BWMG 8-K/A
Brownie's Marine Group, Inc (BWMG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(
CURRENT REPORT
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EXPLANATORY NOTE
On September 9, 2021, Brownie’s Marine Group, Inc., a Florida corporation (the “Company”), filed with the Securities and Exchange Commission (“SEC”), a Current Report on Form 8-K (the “Form 8-K”) to report the acquisition by the Company of Submersible Systems, Inc., a Florida corporation (formerly Submersible Systems, LLC prior to converting to a Florida corporation as of August 31, 2021), and related matters. This Amendment No. 1 on Form 8-K/A is being filed by the Company to amend and restate the original Form 8-K in its entirety, and to supplement the original Form 8-K to include the financial statements and pro forma information required by Item 9.01.
| Item 1.01 | Entry into a Material Definitive Agreement. |
On September 3, 2021, Brownie’s Marine Group, Inc., a Florida corporation (the “Company”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Submersible Acquisition, Inc., a Florida corporation and wholly owned subsidiary of the Company (“Acquisition Sub”), Submersible Systems, Inc., a Florida corporation (“Submersible”), 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 (the “Submersible Shares”), 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. The Merger became effective upon the filing of Articles of Merger with the Secretary of State of the State of Florida on September 3, 2021.
Pursuant to the terms and conditions of the Merger Agreement, the Company acquired all of the Submersible Shares from the Sellers for an aggregate purchase price of $1,750,000 (the “Merger Consideration”), which was paid to the Sellers at closing (the “Closing”): (a) by issuance to the Sellers of 8% convertible promissory notes in the aggregate principal amount of $350,000 (the “Notes”), and (b) by issuance to the Sellers of an aggregate of 27,305,442 shares (the “ Merger Shares”) of the Company’s common stock, par value $0.0001 per share (“Common Stock”), calculated at a price of approximately $0.05127 per share (the “Conversion Rate”).
The Merger Shares received by the Sellers are subject to a leak-out restriction commencing on the date of issuance, as follows: (i) up to 12.5% may be sold after 6 months; (ii) up to 25% may be sold after 9 months; (iii) up to 75% may be sold after 24 months; and (iv) up to 100% may be sold after 36 months. Notwithstanding the foregoing, the leak-out restriction may be waived by the Company under certain conditions.
The Sellers were granted “piggyback” registration rights with respect to the Merger Shares and the shares of Common Stock that may be received upon their conversion of the Notes.
The Notes have a maturity date of September 3, 2024, and bear interest at a rate of 8% per annum. Interest shall be paid at the end of each 3-month period commencing on September 30, 2021, in shares of Common Stock of the Company, calculated based on the amount due on said date divided by the Conversion Rate. The Company has the right to prepay amounts due under the Notes in whole or in part at any time without penalty or premium. Within 30 days after the end of each quarter, commencing on the first full quarter after the Closing, the Company shall pay, as a reduction of the principal amount of the Notes, in cash, payments equal to 50% of Submersible’s Operating Income. For the purposes of the Notes, Operating Income shall be defined as the net income of Submersible before interest, taxes, depreciation and amortization (but expressly excluding any overhead cost allocation applied to Submersible by the Company). The final payment will be a balloon payment of the balance due upon the end of the term of the Notes. The holders of Notes have the right to convert the Notes, in whole or in part, at any time, within the 36-month term into shares of Common Stock at the Conversion Rate.
In connection with the Merger, Rick Kearney, Submersible’s founder, entered into a five-year confidentiality, non-competition and non-solicitation agreement with the Company (the “Non-Compete Agreement”).
The foregoing descriptions of the Notes, the Merger Agreement and the Non-Compete Agreement are not complete and are qualified in their entirety by reference to the full text of such documents, copies of which are attached hereto as Exhibits 4.1, 10.1 and 10.2, respectively, and incorporated herein by reference.
| Item 2.01 | Completion of Acquisition or Disposition of Assets. |
Reference is made to the disclosure set forth under Item 1.01 above, which disclosure is incorporated herein by reference.
On September 3, 2021, the Company consummated the acquisition of Submersible, which designs, tests, manufactures, distributes and sells scuba, diving and rescue equipment., As a result of the Merger, Submersible became a wholly owned subsidiary of the Company.
| Item 2.03 | Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant. |
Reference is made to the disclosure set forth under Items 1.01 and 2.01 above, which disclosure is incorporated herein by reference.
| Item 3.02 | Unregistered Sale of Equity Securities. |
Reference is made to the disclosure set forth under Items 1.01 and 2.01 above, which disclosure is incorporated herein by reference.
