The fair value
of these shares was $
Preferred Stock
During
the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment
to the Company’s Articles of Incorporation authorizing the issuance of shares of blank check preferred stock. The blank
check preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights
as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business
Corporation Act. In April 2011 the Board of Directors designated shares of the blank check preferred stock as Series A Convertible
Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into a share of the Company’s common stock at
any time at the option of the holder at a conversion price of $
Equity Compensation Plan
On May 26, 2021 the Company adopted an Equity Compensation Plan (the “Plan”). Under the Plan, stock options may be granted to employees, directors, and consultants in the form of incentive stock options or non-statutory stock options, stock purchase rights, time vested and/performance invested restricted stock, and stock appreciation rights and unrestricted shares. The maximum number of shares that may be issued under the Plan is shares. The term of the Plan is ten years.
The Company also issued options outside of the plan that were not approved by the security holders. These options may be granted to employees, directors, and consultants in the form of incentive stock options or non-qualified stock options.
| F-26 |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted – average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a) (c) | ||||||||||
| Equity Compensation Plans Approved by Security Holders | $ | |||||||||||
| Equity Incentive Options issued outside of the Equity Compensation Plan | ||||||||||||
| Total | $ | |||||||||||
Options
The Company has issued options to purchase approximately shares at an average price of $ with a fair value of approximately $. For the years ended December 31, 2022 and 2021, the Company issued options to purchase and shares, respectively. Upon exercise, shares of new common stock are issued by the Company.
For
the years ended December 31, 2022 and 2021, the Company recognized an expense of approximately $
| Year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Expected volatility | % - | % | – | % | ||||
| Expected term | – Years | - Years | ||||||
| Risk-free interest rate | % - | % | % - | % | ||||
| Forfeiture Rate | % | % | ||||||
The expected volatility was determined with reference to the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant.
| F-27 |
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
Number of Options | Exercise Price | Contractual Life in Years | Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2020 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Outstanding – December 31, 2021 | $ | |||||||||||||||
| Exercisable – December 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( |
) | ||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Outstanding – December 31, 2022 | $ | |||||||||||||||
| Exercisable – December 31, 2022 | $ | $ | ||||||||||||||
| Range of Exercise Price | Number outstanding at December 31, 2022 | Weighted average remaining life | Weighted average exercise price | Number exercisable at December 31, 2022 | Weighted average exercise price | Weighted average remaining life | |||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| Outstanding options | |||||||||||||||||||||||||
As of December 31, 2022, the Company had approximately $ of unrecognized pre-tax non-cash compensation expense related to options to purchase shares, which the Company expects to recognize, based on a weighted-average period of years.
Warrants
On
September 1, 2021, the Company issued Charles Hyatt units, each unit consisted of one share of common stock and a two-year
warrant to purchase one share of common stock at an exercise price of $
On
September 1, 2021, the Company issued Grace Hyatt, the adult child of Charles Hyatt, units, each unit consisted of one share
of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $
On
September, 2021, the Company issued units to three accredited investors, each unit consisting of one share of common stock
and a two-year warrant to purchase one share of common stock at $
| F-28 |
On
February 2, 2022, the Company issued Charles Hyatt shares of common stock upon the exercise of a warrant at $
On
February 2, 2022, the Company issued Grace Hyatt, the adult child of Charles Hyatt, shares of common stock upon the exercise
of a warrant at $
On
September 7, 2022, the Company issued an aggregate of units to two accredited investors. Each unit consisted of one share of
common stock and a two-year common stock purchase warrant to purchase one share of common stock at an exercise price of $
On
December 13, 2022, the Company issued to Charles Hyatt, units. Each unit consisted of one share of common
stock and a two-year common stock purchase warrant to purchase one share of common stock at an exercise price of $
A summary of the Company’s warrants as of December 31, 2022 and 2021, and changes during the years ended December 31, 2022 and 2021 is presented below:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | |||||||||||||||
| Number of Warrants | Exercise Price | Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2020 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Outstanding – December 31, 2021 | $ | |||||||||||||||
| Exercisable – December 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Cancelled | ||||||||||||||||
| Outstanding – December 31, 2022 | $ | |||||||||||||||
| Exercisable – December 31, 2022 | $ | $ | ||||||||||||||
Note 14. Income Taxes
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.
