BWMG 10-Q
Brownie's Marine Group, Inc (BWMG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For
the quarterly period ended |
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from __________ to __________ |
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| Not applicable |
| Former name, former address and former fiscal year, if changed since last report |
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | Not applicable | Not applicable |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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As of November 7, 2022, there were shares of common stock outstanding.
TABLE OF CONTENTS
| Page No. | ||
| PART I - FINANCIAL INFORMATION | ||
| ITEM 1. | FINANCIAL STATEMENTS. | 4 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 28 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | 38 |
| ITEM 4. | CONTROLS AND PROCEDURES. | 38 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | LEGAL PROCEEDINGS. | 39 |
| ITEM 1A. | RISK FACTORS. | 39 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | 39 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. | 39 |
| ITEM 4. | MINE SAFETY DISCLOSURES. | 39 |
| ITEM 5. | OTHER INFORMATION. | 39 |
| ITEM 6. | EXHIBITS. | 39 |
| 2 |
NOTE REGARDING FORWARD-LOOKING INFORMATION
This Quarterly 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 Quarterly 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 risk factors included in our Annual Report on Form 10-K filed with the SEC on April 22, 2022, which risk factors 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.
| 3 |
PART I
ITEM 1. FINANCIAL STATEMENTS
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| 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 | ||||||||
| Right of use 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 long term debt | ||||||||
| Total current liabilities | ||||||||
| Long term debt | ||||||||
| Long term convertible debentures, net | ||||||||
| Operating lease liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see note 9) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock; $ par value: shares authorized; issued and outstanding as of September 30, 2022 and December 31, 2021. | ||||||||
| Common stock; $ par value; shares authorized; shares issued and outstanding as of September 30, 2022 and shares issued and outstanding as of December 31, 2021, respectively. | ||||||||
| Common stock payable shares and shares, respectively, as of September 30, 2022 and December 31, 2021. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | $ | $ | ||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements
| 4 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net revenues | ||||||||||||||||
| Net revenues | $ | $ | $ | $ | ||||||||||||
| Net revenues - related parties | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Cost of net revenues | ||||||||||||||||
| Cost of net revenues | ||||||||||||||||
| Cost of net revenues - related parties | ||||||||||||||||
| Royalties expense - related parties | ||||||||||||||||
| Royalties expense | ||||||||||||||||
| Total 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 before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on foreign currency contract | ||||||||||||||||
| Comprehensive Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Basic loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Diluted loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted weighted average common shares outstanding | ||||||||||||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements
| 5 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
| Preferred Stock | Common Stock | Common Stock Payable | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholder’s Equity | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income (Loss) | Deficit | (DEFICIT) | |||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Shares issued for the exercise of warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock Option Expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Other Comprehensive Income | - | - | - | |||||||||||||||||||||||||||||||||||||
| March 31, 2022 (unaudited) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Stock Issued for Service | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock Issued for Asset Purchase | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock Issued for Accrued Interest on Convertible Notes | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock Issued for Employee Bonus | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Other Comprehensive Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| June 30, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Common Stock issued for the purchase of units | - | $ | - | $ | $ | |||||||||||||||||||||||||||||||||||
| Stock Issued for Accrued Interest on Convertible Notes | - | - | ||||||||||||||||||||||||||||||||||||||
| Beneficial Conversion Feature | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Other Comprehensive Income | - | - | - | |||||||||||||||||||||||||||||||||||||
| September 30, 2022 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Common Stock Payable | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholder’s Equity | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income (Loss) | Deficit | (DEFICIT) | |||||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Common stock issued for Cash | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for service | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of convertible debentures and accrued interest | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| March 31, 2021 (unaudited) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of convertible debentures and accrued interest | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| June 30, 2021 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Common Stock issued for cash | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for acquisition | - | - | ||||||||||||||||||||||||||||||||||||||
| Beneficial conversion features | - | - | - | |||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of convertible debentures and accrued interest | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| September 30, 2021 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
The accompanying condensed notes are an integral part of these consolidated unaudited financial statements
| 6 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
| 2022 | 2021 | |||||||
| Cash flows used in 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 | ||||||||
| Reserve for bad debt | ||||||||
| Reserve for slow moving inventory | ( | ) | ||||||
| Stock Based Compensation - Options | ||||||||
| Stock based compensation - stock grant | ||||||||
| 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 acquisition | ||||||||
| Cash used in purchase of fixed assets, net of debt | ( | ) | ||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash 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 debt – related party | ||||||||
| Repayment on notes payable | ( | ) | ||||||
| Repayment of debt | ( | ) | ( | ) | ||||
| Net cash provided by in financing activities | ||||||||
| Net change 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 | $ | $ | ||||||
| Common Stock issued for asset acquisition | $ | $ | ||||||
| Convertible notes issued for acquisition | $ | $ | ||||||
| Beneficial conversion feature on convertible note, related party | $ | $ | ||||||
| Common Stock issued for payment of convertible note interest | $ | $ | ||||||
| Fixed asset purchase through the issuance of debt | $ | $ | ||||||
| Common stock issued for the conversion of convertible debentures and accrued interest | $ | $ | ||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements
| 7 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,2022
(UNAUDITED)
Note 1. Company Overview
Brownie’s Marine Group, Inc. (the “Company”) designs, tests, manufactures and distributes recreational hookah diving, scuba and water safety products through its wholly owned subsidiary, Trebor Industries, Inc., a Florida corporation, incorporated in 1981 (“Trebor” or “BTL”), 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 incorporated in 2017 (“BHP”) and doing business as LW Americas (“LWA”) and 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 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.
On February 13, 2022 the Company filed with the Florida Department of State, the 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.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The following unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete annual financial statements. The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading. The balance sheet as of December 31, 2021 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2021 for a broader discussion of our business and the risks inherent in such business. The results of operations for the nine months ended September 30, 2022, are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending December 31, 2022.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company 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.
Cash and cash equivalents
Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.
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 $
| 8 |
Foreign Currency Forward Contracts
We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings, and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies. As of September 30, 2022 the Company closed out it’s only forward contract and has no further obligation relating to such.
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 is estimated based on historical customer experience and industry knowledge. The allowances for doubtful accounts totaled $
Inventory
Inventory consists of the following:
| September 30, 2022 (unaudited) | December 31, 2021 | |||||||
| In-Transit inventory | $ | $ | ||||||
| Raw materials | ||||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Rental Equipment | ||||||||
| Inventory, net | $ | $ | ||||||
Revenue Recognition
We account for revenues in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive.