The issuances of the Notes and Merger Shares were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), as transactions by an issuer not involving any public offering. At the time of their issuance, the Notes and the Merger Shares were deemed to be restricted securities for purpose of the Securities Act and will bear restrictive legends to that effect.
| Item 7.01 | Regulation FD Disclosure. |
On September 9, 2021, the Company issued a press release announcing the Merger. The press release is attached to this Report as Exhibit 99.1 and is incorporated herein by reference.
The information in this Item 7.01 of this Report, including Exhibit 99.1 attached hereto, is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall it be deemed incorporated by reference in any filing of ours under the Securities Act, or the Exchange Act, whether made before or after the date hereof, except as shall be expressly set forth by specific reference to this Report in such filing.
Forward Looking Statements
This filing includes “forward-looking statements.” All statements other than statements of historical facts included or incorporated herein may constitute forward-looking statements. Actual results could vary significantly from those expressed or implied in such statements and are subject to a number of risks and uncertainties. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. The forward-looking statements involve risks and uncertainties that may affect our operations, financial performance, and other factors as discussed in our filings with SEC. Among the factors that could cause results to differ materially are those risks discussed in the periodic reports we file with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 31, 2021. You are urged to carefully review and consider the cautionary statements and other disclosures made in those filings, specifically those under the heading “Risk Factors.” We do not undertake any duty to update any forward-looking statement except as required by law.
| Item 9.01 | Financial Statements and Exhibits. |
| (a) | Financial Statements of Business Acquired. |
In accordance with Item 9.01(a), Submersible Systems, Inc.’s (i) audited balance sheets as of December 31, 2020 and 2019 and statement of operations, statement of changes in members’ equity and statement of cash flows for the years ended December 31, 2020 and 2019 are filed with this Report as Exhibit 99.2 and (ii) condensed balance sheet as of June 30, 2021 (unaudited) and December 31, 2020 and condensed statement of operations, statement of changes in members’ equity and statement of cash flows for the six months ended June 30, 2021 and 2020 (unaudited) are filed with this Report as Exhibit 99.3
| (b) | Pro Forma Financial Information. |
In accordance with Item 9.01(b), the Company’s pro forma unaudited combined financial statements for the fiscal year ended December 31, 2020 and for the six months ended June 30, 2021 are filed with this Report as Exhibit 99.4.
| (d) | Exhibits. |
| (1) | Incorporated by reference to the corresponding exhibit of the Company’s Current Report on Form 8-K filed with the SEC on September 9, 2021. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
| BROWNIE’S MARINE GROUP, INC. | ||
| Date: December 15, 2021 | By: | /s/ Christopher Constable |
| Name: | Christopher Constable | |
| Title: | Chief Executive Officer | |
Exhibit 99.2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Submersible Systems, Inc.
(formerly known as Submersible System, LLC)
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Submersible Systems, LLC (the Company) as of December 31, 2020 and 2019, and the related statements of operations, changes in members’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of inventories
As described in Note 2, the Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated by using standard quantitative measures based on criteria established by the Company. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances.
Auditing management’s estimates for the reserve for obsolete or excess inventory was highly judgmental due to the degree of subjectivity involved in assessing the future’s needs, changes in economic conditions, customer inventory levels or competitive conditions.
To test the management’s estimate for reserves, we performed audit procedures that included, among others, evaluating management’s forecast of inventory usage based on historical results, evaluated the Company’s determination of reserves and inquired with the personnel responsible for inventories to evaluate the reasonableness of the forecast of product demands.
/s/ Liggett & Webb, P.A.
We have served as the Company’s auditor since 2021.