| F-29 |
The components of the provision for income tax expense are as follows for the years ended:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Current taxes | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Current taxes | ||||||||
| Change in deferred taxes | ||||||||
| Change in valuation allowance | ( | ) | ( | ) | ||||
| Provision for income tax expense | $ | $ | ||||||
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2022 and 2021:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Deferred tax assets: | ||||||||
| Equity based compensation | $ | $ | ||||||
| Allowance for doubtful accounts | ||||||||
| Reserves for slow moving inventory | ||||||||
| Depreciation | ||||||||
| Reserve for recall | ( | ) | ||||||
| Net operating loss carryforward | ||||||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities | ||||||||
| Reserve for recall | ( | ) | ||||||
| Total deferred tax liability | ( | ) | ||||||
| Total deferred tax | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net of valuation allowance | $ | $ | ||||||
The
effective tax rate used for calculation of the deferred taxes as of December 31, 2022 was
The
effective tax rate used for calculation of the deferred taxes as of December 31, 2021 was
The significant differences between the statutory tax rate and the effective tax rates for the Company for the years ended are as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Statutory tax rate | ( | )% | ( | )% | ||||
| State tax, net of Federal benefits | ( | )% | ( | )% | ||||
| Permanent differences | % | % | ||||||
| Temporary differences | % | % | ||||||
| Change in valuation allowance | % | ( | )% | |||||
| Effective tax rate | % | % | ||||||
The Company’s income tax returns for 2019 through 2022 remain subject to examination by the Internal Revenue Services and state tax authorities.
| F-30 |
Note 15. Commitments and Contingencies
Leases
On
August 14, 2014, the Company entered into a month lease for its facilities in Pompano Beach, Florida, commencing on September
1, 2014. Terms included payment of a $
On
January 4, 2018, the Company entered into a lease renewal for its facility in Huntington Beach, California commencing
on February 1, 2018. Terms included base rent of approximately $
On
November 11, 2018, the Company entered a lease commencing on January 1, 2019 for approximately
On May 2, 2022, LBI entered into a lease assignment
agreement with Gold Coast Scuba, LLC and Vicnsons Realty Group, LLC whereby LBI is the assignee to the remainder of the lease for the
property located at 259 Commercial Blvd., Suites 2 and 3 in Lauderdale-By-The Sea, Florida. The lease is in its third year of a three-year term and has a $
On September 14, 2022, SSI entered into a sixty-month
lease renewal for its facility in Huntington Beach, California effective February 1, 2022. Terms included base rent of approximately
$
On September 30, 2022, SSI entered into a sublease
of its facility in Huntington Beach, California with Camburg Engineering, Inc.(“Tenant”) commencing October 1, 2022, The term
of the sublease is through December 31, 2023 with a base monthly rent of $
Royalty Agreement
On
June 30, 2020, the Company entered into Amendment No. 2 to its Patent License Agreement with Setaysha Technical Solutions, LLC (“STS”).
The amendment set certain limits and expectations of the assistance from STS related to designing and commercializing certain diving
products and revised the royalty payments due to STS as consideration for uncompensated services. The Company is obligated to pay STS
a minimum yearly royalty of $
Consulting and Employment Agreements
On
June 9, 2020, the Company entered into a one-year advertising and marketing agreement with Figment Design for $
On
November 5, 2020, the Company entered into a three-year employment agreement with Christopher Constable (the “Constable Employment
Agreement”) pursuant to which Mr. Constable serves as Chief Executive Officer of the Company. Previously, Mr. Constable had provided
advisory services to the Company through an agreement with Brandywine LLC. In consideration for his services, Mr. Constable shall receive
(i) an annual base salary of $
| F-31 |
In
addition, Mr. Constable shall be entitled to receive stock options to purchase shares of common stock at an exercise price
equal to $ per share in the following amounts based upon the following performance milestones during the term of the Constable
Employment Agreement: (i) shares – if the Company’s total net revenues, as reported in its statement of operations
in its financial statements in its filings with the SEC, including as a result of a stock or asset acquisition of a third party (“Net
Revenues”) are in excess of $
On March 1, 2021, the Company entered into an investor relations consulting agreement with BGM Equity Partners, LLC. The term of the agreement is twelve months. As compensation, the Company issued shares of its common stock valued at $ to BGM Equity Partners. The agreement expired on March 1, 2022.