We recognize the sale of products under single performance obligations upon shipment of the products as that is when ownership is transferred and our performance is completed. Revenues from repair and maintenance activities is recognized when the repairs are completed and the products have been shipped.
Lease Accounting
We account for leases in accordance with ASC 842, “Leases”. The lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations.
We categorize leases with contractual terms longer than twelve months as either operating or finance. 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 September 30, 2022. Our leases generally have terms that range from three years for equipment and five to twenty 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.
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. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
| 9 |
When we have the option to extend the lease term, terminate the lease for 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.
For
the three and nine months ended September 30, 2022, lease expenses were approximately $
During
the three months ended September 30, 2022, the Company entered into a -year lease extension for the SSI lease in Huntington Beach,
CA. This extension increased the operating asset and liability by approximately $
Supplemental balance sheet information related to leases was as follows:
| Operating Leases | September 30, 2022 (unaudited) | |||
| Right-of-use assets | $ | |||
| Current lease liabilities | $ | |||
| Non-current lease liabilities | ||||
| Total lease liabilities | $ | |||
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee and non-employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee and non-employee are required to provide service in exchange for the award, usually the vesting period.
Derivatives
The accounting treatment of derivative financial instruments requires that the Company record certain warrants and embedded conversion options at their fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As a result of entering into certain note agreements, for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy, by earliest issuance date, in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors, as long as the certain variable issuance terms in certain convertible instruments exist.
Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. At September 30, 2022 and September 30, 2021, and , respectively, of potentially dilutive shares were not recognized as their inclusion would be anti-dilutive. These shares reflect shares potentially issuable under convertible notes, outstanding warrants, outstanding stock options and the conversion of preferred stock.
Recent 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.
| 10 |
ASU 2019-12 Income Taxes (Topic 740)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company determined that the standard has no impact on its consolidated financial statements and related disclosures.
Note 3. 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 these consolidated financial statements. For the nine months ended September 30, 2022, the
Company incurred a net loss of $
Note 4. Related Party Transactions
The
Company sells products to Brownie’s Southport Divers, Brownie’s Yacht Toys and Brownie’s Palm Beach Divers,
companies owned by the brother of Robert Carmichael, the Company’s President and Chief Financial Officer. Terms of sale are no
more favorable than those extended to any of the Company’s other customers with similar sales volumes. These entities
accounted for $
The
Company sells products to BGL and 940 A, entities wholly-owned by Robert Carmichael. Terms of sale are more favorable than those extended
to the Company’s regular customers, but no more favorable than those extended to the Company’s strategic partners. Accounts
receivable from these entities totaled $
The
Company had accounts payable to related parties of $
The
Company has exclusive license agreements with 940 A to license the trademark “Brownie’s Third Lung”, “Tankfill”,
“Brownie’s Public Safety” and various other related trademarks as listed in the agreements. The agreements provide that the
Company pay 940 A
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 $
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On
September 30, 2022, the Company issued a convertible demand
Note 5. Convertible Promissory Notes and Notes Payable
Convertible Promissory Notes
Convertible promissory notes consisted of the following at September 30, 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. | |||||||||||||||||||||||||
| % | ( | ) | (1 | ) | ||||||||||||||||||||||||||||||
| % | ( | ) | - | (2 | ) | |||||||||||||||||||||||||||||
| % | ( | ) | ( | ) | (3 | ) | ||||||||||||||||||||||||||||
| % | ( | ) | ( | ) | (4 | ) | ||||||||||||||||||||||||||||
| % | ( | ) | ( | ) | (5 | ) | ||||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||
| (1) | On
December 1, 2017, the Company issued a |
| The
conversion price of the note initially ranged from $ | |
| (2) | On
December 5, 2017, the Company entered into a |
| The
conversion price under the note initially ranged from $ |
| 12 |
| (3) | |
| (4) | |
| (5) |
Loan Payable
Marlin Note
On
September 30, 2019 the Company, through its wholly owned subsidiary BLU3, executed an equipment finance agreement for the purchase of
certain plastic molding equipment through Marlin Capital Solutions. The initial principal balance was $
| Payment Amortization | ||||
| 2022 (3 months remaining) | ||||
| Total Loan Payments | $ | |||
| Current portion of Loan payable | ( | ) | ||
| Non-Current Portion of Loan Payable | $ | |||
Mercedes Benz Note
On
August 21, 2020, the Company executed an installment sales contract with Mercedes Benz Coconut Creek for the purchase of a 2019 Mercedes
Benz Sprinter delivery van. The installment agreement was for $
| Payment Amortization | ||||
| 2022 (3 months remaining) | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 and thereafter | $ | |||
| Total note payments | $ | |||
| Current portion of note payable | $ | ( | ) | |
| Non-Current Portion of notes payable | $ | |||
| 13 |
Navitas Note
On May 19, 2021 the Company, through its wholly owned subsidiary BLU3, executed an equipment finance agreement for the purchase of certain plastic molding equipment through Navitas Credit Corp. (“Navitas”). The amount financed is $payable in equal monthly installments of $. The equipment finance agreement contains customary events of default. The agreement was fully funded as of September 30, 2021.
| Payment Amortization | ||||
| 2022 (3 months remaining) | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total Note Payments | $ | |||
| Current portion of Note payable | ( | ) | ||
| Non-Current Portion of Note Payable | $ | |||
Alliance Lease
On
January 19, 2022, SSI entered into a capital lease with Alliance Funding Group (“Lessor”) to secure a new piece of
essential equipment for its operations. The lease has a
NFS Note
On
June 29, 2022, SSI executed an equipment financing agreement with NFS Leasing (“NFS Leasing”) to secure replacement
production molds. The total purchase price of the molds was $
| Payment Amortization | ||||
| 2022 (3 months remaining) | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 (5 months) | ||||
| Total Note Payments | $ | |||
| Current portion of Note payable | ( | ) | ||
| Non-Current Portion of Note Payable | $ | |||
| 14 |
Note 6. Business Combination
Merger with Submersible Systems, Inc.
On
September 3, 2020, the Company completed its merger with SSI. 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 restriction may be waived by the Company, upon written request by a seller, if the Company’s common stock is trading on 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 and (ii) only 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 | $ |
The
value of the stock was calculated based on the 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 which resulted in a conversion
price of $
| 15 |
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.