Boynton Beach, Florida
December 15, 2021
SUBMERSIBLE SYSTEMS, LLC
BALANCE SHEET
| December 31, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 393,313 | $ | 323,544 | ||||
| Accounts receivable - net | 37,457 | 33,217 | ||||||
| Inventory, net | 489,701 | 434,298 | ||||||
| Prepaid expenses and other current assets | 6,722 | 2,143 | ||||||
| Total current assets | 927,193 | 793,202 | ||||||
| Property, equipment and leasehold improvements, net | 45,406 | 60,871 | ||||||
| Other assets | 9,916 | 10,524 | ||||||
| Total assets | $ | 982,515 | $ | 864,597 | ||||
| Liabilities and members’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 124,768 | $ | 114,109 | ||||
| Customer deposits and unearned revenue | 10,281 | 6,676 | ||||||
| Other liabilities | 7,696 | 7,700 | ||||||
| Total current liabilities | 142,745 | 128,485 | ||||||
| Loan payable | 116,160 | - | ||||||
| Total liabilities | 258,905 | 128,485 | ||||||
| Commitments and contingencies (see note 10) | - | - | ||||||
| Total members’ equity | 723,610 | 736,112 | ||||||
| Total liabilities and members’ equity | $ | 982,515 | $ | 864,597 | ||||
The accompanying notes are an integral part of these audited financial statements
SUBMERSIBLE SYSTEMS, LLC
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
| 2020 | 2019 | |||||||
| Net revenues | ||||||||
| Net revenues | $ | 1,425,343 | $ | 1,860,329 | ||||
| Total net revenues | 1,425,343 | 1,860,329 | ||||||
| Cost of net revenues | ||||||||
| Cost of net revenues | 1,100,107 | 1,428,575 | ||||||
| Total cost of revenues | 1,100,107 | 1,428,575 | ||||||
| Gross profit | 325,236 | 431,754 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative | 319,110 | 344,944 | ||||||
| Research and development costs | 17,590 | 7,154 | ||||||
| Total operating expenses | 336,700 | 352,098 | ||||||
| (Loss) Income from operations | (11,464 | ) | 79,656 | |||||
| Other expense, net | ||||||||
| Interest expense | (1,038 | ) | (475 | ) | ||||
| Total other expense | (1,038 | ) | (475 | ) | ||||
| Net (loss) income | $ | (12,502 | ) | $ | 79,181 | |||
The accompanying notes are an integral part of these audited financial statements
SUBMERSIBLE SYSTEMS, LLC
STATEMENT OF CHANGES IN MEMBERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
| Total Members’ Equity | ||||
| Balance, December 31, 2019 | $ | 736,112 | ||
| Net loss | (12,502 | ) | ||
| Balance, December 31, 2020 | $ | 723,610 | ||
| Total Members’ Equity | ||||
| Balance, December 31, 2018 | $ | 868,931 | ||
| Members’ Distribution | (212,000 | ) | ||
| Net Income | 79,181 | |||
| Balance, December 31, 2019 | $ | 736,112 | ||
The accompanying notes are an integral part of these audited financial statements
SUBMERSIBLE SYSTEMS, LLC
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (12,502 | ) | $ | 79,181 | |||
| Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 22,433 | 18,874 | ||||||
| Reserve for slow moving inventory | 7,277 | 10,394 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Change in accounts receivable | (4,240 | ) | 30,825 | |||||
| Change in inventory | (62,680 | ) | (14,195 | ) | ||||
| Change in prepaid expenses and other current assets | (4,579 | ) | 8,954 | |||||
| Change in other assets | 26 | 1,508 | ||||||
| Change in accounts payable and accrued liabilities | 10,659 | (31,094 | ) | |||||
| Change in customer deposits and unearned revenue | 3,605 | (27,176 | ) | |||||
| Change in other liabilities | (4 | ) | 151 | |||||
| Net cash (used in) provided by operating activities | (40,005 | ) | 77,422 | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | (6,386 | ) | (29,868 | ) | ||||
| Net cash used in investing activities | (6,386 | ) | (29,868 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from PPP loan | 116,160 | - | ||||||
| Members’ distribution | - | (212,000 | ) | |||||
| Net cash provided by (used in) financing activities | 116,160 | (212,000 | ) | |||||
| Net change in cash | 69,769 | (164,446 | ) | |||||
| Cash, beginning of year | 323,544 | 487,990 | ||||||
| Cash, end of year | $ | 393,313 | $ | 323,544 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash Paid for Interest | $ | 1,038 | $ | 475 | ||||
| Cash Paid for Income Taxes | $ | - | $ | - | ||||
The accompanying notes are an integral part of these audited financial statements
Note 1. Company Overview
Located in Huntington Beach, California, Submersible Systems, LLC (the “Company”) was incorporated as Submersible Systems, Inc. in the State of California in 1979. The Company was acquired in 2015 by Summit Acquisition, LLC and changed its name to Submersible Systems, LLC, and re-organized under the laws of the State of Florida. The primary focus of the Company is manufacturing, assembling and selling life-saving breathing systems worldwide under brand names including SpareAir, HEED, and Easy Dive.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates of useful life of property, equipment and leasehold improvements, allowance for doubtful accounts, and inventory reserves.
Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At December 31, 2020 and 2019, the Company had $159,236 and $104,060 in excess of the FDIC insured limit, respectively.
Accounts Receivable
Accounts receivable consist of amounts due from the sale of the Company’s products to wholesale and retail customers. The allowance for doubtful accounts are estimates that are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances. As of December 31, 2020 and 2019, the Company did not record an allowance for doubtful accounts.
As of December 31, 2020, the Company had three accounts that individually comprised over 10% of outstanding accounts receivable and in the aggregate comprised 50.1% of outstanding accounts receivable. Additionally, the Company had one customer that comprised 10.3% of revenue for the year ended December 31, 2020.