On
August 1, 2021, the Company and Blake Carmichael entered into a three-year employment agreement (the “Blake Carmichael Employment
Agreement”) pursuant to which Mr. Carmichael shall serve as Chief Executive Officer of BLU3. In consideration for his services,
Blake Carmichael shall receive (i) an annual base salary of $
In addition, Blake Carmichael shall be entitled to receive a stock option to purchase up to shares of common stock at an exercise price of $ per share that will vest upon annual financial metrics based upon a revenue measurement, expediency measurement and an EBITDA measurement.
On
August 6, 2021, the Company entered into a six-month, non-exclusive mergers and acquisitions services agreement with Newbridge Securities
Corporation which provides for a
On
September 3, 2021, SSI and Christeen Buban entered into a three-year employment agreement (the “Buban Employment Agreement”)
pursuant to which Ms. Buban shall serve as the President of SSI. In consideration for her services, Mrs. Buban shall receive (i) an annual
base salary of $
In addition, Mrs. Buban shall be entitled to receive a stock option to purchase up to shares of common stock of the Company at an exercise price of $ per share, which vests upon the attainment of certain defined annual financial metrics, as set forth in the Buban Employment Agreement.
On May 2, 2022, the Company entered into a two-year
employment agreement with Steven Gagas (the “Gagas Employment Agreement”) pursuant to which Mr. Gagas shall serve as the General
Manager of the dive shop currently operating within LBI. In consideration for his services Mr. Gagas shall receive an annual salary of
$
On
January 17, 2022, the Company entered into an agreement with The Crone Law Group, PC (“CLG”) for the provision of legal services.
In consideration therefor, the Company will pay CLG a monthly flat fee of $
| F-32 |
On December
22, 2022, the U.S. Consumer Products Safety Commission (the “CPSC”) issued a voluntary recall notice for the Nomad tankless
dive system, which is distributed by BLU3, Inc. As part of the recall procedure, the CPSC has approved the Company’s proposed remedy
for the recall and BLU3 will begin to receive units back from consumers to repair affected Nomad units. The Company has evaluated the
costs of this recall and has deemed it necessary to set an allowance of $
Legal
The
Company was a defendant in an action, Basil Vann, as Personal Representative of the Estate of Jeffrey William Morris v. Brownie’s
Marine Group, Inc., filed on May 6, 2019 in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida. The complaint, related to consulting services provided to the Company by the deceased between 2005 and 2017, alleged breach of contract and quantum
meruit and sought $
Note 16. Segments
The Company has five operating segments as described below:
| 1. | SSA Products, which sells recreational multi-diver surface supplied air diving systems. | |
| 2. | High Pressure Gas Systems, which sells high pressure air and industrial gas compressor packages. | |
| 3. | Ultra- Portable Tankless Dive Systems, which sells next generation electric surface supply air diving systems and electric shallow dive system that are battery operated and completely portable to the user. | |
| 4. | Redundant Air Tank Systems, which manufactures and distributes a line of high-pressure tanks and redundant air systems for the military and recreational diving industries. | |
| 5. | Guided Tour and Retail, which provides guided tours using the BLU3 technology, and also operates as a retail store for the diving community. |
| Year ended December 31 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Legacy SSA Products | High Pressure Gas Systems | Ultra-Portable Tankless Dive Systems | Redundant Air Tank Systems | Guided Tour Retail | Total Company | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| Net Revenues | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Cost of Revenue | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation/Amortization | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
Note 17. Subsequent Events
On
January 18, 2023 and February 18, 2023, the Company issued to Charles Hyatt, an aggregate of
units, with each
| F-33 |