As
of September 30, 2022, the Company recorded an estimated fair value of the intangible assets and goodwill of $
Asset acquisition Gold Coast Scuba, LLC
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 $
Fair Value of Consideration Transferred and Recording of Assets Acquired
The following table summarizes the asset acquisition date fair value of the consideration paid, identifiable assets acquired, including an amount for overpayment and transaction fees:
| Book Value | Overpayment Allocation | Transaction Cost Allocation | Fair Value | |||||||||||||
| Rental Inventory | $ | $ | $ | $ | ||||||||||||
| Fixed Assets | ||||||||||||||||
| Retail Inventory | ||||||||||||||||
| Total Cost | $ | $ | $ | $ | ||||||||||||
| 16 |
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.
Nine months ended (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 shares outstanding have been adjusted to include the stock issued in connection with the acquisition of SSI and the assets of LBI.
Pro Forma Information
The following unaudited pro forma information assumes all business acquisitions occurred on January 1, 2022. 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.
The information included in the pro forma amounts is derived from historical information obtained from the sellers of the businesses. The pro forma amounts for basic and diluted weighted average shares outstanding have been adjusted to include the stock issued in connection with the acquisition of Gold Coast Scuba.
Nine months ended (unaudited) | ||||
| Revenue | $ | |||
| Net Loss | $ | ( | ) | |
| Basic and Diluted Loss per Share | $ | ( | ) | |
| Basic and Diluted Weighted Average Common Shares Outstanding | ||||
| 17 |
Note 7. Goodwill and Intangible Assets, Net
The following table sets for the changes in the carrying amount of the Company’ Goodwill for the quarter ended September 30, 2022.
| 2022 | ||||
| Balance, January 1 | $ | |||
| Addition: | ||||
| Balance, September 30 | $ | |||
The following table sets for the components of the Company’s intangible assets at September 30, 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 September 30, 2022 is a follows:
| Intangible Amortization | ||||
| 2022 (3 months remaining) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
Note 8. Stockholders’ Equity
Common Stock
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 $
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 were $
| 18 |
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 were $
Preferred Stock
During
the second quarter of 2010, the holders 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 Incentive Plan
On May 26, 2021 the Company adopted an Equity Incentive 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-qualified stock options, stock purchase rights, time vested and/performance invested restricted stock, and stock appreciation rights and unrestricted shares may also be granted under the Plan. shares are reserved for issuance under the Plan. The term of the Plan is ten years.
| 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 Compensation Plans Not Approved by Security Holders | ||||||||||||
| Total | $ | |||||||||||
| 19 |
Options
On April 14, 2020, the Company entered into a Non-Qualified Stock Option Agreement with Robert Carmichael (the “Carmichael Option Agreement”). Under the terms of the Carmichael Option Agreement, as additional compensation, the Company granted Mr. Carmichael an option (the “Carmichael Option”) to purchase up to an aggregate of shares of the Company’s common stock at an exercise price of $ per share, of which the right to purchase shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase shares of common stock is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
| ● | the right to purchase shares of the Company’s common stock shall vest at such time as the Company reports cumulative consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any subsequent acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively, “Net Revenues”), in excess of $ in the aggregate over four consecutive fiscal quarters commencing May 1, 2020 and ending on April 30, 2023 (the “Net Revenue Period”); |
| ● | the right to purchase an additional shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $ in the aggregate over four consecutive fiscal quarters during the Net Revenue Period; and |
| ● | the right to purchase an additional shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $ in the aggregate over four consecutive quarters during the Net Revenue Period. |
The Carmichael Option Agreement provides that the Carmichael Option is exercisable by Mr. Carmichael on a cashless basis. The Carmichael Option is not transferrable by Mr. Carmichael, and he must remain an employee of the Company as an additional term of vesting. Once a portion of the Carmichael Option vests, it is exercisable by Mr. Carmichael for 90 days. Any portion of the Carmichael Option which does not vest during the Net Revenue Period lapses and Mr. Carmichael has no further rights thereto.
The fair value of the Carmichael Option 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 %. The Company analyzed the likelihood that the vesting qualifications would be met. As of December 31, 2021, of options were vested as the targeted net revenues were reached and three quarters of Tranche 2 was also met and fully expensed through December 31, 2021. For the nine months ended September 30, 2022 the Company revenues reached the target revenues for Tranche 2, and an additional shares of the option vested. Stock option expense recognized during the three and nine months ended September 30, 2022 for this option was $ and $, respectively.
On November 5, 2020, the Company entered into a Non-Qualified Stock Option agreement with Christopher Constable (the “Constable Option Agreement”) as part of his employment agreement. As part of the Constable Option Agreement, the Company granted Mr. Constable 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, of which the right to purchase shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase shares of common stock is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
| 20 |
As part of the Constable Option Agreement, the Company also granted Mr. Constable 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, of which the right to purchase shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase shares of common stock is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
| ● | the
right to purchase shares of the Company’s common stock shall vest at such time as the Company reports cumulative
consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any subsequent
acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively, “Net
Revenues”), in excess of $ |
| ● | the right to purchase an additional shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $ in the aggregate over four consecutive fiscal quarters during the Net Revenue Period; and |
| ● | the right to purchase an additional shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $ in the aggregate over four consecutive quarters during the Net Revenue Period. |
The Constable Option Agreement provides that the Compensation Options and Bonus Options are exercisable by Mr. Constable on a cashless basis. The Constable Option is not transferrable by Mr. Constable, and he must remain an employee of the Company as an additional term of vesting. Once a portion of the Constable Option vests, it is exercisable by Mr. Constable for four years.
The fair value of the Bonus 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 %. The Company analyzed the likelihood that the vesting qualifications would be met, and as of September 30, 2022, it was deemed that the Company met the qualifications for four quarters for Tranches 1 and 2. For the three and nine months ended September 30, 2022, the Company recognized option expense related to these options of $and $, respectively.
On June 14, 2021, the Company issued options to purchase up to an aggregate of shares of common stock to various employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at $ per share for a period of from the date of issuance, with % of the options vesting each fiscal quarter over a period of . The fair value of the options totaled $ 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 %, (iv) expected volatility of %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ and $, respectively.
On August 1, 2021 as part of the Blake Carmichael Employment Agreement (as defined below), the Company granted Blake Carmichael a five-year option to purchase shares of the Company’s common stock at an exercise price of $, (the “BC Compensation Options”). The BC Compensation Options 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 %. The Company expensed $ as for the three and nine months ended September 30, 2022.