As of December 31, 2019, the Company had four accounts that individually comprised over 10% of outstanding accounts receivable and in the aggregate comprised 57.8% of outstanding accounts receivable. Additionally, the Company had no customers that comprised in excess of 10% of revenue for the year ended December 31, 2019.
Inventory
The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated using standard quantitative measures based on criteria established by the Company. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances.
Property and equipment and leasehold improvements
Property and equipment and leasehold improvements are stated at cost less accumulated depreciation or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated useful lives of the assets or term of the lease, which are primarily 5 to 7 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Research and development costs
The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. During the years ended December 31, 2020 and December 31, 2019 the Company incurred research and development costs of $17,590 and $7,154, respectively.
Revenue Recognition
We account for revenues in accordance with the Accounting Standard Codification topic 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principal 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 units as that is when ownership is transferred and performance is completed. Revenues from repair and maintenance activities is recognized when the repairs are completed and the units have been shipped.
Advertising
The Company expenses the costs of advertising as incurred. Advertising expenses which are included in Selling General and Administrative expenses were $70,587 and $66,186 for the years ended December 31, 2020 and 2019, respectively.
Customer deposits and unearned revenue and returns policy
The Company typically takes a 100% deposit against new customer or large orders. The remaining balance due is payable prior to shipment of the goods. There is no provision for cancellation of such orders once the deposit is accepted. Additionally, returns of all other merchandise are subject to a 25% restocking fee as stated on each sales invoice. Customer deposits and unearned revenue totaled $10,281 and $6,676 at December 31, 2020 and 2019, respectively.
Warranty policy
Under the provisions of the Financial Accounting Standards Board (“FASB”) ASC 460, Guarantor’s Guarantees, the Company may accrue a liability for estimated warranty policy costs based on standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations. The Company provides our customers with an industry standard one year warranty on units sold and may recognizes a warranty reserve based on gross sales multiplied by the historical warranty expense return rate. Currently, warranty related expenses are charged against net revenues and there is no accrued expense related to a warranty reserve. Warranty related expenses for the rolling two years ended December 31, 2019 and 2020 was less than .1% and deemed immaterial to record a reserve.
Income Taxes
The Company is a limited liability company, taxable income or loss flows through to the member on their individual tax returns rather than at the corporate level. The tax returns of the Company for the years ending in 2020, 2019, and 2018, are subject to examination by the Internal Revenue Service, generally for three years after they are filed.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on its results of operations, cash flows or financial condition.
Note 3. Inventory
Inventory consists of the following as of:
Schedule of Inventory
December 31, 2020 | December 31, 2019 | |||||||
| Raw materials | $ | 229,768 | $ | 242,775 | ||||
| Work in process | 126,517 | 65,608 | ||||||
| Finished goods | 133,416 | 125,915 | ||||||
| Total Inventory, net | $ | 489,701 | $ | 434,298 | ||||
As of December 31, 2020 and 2019, the Company recorded reserves for obsolete or slow moving inventory of approximately $26,175 and $18,897 respectively.
Note 4. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements comprised the following at::
Schedule of Fixed Assets
December 31, 2020 | December 31, 2019 | |||||||
| Machinery and equipment | $ | 67,511 | $ | 69,328 | ||||
| Tools, molds, jigs and dies | 18,320 | 15,878 | ||||||
| Furniture and fixtures | 1,477 | 1,477 | ||||||
| Computer equipment | 5,722 | 921 | ||||||
| Leasehold improvement | 10,859 | 10,859 | ||||||
| Total | 103,889 | 98,463 | ||||||
| Less: Accumulated depreciation and amortization | (58,483 | ) | (37,592 | ) | ||||
| Property, Equipment and Leasehold Improvements, net | $ | 45,406 | $ | 60,871 | ||||
| For the years ended December 31, 2020 and 2019, depreciation and amortization expense of the property, equipment and leasehold improvements totaled approximately $21,851 and $17,860. |
Note 5. Other Assets
Other assets consisted of the following:
Schedule of Other Assets
December 31, 2020 | December 31, 2019 | |||||||
| Refundable deposits | $ | 9,593 | $ | 9,619 | ||||
| Unamortized patent asset | 230 | 777 | ||||||
| Unamortized trademark asset | 93 | 128 | ||||||
| Total Other Assets | $ | 9,916 | $ | 10,524 | ||||
Amortization on the patent and trademark assets totaled $582 and $1,014 for the years ended December 31, 2020 and 2019, respectively.
Note 6. Related Party Transactions
On March 14, 2019 the Company advanced Banner Crossing III, LLC, an affiliate by common ownership, $212,000. This transaction was initially booked as a note receivable – member but was moved to members’ equity as a distribution.