As part of the Blake Carmichael Agreement, the Company granted Blake Carmichael a five-year option to purchase up to shares of common stock which vest annually on a contract year basis, based upon the achievement of certain revenue and EBITA financial metrics. The fair value of the BC Bonus Options 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 %, (iv) expected volatility of %, and (v) exercise price of per share. The Company analyzed the likelihood that the vesting qualifications would be met, and as of September 30, 2022, it was deemed that it was likely that shares would be issued at the end of the first year, and accordingly was fully expensed as of December 31, 2021. For the three and nine months ended September 30, 2022 there were no material changes to vesting qualifications and no stock option expense was recognized.
| 21 |
During the third quarter of 2021, the Company issued options to purchase up to an aggregate of shares of common stock to two employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $ to $ per share for a periods ranging from to from the date of issuance, with quarterly vesting periods over to . The fair value of the options totaled $ using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate from % to %, (ii) expected life of to years, (iii) dividend yield of %, and (iv) expected volatility of % to %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ and $, respectively.
On September 3, 2021, the Company issued options to purchase up to an aggregate of shares of common stock under the Plan to Christeen Buban, President of SSI. The options were issued pursuant to the Buban Employment Agreement and a stock option grant agreement and are exercisable at $ per share for a period of from the date of issuance, with % of the options vesting each fiscal quarter over a period of . The fair value of the options totaled $ 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 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ and $, respectively.
In connection with the Buban Employment Agreement, the Company granted Ms. Buban that will grant Ms. Buban a five-year option (the “Buban Bonus Option”) to purchase up to shares of the Company’s common stock which vest annually on a contract year basis, based upon the achievement of certain revenue and EBITA financial metrics. The fair value of the Buban Bonus Option 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 %, (iv) expected volatility of %, and (v) exercise price of $ per share. The measurement period for the Buban Bonus Option began on September 3, 2021. The Company analyzed the likelihood that vesting qualifications would be met during the contract year and deemed that there was no option expense to be recognized for the nine months ended September 30, 2022.
On September 3, 2021 the Company issued options to purchase up to an aggregate of shares of common stock to various employees of SSI under the Plan. The options were issued pursuant to a stock option grant agreement and is exercisable at $ per share for a period of four years from the date of issuance, with % of the options vesting each fiscal quarter over a period of . The fair value of the options totaled $ 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 %, (iv) expected volatility of %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ and $, respectively.
During the fourth quarter of 2021, the Company issued options to purchase up to an aggregate of shares of common stock to two employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $ to $ per share for a period of of from the date of issuance, with quarterly vesting periods over two years. The fair value of the options totaled $ 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 %, (iv) expected volatility of % to %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ and $, respectively.
On November 5, 2021, the Company entered into a non-qualified stock option agreement with Christopher Constable (the “Constable Option Agreement”) as part of his employment agreement. Under the terms of the option agreement, the Company granted Mr. Constable an immediately exercisable five-year option to purchase shares of the Company’s common stock at an exercise price of $ (the “Compensation Option”). The fair value of the Compensation Option 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 %. The Compensation Option was fully expensed as of December 31, 2021.
On January 21, 2022, the Company issued options to purchase up to an aggregate of shares of common stock to an employee under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at $ per share for a period of from the date of issuance, with quarterly vesting periods over . The fair value of the options totaled $ 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 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ and $, respectively.
| 22 |
During the three months ended June 30, 2022, the Company issued options to purchase up to an aggregate of shares of common stock to three employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $ to $ per share for a period of of from the date of issuance, with quarterly vesting periods over two years. The fair value of the options totaled $ using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate ranging from % to % (ii) expected life of years, (iii) dividend yield of %, (iv) expected volatility of % to %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ and $, respectively.
On April -8, 2022, the Company issued an option to purchase up to shares of common stock to one contractor under the Plan. The option was issued pursuant to a stock option grant agreement and is exercisable at $ per share for a period of of from the date of issuance. The options vested immediately. The fair value of the options totaled $ 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 %, (iv) expected volatility of %. The stock options expense of $ was fully recognized as of the three and nine months ended September 30, 2022.
On May 16, 2022, the Company issued an option to purchase up to shares of common stock to one employee under the Plan. The option was issued pursuant to a stock option grant agreement and is exercisable at $ per share for a period of four years of from the date of issuance, with quarterly vesting periods over three quarters. The fair value of the options totaled $ 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 %, (iv) expected volatility of %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ and $, respectively.
In August, 2022, the Company issued options to purchase up to shares of common stock to two employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $ to $ per share for a period of four years of from the date of issuance, with quarterly vesting periods over two years. The fair value of the options totaled $ using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate ranging from % to % (ii) expected life of years, (iii) dividend yield of %, (iv) expected volatility of % to %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ and $, respectively
On September 27, 2022, the Company issued options to purchase up to shares of common stock to one employee under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at $ per share for a period of four years of from the date of issuance, with quarterly vesting periods over two years. The fair value of the options totaled $ 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 %, (iv) expected volatility of %. There was stock option expense recognized for the three and nine months ended September 30, 2022.
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – December 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding – September 30, 2022 (unaudited) | $ | |||||||||||||||
| Exercisable – September 30, 2022 (unaudited) | $ | $ | ||||||||||||||
At September 30, 2022, there was approximately $ of unrecognized stock option expense which may be recognized only if the full vesting requirements for these options are met.
At September 30, 2022, there was approximately $ of total unrecognized stock option expense which is expected to be recognized on a straight-line basis over a weighted-average period of 1.8 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 $
| 23 |
In
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 $
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 to two accredited
investors, units of the Company, with the 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 $
A summary of the Company’s warrants as of December 31, 2021 and changes during the nine months ended September 30, 2022 is presented below:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – December 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Forfeited or Expired | ||||||||||||||||
| Outstanding – September 30, 2022 | $ | |||||||||||||||
| Exercisable – September 30, 2022 | $ | $ | ||||||||||||||
Note 9. Commitments and contingencies
Leases
On
August 14, 2014, the Company entered into a 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
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 $
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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 $
In
addition, Mr. Constable shall be entitled to receive four-year 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
| 25 |
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 five-year 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
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 $
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
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 commencing on 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 $
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, which relates to consulting services provided to the Company by the deceased between 2005 and 2017, alleges breach of
contract and quantum meruit and is seeking $
| 26 |
Note 10. Segment Reporting
The
Company has
| 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 reteal store for the diving community. |
Three Months Ended
September 30
(unaudited)
| 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 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from Operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ( | ) | ||||||||||||||||||||
Nine Months Ended
September 30
(unaudited)
| 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 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
Note 11. Subsequent Events
Effective as of October 10, 2022, Liggett & Webb, P.A. (“Liggett & Webb”) 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.