The Company billed a total of $5,000 and $6,620 to Nobilis Therapeutics, an affiliate by common ownership, related to research and development consulting for a product to be developed using the Company’s technology for the years ending December 31, 2020 and 2019, respectively.
Note 7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists of the following as of:
Schedule of Accounts Payable and Accrued Liabilities
December 31, 2020 | December 31, 2019 | |||||||
| Accounts payable trade and other | $ | 76,228 | $ | 53,459 | ||||
| Accrued payroll and fringe benefits | 41,624 | 54,299 | ||||||
| Accrued payroll taxes and withholding | 6,916 | 6,351 | ||||||
| Total | $ | 124,768 | $ | 114,109 | ||||
As of December 31, 2020 and 2019, the Company had two vendors that comprised more than 10% of total purchases and in the aggregate comprised 23.8% and 30.2% of total purchases, respectively.
Note 8. Other Liabilities
Other liabilities consist of the following as of:
Schedule of Other Liabilities
December 31, 2020 | December 31, 2019 | |||||||
| California franchise tax | $ | 6,800 | $ | 6,800 | ||||
| Accrued California sales tax | 896 | 900 | ||||||
| $ | 7,696 | $ | 7,700 | |||||
Note 9. Loans Payable
On May 1, 2020, the Company received an unsecured loan from City National Bank in the principal amount of $116,160 (the “SBA Loan I”) pursuant to a two-year promissory note, under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”). The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a focus on payroll. As a qualifying business as defined by the SBA, the proceeds from this loan were used to primarily help maintain the Company’s payroll and cover rent and utilities as the Company navigated its business through the lockdowns associated with the COVID-19 pandemic.
The term of the note is two years from the disbursement date, though it may be payable sooner in connection with an event of default under the note. The SBA Loan I carries a fixed interest rate of one percent per year, with the first payment due seven months from the date of initial cash receipt. To date, the payments have been waived by the SBA. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company used the SBA Loan I for qualifying expenses and have applied for forgiveness of the SBA Loan I in accordance with the terms of the CARES Act. The loan balance as of December 31, 2020 was $116,160.
The SBA Loan I was forgiven in full under the terms of the CARES Act on April 21, 2021.
Schedule of Future Amortization of Loans Payable
Note 10. Commitment and Contingencies
Commitment
On January 4, 2018, the Company entered into a sixty-one month term lease renewal for its facility in Huntington Beach, California, commencing on February 1, 2018. Base rent is approximately $9,300 per month for the first 12 months with a 2.5% annual escalation throughout the term. The Company paid a security deposit of $8,450 with the initial lease that ended with the renewal.
At December 31, 2020, future minimum lease payments under operating lease agreement are as follows:
Schedule of Future Minimum Lease Payments Under Operating Lease
| 2021 | 119,937 | |||
| 2022 | 122,935 | |||
| 2023 | 10,265 | |||
| Total | $ | 253,137 |
Rent expenses amounted to approximately $117,000 and $114,200 for the years ended December 31, 2020 and 2019, respectively.
Legal Contingencies
There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Company’s financial position.
Note 11. Subsequent Events
The SBA Loan I was forgiven in full under the terms of the CARES Act on April 21, 2021
The Company was converted from a Florida limited liability company to a Florida corporation, effective July 1, 2021.
On September 3, 2021, the holders of all of the outstanding shares of common stock, par value $0.0001 per share, of Submersible Systems, Inc. (the “Sellers”) executed an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Brownie’s Marine Group, Inc. (“Purchaser”) and Submersible Acquisition, Inc., a Florida corporation and newly formed wholly owned subsidiary of the Purchaser (“Acquisition Subsidiary”). Pursuant to the terms of the Merger Agreement, the Company merged with and into the Acquisition Subsidiary, with the Company being the surviving company (the “Merger”).
Pursuant to the terms and conditions of the Merger Agreement, the Purchaser acquired all of the shares of the Company from the Sellers for an aggregate purchase price of $1,750,000 (the “Merger Consideration”), which was paid to the Sellers at closing by issuance to the Sellers of: (a) 8% convertible promissory notes in the aggregate principal amount of $350,000 (the “Notes”), and (b) an aggregate of 27,305,442 shares (the “ Merger Shares”) of the Company’s common stock at a price of approximately $0.05127 per share (the “Conversion Rate”).
The Merger Shares received by the Sellers are subject to a leak-out restriction commencing on the date of issuance, as follows: (i) up to 12.5% may be sold after 6 months; (ii) up to 25% may be sold after 9 months; (iii) up to 75% may be sold after 24 months; and (iv) up to 100% may be sold after 36 months from the date of issuance. Notwithstanding the foregoing, the leak-out restriction may be waived by the Company under certain conditions.