The reports of Liggett & Webb on the financial statements of the Company for the fiscal years ended December 31, 2021 and December 31, 2020, did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that such reports included an explanatory paragraph with respect to the Company’s ability to continue as a going concern.
During the years ended December 31, 2021 and December 31, 2020, and the subsequent interim periods from January 1, 2022 through the date of this report, there were no (a) disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K) with Liggett & Webb on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Liggett & Webb’s satisfaction, would have caused Liggett & Webb to make reference to the subject matter thereof in connection with its reports for such years; or (b) reportable events, as described under Item 304(a)(1)(v) of Regulation S-K.
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ITEM 2. 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 Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly 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 Quarterly Report. 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.
The management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Overview
The Company owns and operates a portfolio of companies with a concentration in the industrial and recreational diving industry. The Company, through its subsidiaries, designs, tests, manufactures, and distributes recreational hookah diving, yacht-based scuba air compressors and nitrox generation systems and scuba and water safety products in the United States and internationally.
The Company has five subsidiaries focused on various sub-sectors:
| ● | 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 and Retail |
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, a manufacturing facility in Huntington Beach, California, and a retail facility in Lauderdale-By-The-Sea, Florida.
The Company, through its wholly owned subsidiaries, designs, tests, and manufactures 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 building a guided tour operation that also include dive retail. Lastly, The Company is 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.
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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
Net Revenues, Costs of Net Revenues and Gross Profit
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Net revenues increased 80.2% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 as a result of a 187.2% increase in revenue for BLU3, Inc. from the continued expansion of its customer base as well as the addition of NOMAD to its product line, an increase in LWA’s revenues of 193.9% as a result of the addition of a new distributor in Mexico during the three months ended September 30, 2022 and the addition of revenue from both SSI and LBI. SSI was acquired in September, 2021, therefore SSI revenue for the three months ended September 30, 2021 reflected only a partial month of revenue activity. For the three months ended September 30, 2022, cost of net revenues was 65.9% as compared with the cost of revenues of 75.9% for the three months ended September 30, 2021. Included in cost of net revenues are royalty expenses paid to Robert Carmichael which increased 17.8% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Gross profit margin was 34.1% for the three months ended September 30, 2022 as compared to gross profit margin of 24.1% for the three months ended September 30, 2021. The improvement in gross margin, is directly attributable to improvement in BLU3’s margin from a negative 6.2% margin for the three months ended September 30, 2021 to a 40.0% margin for the three months ended September 30, 2022.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Net revenues increased 70.2% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This increase is a result of a 120.8% increase in revenue for BLU3, Inc. from the continued expansion of its customer base as well as the addition of NOMAD to its product line, an increase in LWA’s revenues of 88.2% as a result of the expansion of its customer base with the addition of a new distributor in Mexico during the nine months ended September 20, 2022 and the addition of SSI and LBI revenue. SSI was acquired in September, 2021 therefore SSI revenue for the three months ended September 30, 2021 reflected only a partial month of revenue activity. These revenue increases were offset by a decrease of 5.3% in revenue for BTL. For the nine months ended September 30, 2022, cost of net revenues was 65.3% as compared with the cost of revenues of 69.6% for the nine months ended September 30, 2021. Included in cost of net revenues are royalty expenses paid to a third party which increased 86.7% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Gross profit margin was 34.7% for the nine months ended September 30, 2022 as compared to gross profit margin of 30.4% for the nine months ended September 30, 2021. The improvement in gross margin, of 4.3% of revenue is a result of a 14.3% margin increase in the BLU3 product line.
The following tables provides net revenues, total costs of net revenues and gross profit margins for our segments for the periods presented.
Net Revenues
| Three Months Ended September 30, | % of | Nine Months Ended September 30, | % of | |||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||
| Legacy SSA Products | $ | 913,785 | $ | 976,904 | (6.5 | )% | $ | 2,291,916 | $ | 2,419,920 | (5.3 | )% | ||||||||||||
| High Pressure Gas Systems | 350,839 | 119,392 | 193.9 | % | 897,849 | 477,085 | 88.2 | % | ||||||||||||||||
| Ultra-Portable Tankless Dive Systems | 980,169 | 341,287 | 187.2 | % | 2,659,027 | 1,204,265 | 120.8 | % | ||||||||||||||||
| Redundant Air Tank Systems | 471,051 | 121,131 | 288.9 | % | 1,192,986 | 121,131 | 884.9 | % | ||||||||||||||||
| Guided Tour Retail | 92,960 | - | 100.0 | % | 143,233 | - | 100.0 | % | ||||||||||||||||
| Total net revenues | $ | 2,808,804 | $ | 1,558,714 | 80.2 | % | $ | 7,185,011 | $ | 4,222,401 | 70.2 | % | ||||||||||||
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Cost of revenues as a percentage of net revenues
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Legacy SSA Products | 63.3 | % | 66.0 | % | 69.8 | % | 69.5 | % | ||||||||
| High Pressure Gas Systems | 72.6 | % | 70.8 | % | 61.9 | % | 58.5 | % | ||||||||
| Ultra-Portable Tankless Dive Systems | 60.0 | % | 106.2 | % | 59.2 | % | 73.5 | % | ||||||||
| Redundant Air Tank Systems | 68.4 | % | 76.0 | % | 70.2 | % | 76.0 | % | ||||||||
| Guided Tour Rental | 117.3 | % | - | 86.0 | % | - | ||||||||||
Gross profit (loss) margins
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Legacy SSA Products | 36.7 | % | 34.0 | % | 30.2 | % | 30.5 | % | ||||||||
| High Pressure Gas Systems | 27.4 | % | 29.2 | % | 38.1 | % | 41.5 | % | ||||||||
| Ultra-Portable Tankless Dive Systems | 40.0 | % | (6.2 | )% | 40.8 | % | 26.5 | % | ||||||||
| Redundant Air Tank Systems | 31.6 | % | 24.0 | % | 29.8 | % | 24.0 | % | ||||||||
| Guided Tour Rental | (17.3 | )% | - | 14.0 | % | - | ||||||||||
SSA Products
Net revenues decreased 5.3% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The decrease can be primarily attributed to a 12.3% decrease in the dealer segment for the nine months ended September 30, 2022 as compared to the same period in 2021. The decrease in dealer orders can be attributed to the 22.1% net revenue decrease during the three months ended September 30, 2022 as compared the same period in 2021 as a result of, we believe, many dealers increasing purchases during the first quarter of 2022 for the summer season and holding with restocking orders due to trepidation regarding the economy. Affiliate sales, while the smallest segment of revenue increased 348.7% for the three months ending September 30, 2022 as compared to the three months ended September 30 30, 2021 and increased 56.0% for the nine months ended September 30, 2022 compared to the nine month ended September 30, 2021. Direct to consumer sales increased 5.1% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 as direct consumer demand continues to shift to online sales.
The costs of revenues as a percentage of net revenues in this segment increased slightly from 69.5% to 69.8% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 due to a decrease in margins in the direct to consumer and dealer segments.
A breakdown of the revenue channels for this segment are 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 under dealer agreements which typically have lower margins. Affiliates are resellers of our products with which we do not have formal dealer arrangements.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | % change | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||
| Dealers | $ | 514,566 | $ | 660,180 | (22.1 | )% | 70.3 | % | 70.4 | % | 29.7 | % | 29.6 | % | ||||||||||||||
| Direct to Consumer (includes website ) | 375,680 | 311,479 | 20.6 | % | 55.3 | % | 54.8 | % | 44.7 | % | 45.2 | % | ||||||||||||||||
| Affiliates | 23,539 | 5,245 | 348.7 | % | 36.5 | % | 173.4 | % | 63.5 | % | (73.4 | )% | ||||||||||||||||
| Total | $ | 913,785 | $ | 976,904 | (6.5 | )% | 63.3 | % | 66.0 | % | 36.7 | % | 34.0 | % | ||||||||||||||
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| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | % change | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | ||||||||||||||||||||||
| Dealers | $ | 1,383,321 | $ | 1,577,607 | (12.3 | )% | 74.8 | % | 75.3 | % | 25.2 | % | 24.7 | % | ||||||||||||||
| Direct to Consumer (includes website ) | 837,214 | 796,565 | 5.1 | % | 59.4 | % | 57.2 | % | 40.6 | % | 42.8 | % | ||||||||||||||||
| Affiliates | 71,381 | 45,748 | 56.0 | % | 92.3 | % | 85.8 | % | 7.7 | % | 14.2 | % | ||||||||||||||||
| Total | $ | 2,291,916 | $ | 2,419,920 | (5.3 | )% | 69.8 | % | 69.5 | % | 30.2 | % | 30.5 | % | ||||||||||||||
High Pressure Gas Systems
Sales of high-pressure breathing air compressors increased 88.2% for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021 as LWA was able to continue to supply its customers with their needs despite industry supply chain issues. The reseller segment revenues increased significantly by 205.7% and 73% for the three and nine months ended September 30, 2022 as compared to the same periods in the prior year with the addition of a new distributor in Mexico in July 2022. The Original Equipment Manufacturer segment continued to show growth of 156.0% through the nine months ended September 30, 2022 due to international orders to boat manufacturers but decreased 280.3% for the three months ended September 30, 2022 as compared to the same period in the prior year, as OEM volume has proven to be sporadic. The direct to consumer segment, which includes yacht owners and direct to dive stores, increased 69.9% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 and increased 102.8% for the nine months ended September 30, 2022 as compared to September 30, 2021, as this segment has become more active post-COVID, and we believe these customers are beginning to re-invest in their operations.
Costs of revenues as a percentage of net revenues in this segment increased to 61.9% for the nine months ended September 30, 2022 as compared to 58.5% for the nine months ended September 30, 2021. This increase is attributed increased revenue in the reseller segment during the three months ended September 30, 2022, which yields a lower margin than that of the segments as these customers are typically larger volume customers and are given volume discounts.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | % change | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||
| Resellers | $ | 316,914 | $ | 103,667 | 205.7 | % | 76.1 | % | 73.6 | % | 23.9 | % | 26.4 | % | ||||||||||||||
| Direct to Consumers | 20,903 | 12,301 | 69.9 | % | 28.1 | % | 53.4 | % | 71.9 | % | 46.6 | % | ||||||||||||||||
| Original Equipment Manufacturers | 13,022 | 3,424 | 280.3 | % | 57.4 | % | 48.1 | % | 42.6 | % | 51.9 | % | ||||||||||||||||
| Total | $ | 350,839 | $ | 119,392 | 193.9 | % | 72.6 | % | 70.8 | % | 27.4 | % | 29.2 | % | ||||||||||||||
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| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | % change | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | ||||||||||||||||||||||
| Resellers | $ | 556,454 | $ | 321,590 | 73.0 | % | 65.6 | % | 73.0 | % | 34.4 | % | 27.0 | % | ||||||||||||||
| Direct to Consumers | 216,148 | 106,564 | 102.8 | % | 55.3 | % | 49.1 | % | 44.7 | % | 50.9 | % | ||||||||||||||||
| Original Equipment Manufacturers | 125,247 | 48,931 | 156.0 | % | 57.0 | % | 83.9 | % | 43.0 | % | 16.1 | % | ||||||||||||||||
| Total | $ | 897,849 | $ | 477,085 | 88.2 | % | 61.9 | % | 58.5 | % | 38.1 | % | 41.5 | % | ||||||||||||||
Ultra Portable Tankless Dive Systems
Net revenue for the nine months ended September 30, 2022 in the Ultra Portable Tankless Dive System segment increased 120.8% as compared to the nine months ended September 30, 2021 as a result of the addition of the Nomad product line. The 146.2% increase in the Dealers segment represents the continued expansion of the international dealer base. The addition of Nomad to the Amazon segment during the three months ended September 30, 2022 resulted in a 334.1% growth in that segment as compared to the three months ended September 30, 2021.