The Company evaluated its financial statements for subsequent events through December 15, 2021, the date the financial statements were available to be issued. The Company is not aware of any other subsequent events which would require recognition or disclosure that have not already been disclosed above.
Exhibit 99.3
SUBMERSIBLE SYSTEMS, LLC
CONDENSED BALANCE SHEET
| June 30, 2021 | December 31, 2020 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 485,320 | $ | 393,313 | ||||
| Accounts receivable – net | 46,545 | 37,457 | ||||||
| Inventory, net | 413,625 | 489,701 | ||||||
| Prepaid expenses and other current assets | 26,229 | 6,722 | ||||||
| Total current assets | 971,719 | 927,193 | ||||||
| Property, equipment and leasehold improvements, net | 52,564 | 45,406 | ||||||
| Other assets | 9,834 | 9,916 | ||||||
| Total assets | $ | 1,034,117 | $ | 982,515 | ||||
| Liabilities and members’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 110,738 | $ | 124,768 | ||||
| Customer deposits and unearned revenue | 556 | 10,281 | ||||||
| Other liabilities | 11,952 | 7,696 | ||||||
| Total current liabilities | 123,246 | 142,745 | ||||||
Loan payable | 116,160 | 116,160 | ||||||
| Total liabilities | 239,406 | 258,905 | ||||||
| Commitments and contingencies (see note 5) | - | - | ||||||
| Total members’ equity | 794,711 | 723,610 | ||||||
| Total liabilities and members’ equity | $ | 1,034,117 | $ | 982,515 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements
SUBMERSIBLE SYSTEMS, LLC
CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
2021 | 2020 | |||||||
| Net revenues | ||||||||
| Net revenues | $ | 779,604 | $ | 583,275 | ||||
| Cost of net revenues | ||||||||
| Cost of net revenues | 639,668 | 496,918 | ||||||
| Total cost of revenues | 639,668 | 496,918 | ||||||
| Gross profit | 139,936 | 86,357 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative | 185,341 | 146,767 | ||||||
| Research and development costs | 3,292 | 11,234 | ||||||
| Total operating expenses | 188,633 | 158,001 | ||||||
| Loss from operations | (48,697 | ) | (71,644 | ) | ||||
| Other income (expense) | ||||||||
| Gain on forgiveness of PPP Loan | 116,160 | - | ||||||
| Other income (expense), net | 4,450 | - | ||||||
| Interest expense | (812 | ) | 1,393 | |||||
| Total other income, net | 119,798 | 1,393 | ||||||
| Net income (loss) | $ | 71,101 | $ | (70,251 | ) | |||
The accompanying notes are an integral part of these unaudited condensed financial statements
SUBMERSIBLE SYSTEMS, LLC
CONDENSED STATEMENT OF CHANGES IN MEMBERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020
Total Members’ Equity | ||||
| Balance, December 31, 2020 | $ | 723,610 | ||
| Net Income | 71,101 | |||
| Balance, June 30, 2021 (unaudited) | $ | 794,711 | ||
Total Members’ Equity | ||||
| Balance, December 31, 2019 | $ | 736,112 | ||
| Net loss | (70,251 | ) | ||
| Balance, June 30, 2020 (unaudited) | $ | 665,861 | ||
The accompanying notes are an integral part of these unaudited condensed financial statements
SUBMERSIBLE SYSTEMS, LLC
CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 71,101 | $ | (70,251 | ) | |||
| Adjustments to reconcile net income (loss) to cash used in operating activities: | ||||||||
| Depreciation and amortization | 10,757 | 11,875 | ||||||
| Gain on forgiveness of PPP loan | (116,160 | ) | - | |||||
| Changes in operating assets and liabilities | ||||||||
| Change in accounts receivable | (9,088 | ) | (10,446 | ) | ||||
| Change in inventory | 76,076 | (27,081 | ) | |||||
| Change in prepaid expenses and other current assets | (19,506 | ) | (6,292 | ) | ||||
| Change in other assets | 82 | 1,502 | ||||||
| Change in accounts payable and accrued liabilities | (14,030 | ) | (23,801 | ) | ||||
| Change in customer deposits and unearned revenue | (9,726 | ) | 58,706 | |||||
| Change in other liabilities | 4,256 | (3,324 | ) | |||||
| Net cash used in operating activities | (6,238 | ) | (69,112 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | (17,915 | ) | (1,920 | ) | ||||
| Net cash used in investing activities | (17,915 | ) | (1,920 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from PPP loan | 116,160 | 116,160 | ||||||
| Net cash provided by financing activities | 116,160 | 116,160 | ||||||
| Net change in cash | 92,007 | 45,128 | ||||||
| Cash, beginning of period | 393,313 | 323,544 | ||||||
| Cash, end of period | $ | 485,320 | $ | 368,672 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash Paid for Interest | $ | - | $ | - | ||||
| Cash Paid for Income Taxes | $ | - | $ | - | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements
Note 1. Company Overview
Located in Huntington Beach, California, Submersible Systems, LLC (the “Company”) was incorporated as Submersible Systems, Inc in the State of California in 1979. The Company was acquired in 2015 by Summit Acquisition, LLC and changed its name to Submersible Systems, LLC, and re-organized under the laws of the State of Florida. The primary focus of the Company is manufacturing, assembling and selling life-saving breathing systems worldwide under brand names including Spare Air, HEED, and Easy Dive.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared 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 generally accepted accounting principles 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, 2020 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm. These financial statements should be read in conjunction with the audited financial statements and notes thereto which are included in this Current Report on Form 8-K/A for a broader discussion of our business and the risks inherent in such business. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At June 30, 2021 and December 31, 2020, the Company had $271,179 and $159,236 in excess of the FDIC insured limit, respectively.
Accounts Receivable
Accounts receivable consist of amounts due from the sale of the Company’s products to wholesale and retail customers. The allowance for doubtful accounts is estimated based on historical customer experience and industry knowledge. As of June 30, 2021 and December 31, 2020 there was no allowance for doubtful accounts.
As of June 30, 2021 and December 31, 2020, the Company had three accounts that individually comprised over 10% of outstanding accounts receivable and in the aggregate comprised 58.4% and 50.1% of outstanding accounts receivable, respectively. Additionally, the Company had one customer that comprised 11.4% and 11.3 % of revenue for the six months ended June 30, 2021 and 2020, respectively.
Inventory
Inventory consists of the following as of:
Schedule of Inventory
| June 30, 2021 | December 31, 2020 | |||||||
(unaudited) | ||||||||
| Raw materials | $ | 213,144 | $ | 229,768 | ||||
| Work in process | 95,793 | 126,517 | ||||||
| Finished goods, net | 104,688 | 133,416 | ||||||
| Total Inventory, net | $ | 413,625 | $ | 489,701 | ||||
As of December 31, 2020, the Company recorded reserves for slow moving or obsolete inventory of $26,175. There was no additional reserve for slow moving or obsolete inventory during the six months ending June 30, 2021.
Revenue Recognition
We account for revenues in accordance with the Accounting Standard Codification topic 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principal 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 units as that is when ownership is transferred and performance is completed. Revenues from repair and maintenance activities is recognized when the repairs are completed and the units have been shipped.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on its results of operations, cash flows or financial condition.
Note 3. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists of the following as of:
June 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Accounts payable trade and other | $ | 53,832 | $ | 76,228 | ||||
| Accrued payroll and fringe benefits | 51,471 | 41,624 | ||||||
| Accrued payroll taxes and withholding | 5,435 | 6,916 | ||||||
| $ | 110,738 | $ | 124,768 | |||||
As of June 30, 2021, the Company had one vendor and as of December 31, 2020, the Company had two vendors that comprised more than 10% of total purchases and in the aggregate comprised 16.4% and 23.8% of total purchases, respectively.
Note 4. Loans Payable
On May 1, 2020, the Company received an unsecured loan from City National Bank in the principal amount of $116,160 (the “SBA Loan I”), under the Paycheck Protection Program (“PPP”), pursuant to a two-year promissory note, under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”). The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a focus on payroll. As a qualifying business as defined by the SBA, the proceeds from this loan were used to primarily help maintain our payroll and cover rent and utilities as the Company navigated its business through the lockdowns associated with the COVID-19 pandemic.
The term of the note is two years from the disbursement date, though it may be payable sooner in connection with an event of default under the note. The SBA Loan I carries a fixed interest rate of one percent per year, with the first payment due seven months from the date of initial cash receipt. To date, the payments have been waived by the SBA.. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. This PPP loan was forgiven on April 21, 2021 under the terms of the CARES Act. As of June 30, 2021 and December 31, 2020, there was $0 and $116,160 outstanding under this note, respectively.
On May 12, 2021 the Company received a second unsecured loan from City National Bank in the principal amount of $116,160 (the “SBA Loan II”), under the PPP with the same terms as the note for the SBA Loan I. We used the SBA Loan II for qualifying expenses and have applied for forgiveness of the SBA Loan II in accordance with the terms of the CARES Act. The loan balance as of June 30, 2021 and December 31, 2020 was $116,160 and $0, respectively. On October 15, 2021 the SBA Loan II was forgiven in full, in accordance with the terms of the CARES Act.