Cost of revenues from this segment as a percentage of net revenues for the three and nine months ended September 30, 2022 showed improvement over both the three and nine months ended September 30, 2021, primarily due to the impact of the cost and production efficiencies of the Nomad dive system and the resulting increase in margin as a percentage of revenue for the same periods in 2022 as compared to 2021.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | % change | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||
| Direct to Consumer | 366,178 | 146,901 | 149.3 | % | 67.3 | % | 82.4 | % | 32.7 | % | 17.6 | % | ||||||||||||||||
| Amazon | 410,513 | 94,569 | 334.1 | % | 44.6 | % | 106.8 | % | 55.4 | % | (6.8 | )% | ||||||||||||||||
| Dealers | 203,478 | 99,817 | 103.9 | % | 78.0 | % | 82.9 | % | 22.0 | % | 17.1 | % | ||||||||||||||||
| Total | $ | 980,169 | $ | 341,287 | 187.2 | % | 60.0 | % | 106.2 | % | 40.0 | % | (6.2 | )% | ||||||||||||||
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| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | % change | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | ||||||||||||||||||||||
| Direct to Consumer | 906,133 | 487,566 | 85.8 | % | 57.6 | % | 61.3 | % | 42.4 | % | 38.7 | % | ||||||||||||||||
| Amazon | 859,633 | 353,834 | 142.9 | % | 54.1 | % | 90.1 | % | 45.9 | % | 9.9 | % | ||||||||||||||||
| Dealers | 893,261 | 362,865 | 146.2 | % | 65.8 | % | 73.6 | % | 34.2 | % | 26.4 | % | ||||||||||||||||
| Total | $ | 2,659,027 | $ | 1,204,265 | 120.8 | % | 59.2 | % | 73.5 | % | 40.8 | % | 26.5 | % | ||||||||||||||
Redundant Air Tank Systems
Net revenue in the Redundant Air Tank Systems System segment was $1,192,986 and $471,051 for the nine and three months ended September 30, 2022, respectively. The margins for the three months ended September 30, 2022 increased 31.6% as compared to 29.8% for the nine months ended September 30, 2022 as the margin for dealer sales improved during the three months ended September 30, 2022 to 30.9% as compared to 25.7% for the nine months ended September 30, 2022. Except for the margin for repairs, dealer margins continue to be the lowest margin segment as SSI sees this segment as the volume driver and sets prices help enable dealers to also 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 segments.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | % change | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||
| Commercial | $ | 73,691 | $ | 7,020 | 949.7 | % | 45.8 | % | 53.2 | % | 54.2 | % | 46.8 | % | ||||||||||||||
| Dealers | 329,739 | 95,191 | 246.4 | % | 69.1 | % | 88.5 | % | 30.9 | % | 11.5 | % | ||||||||||||||||
| Government | 14,017 | 14,302 | -2.0 | % | 76.5 | % | 19.7 | % | 23.5 | % | 80.3 | % | ||||||||||||||||
| Repairs | 2,620 | - | 100.0 | % | 569.6 | % | - | -469.6 | % | - | ||||||||||||||||||
| Direct to Consumers (Website) | 50,984 | 4,618 | 1004.0 | % | 68.0 | % | 28.3 | % | 32.0 | % | 71.7 | % | ||||||||||||||||
| Total | $ | 471,051 | $ | 121,131 | 288.9 | % | 68.4 | % | 76.0 | % | 31.6 | % | 24.0 | % | ||||||||||||||
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| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | % change | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | ||||||||||||||||||||||
| Commercial | $ | 176,847 | $ | 7,020 | 2419.2 | % | 44.5 | % | 53.2 | % | 55.5 | % | 46.8 | % | ||||||||||||||
| Dealers | 792,081 | 95,191 | 732.1 | % | 74.3 | % | 88.5 | % | 25.7 | % | 11.5 | % | ||||||||||||||||
| Government | 66,729 | 14,302 | 366.6 | % | 45.1 | % | 19.7 | % | 54.9 | % | 80.3 | % | ||||||||||||||||
| Repairs | 21,478 | - | 100.0 | % | 276.8 | % | 0.0 | % | -176.8 | % | - | |||||||||||||||||
| Direct to Consumers (Website) | 135,851 | 4,618 | 2841.8 | % | 59.2 | % | 28.3 | % | 40.8 | % | 71.7 | % | ||||||||||||||||
| Total | $ | 1,192,986 | $ | 121,131 | 884.9 | % | 70.2 | % | 76.0 | % | 29.8 | % | 24.0 | % | ||||||||||||||
Guided Tours and Retail
The guided tour and retail segment is a new segment and is derived from 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.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | % change | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | ||||||||||||||||||||||
| Retail Sales | $ | 55,693 | - | 100.0 | % | 119.4 | % | - | (19.4 | )% | - | |||||||||||||||||
| Tours and Lessons | 37,267 | - | 100.0 | % | 114.3 | % | - | (14.3 | )% | - | ||||||||||||||||||
| Total | $ | 92,960 | - | 100.0 | % | 117.3 | % | - | (17.3 | )% | - | |||||||||||||||||
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| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | % change | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | ||||||||||||||||||||||
| Retail Sales | $ | 90,241 | - | 100.0 | % | 77.1 | % | - | 22.9 | % | - | |||||||||||||||||
| Tours and Lessons | 52,992 | - | 100.0 | % | 101.3 | % | - | (1.3 | )% | - | ||||||||||||||||||
| Total | $ | 143,233 | - | 100.0 | % | 86.0 | % | - | 14.0 | % | - | |||||||||||||||||
Operating Expenses
Operating expenses, consist of selling, general and administrative (“SG&A”) expenses and research and development costs and are reported on a consolidated basis for our operating segments. Operating expenses increased 35.1% for the three months ended September 30, 2022 and 40.1% for the nine months ended September 30, 2022 as compared to the same periods in the prior year.
Selling, General & Administrative Expenses (SG&A Expenses)
SG&A increased by 38.7% for the three months ended September 30, 2022 and 43.6% for the nine months ending September 30, 2022 as compared to the same periods in the prior year. SG&A expenses were comprised of the following:
| Expense Item | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | % Change | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | % Change | ||||||||||||||||||
| Payroll, Selling & Administrative | $ | 536,383 | $ | 276,262 | 94.2 | % | $ | 1,476,868 | $ | 737,791 | 100.2 | % | ||||||||||||
| Non-Cash Stock Compensation Expense | 315,152 | 312,946 | .7 | % | 894,453 | 811,821 | 10.2 | % | ||||||||||||||||
| Professional Fees | 72,144 | 121,470 | (40.6 | )% | 297,175 | 276,998 | 7.3 | % | ||||||||||||||||
| Advertising | 125,456 | 64,317 | 95.1 | % | 383,029 | 178,158 | 115.0 | % | ||||||||||||||||
| Other | 175,583 | 107,942 | 62.7 | % | 456,534 | 438,811 | 4.0 | % | ||||||||||||||||
| Total SG&A | $ | 1,224,718 | $ | 882,937 | 38.7 | % | $ | 3,508,059 | $ | 2,443,579 | 43.6 | % | ||||||||||||
Payroll increases for the nine months ended September 30, 2022 can be attributed primarily to the addition of SSI payroll which accounted for 47.1% of the increase. Additional payroll expenses for BLU3 made up 23.4% of the change with additions of customer service and engineering personnel. The BTL payroll increased 13.7% with the addition of marketing and social media personnel, and LWA payroll made up 12.0% of the change with increases in the pay structure of the primary operator of the business unit, and the addition of accounting personnel.
Non-Cash Stock Compensation expenses increased 10.2% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase can be primarily attributed the issuance of options under the plan to employees and contractors for a total of approximately 1,742,600 shares with 300,000 of those shares vesting immediately upon issuance during the nine months ended September 30, 2022.
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Professional fees, including legal, accounting and other professional fees which the Company has paid with a combination of cash and common stock increased 7.3% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase can be attributed to an increase in accounting fees related to the year-end audit. For the three months ended September 30, 2022, professional fees decreased 40.6% as compared to the prior year, due to the lack of acquisition related legal fees paid during 2022.
The increase in advertising expense for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was 115.0%, attributable to BLU3’s focus on social media, Google and trade show advertising. SSI added 32.9% to the increase in advertising expense attributed to a full nine months of advertising expenses as compared to the same period in the prior year. BTL’s decrease in advertising expense by approximately 50% as compared to the prior year reduced the overall change in advertising expense by 22.5% for the nine months ended September 30, 2022 as compared to the same period in the prior year.
Other expenses increased 62.7% and 4.0% for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in the prior year, The primary driver of this increase was rent expense which accounted for 92.3% of the increase for the nine months ended September 30, 2022. The Company also obtained directors and officers insurance for the fiscal year ending December 31, 2022 which expense accounted for 28.8% of the increase for the nine months ended September 30, 2022.
Research & Development Expenses (R&D Expenses)
R&D expenses for the three months ended September 30, 2022 decreased 82.1% and 81.1% for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The decrease can be primarily attributed to the completion of the R&D for BLU3’s NOMAD, as it moved into production in the third quarter of 2021.
Other Income/Expense
For the nine months ended September 30, 2022, other expenses totaled approximately $31,300 of interest expense as compared to other income of approximately $157,900 for the nine months ended September 30, 2021. Other income for the nine months ended September 30, 2021 consisted of a gain due to the settlement of debt of $10,000, the forgiveness of a PPP loan less interest expense of approximately $11,700. The increase in interest expense can be attributed to the Navitas loan that was funded in the second quarter of 2021, and the interest on the debt related to the acquisition of SSI.
Liquidity and Capital Resources
We had cash of $577,076 as of September 30, 2022. The following table summarizes total current assets, total current liabilities and working capital at September 30, 2022 as compared to December 31, 2021.
| September 30, | December 31, | % | ||||||||||
| 2022 | 2021 | change | ||||||||||
| (unaudited) | ||||||||||||
| Total current assets | $ | 3,575,239 | $ | 2,966,432 | 20.5 | % | ||||||
| Total current liabilities | $ | 1,591,371 | $ | 1,396,197 | 14.0 | % | ||||||
| Working capital | $ | 1,983,868 | $ | 1,570,235 | 26.3 | % | ||||||
The increase in our current assets at September 30, 2022 from December 31, 2021 primarily reflects an increases in inventory purchases reflected by an increase in inventory and prepaid assets which includes prepayments of inventory, as the Company has experienced revenue growth and ramped up purchasing and production to account for potential supply chain issues. The increase in total current liabilities primarily reflects a significant increase in account payable of 14.9% and a related party convertible demand note issued in September 2022.
Summary Cash Flows
Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| Net cash used in operating activities | $ | (499,713 | ) | $ | (569,142 | ) | ||
| Net cash provided by (used in) investing activities | $ | (60,290 | ) | $ | 517,701 | |||
| Net cash provided by financing activities | $ | 493,935 | $ | 566,970 | ||||
| 36 |
Net cash used in operating activities for the nine months ended September 30, 2022 was due to the net loss of approximately $1,056,444 which is primarily attributable to non-cash stock compensation expenses of approximately $894,453. The non-cash stock compensation expense for the nine months ended September 30, 2022 is attributable to stock options and grants issued to our executive officers and various employees as well as common stock issued to consultants and professionals for services. Net cash used in operating activities is also the result of increases in current assets, including, accounts receivable, inventory, net, and prepaid expenses that utilized approximately $486,000, a net decrease in liabilities which also utilized cash with decreases in customer deposits, long term lease liability and accounts payable-related party utilizing approximately $215,400 offset by increases in accounts payable and accrued liabilities as well as other liabilities of approximately $142,100.
Net cash used in investing activities for the nine months ended September 30, 2022 of approximately $60,300 consists of $30,000 used in an asset acquisition and fixed asset purchases, net of debt of approximately $30,200.
Net cash provided by financing activities for the nine months ended September 30, 2022 reflects proceeds from the exercise of warrants of approximately $265,000, the issuance of new units of $205,000, related party debt of approximately $66,800, less the repayment of debt of approximately $42,900.
Going Concern
Our unaudited consolidated financial statements included in this Quarterly Report were prepared assuming we 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 consolidated financial statements. The report of our independent registered public accounting firm on our audited consolidated financial statements for the year ended December 31, 2021 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.
We have a history of losses, and an accumulated deficit of $15,601,548 as of September 30, 2022. Despite a working capital surplus of $1,983,868 at September 30, 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 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.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, valuation of inventory, allowance for doubtful accounts, and equity-based transactions. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited consolidated financial statements contained in this Quarterly Report.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company’s operations, financial position or cash flows.
These recent accounting pronouncements are described in Note 2 to our unaudited consolidated financial statements contained in this Quarterly Report.
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Off Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company and is not required to provide this information.
ITEM 4. 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 September 30, 2022, 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, that 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 September 30, 2022 and based upon the such evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to the material weaknesses set forth below.
| ● | Insufficient number and lack of qualified accounting department and administrative personnel and support; | |
| ● | 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; | |
| ● | 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. |
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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 is being analyzed and adjusted Company-wide, where possible. The Company is in the process of hiring additional personnel in the accounting department, as well as the documentation of controls and procedures. | |
| ● | The Company plans on evaluating various accounting systems to enhance its 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.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEEDINGS
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 1A. RISK FACTORS
The Company is a smaller reporting company and is not required to provide this information.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of equity securities during the period covered by this Quarterly Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 8, 2022 | 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) | ||
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