Note 5. Commitment and Contingencies
Commitment
On January 4, 2018, the Company entered into a sixty-one month term lease renewal for its facility in Huntington Beach, California, commencing on February 1, 2018. Base rent was approximately $9,300 per month for the first 12 months with a 2.5% annual escalation throughout the term. The Company paid a security deposit of $8,450 with the initial lease that ended with the renewal.
At June 30, 2021, future minimum lease payments under operating lease agreements are as follows:
Schedule of Operating Lease Payable
| 2021 (6 months) | $ | 60,091 | ||
| 2022 | 122,935 | |||
| 2023 | 10,265 | |||
| Total | $ | 193,291 |
Rent expenses amounted to approximately $59,800 and $58,400 for the six months ended June 30, 2021 and 2020.
Legal Contingencies
There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Company’s financial position.
Note 6. Subsequent Events
The Company was converted from a Florida limited liability company to a Florida corporation effective July 1, 2021.
On September 3, 2021, the holders of all of the outstanding shares of common stock, par value $0.0001 per share, of Submersible Systems, Inc. (the “Sellers”) executed an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Brownie’s Marine Group, Inc. (“Purchaser”) and Submersible Acquisition, Inc., a Florida corporation and newly formed wholly owned subsidiary of the Purchaser (“Acquisition Subsidiary”). Pursuant to the terms of the Merger Agreement, the Company merged with and into the Acquisition Subsidiary, with the Company being the surviving company (the “Merger”).
Pursuant to the terms and conditions of the Merger Agreement, the Company acquired all of the Submersible Shares from the Sellers for an aggregate purchase price of $1,750,000 (the “Merger Consideration”), which was paid to the Sellers at closing by issuance to the Sellers of (a) 8% convertible promissory notes in the aggregate principal amount of $350,000 (the “Notes”), and (b) an aggregate of 27,305,442 shares (the “ Merger Shares”) of the Company’s common stock, par value $0.0001 per share, at a price of approximately $0.05127 per share.
The Merger Shares received by the Sellers are subject to a leak-out restriction commencing on the date of issuance, as follows: (i) up to 12.5% may be sold after 6 months; (ii) up to 25% may be sold after 9 months; (iii) up to 75% may be sold after 24 months; and (iv) up to 100% may be sold after 36 months from the date of issuance. Notwithstanding the foregoing, the leak-out restriction may be waived by the Company under certain conditions.
On October 15, 2021 the SBA Loan II was forgiven in full, in accordance with the terms of the CARES Act.
The Company evaluated its financial statements for subsequent events through December 15, 2021, the date the financial statements were available to be issued. The Company is not aware of any other subsequent events which would require recognition or disclosure that have not already been disclosed above.
Exhibit 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information and related notes give effect to the Merger and presents the historical condensed combined financial information of Brownie’s Marine Group, Inc. (the “Company”) and Submersible Systems, Inc. (“Submersible”), after giving effect to the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Submersible Acquisition, Inc., a Florida corporation and newly-formed, wholly-owned subsidiary of the Company (the “Acquisition Subsidiary”), that was completed on September 3, 2021 (the “Merger”). The Merger was accounted for as a “reverse merger” and recapitalization since, immediately following the completion of the transaction, Submersible Systems, Inc. became a wholly owned subsidiary of the Company.
The unaudited pro forma condensed combined financial information gives effect to the Merger based on the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information.
Pursuant to the terms of the Merger Agreement, the Company acquired all of the issued and outstanding shares of common stock held by the shareholders of Submersible (the “Sellers”) for an aggregate purchase price of $1,750,000 (the “Merger Consideration”), which was paid to the Sellers at closing (the “Closing”) by issuance to the Sellers of:
| (i) | 8% convertible promissory notes in the aggregate principal amount of $350,000 (the “Notes”), and | |
| (ii) | an aggregate of 27,305,442 shares (the “Merger Shares”) of the Company’s common stock, par value $0.0001 per share, at a price of approximately $0.05127 per share (the “Conversion Rate”). |
The Merger Shares received by the Sellers are subject to a leak-out restriction commencing on the date of issuance, as follows: (i) up to 12.5% may be sold after 6 months; (ii) up to 25% may be sold after 9 months; (iii) up to 75% may be sold after 24 months; and (iv) up to 100% may be sold after 36 months from the date of issuance. Notwithstanding the foregoing, the leak-out restriction may be waived by the Company under certain conditions.
The Sellers were granted “piggyback” registration rights with respect to the Merger Shares and the shares of common stock that may be received upon their conversion of the Notes.
The Notes have a maturity date of September 3, 2024, and bear interest at a rate of 8% per annum. Interest is payable at the end of each 3-month period commencing on September 30, 2021, in shares of common stock of the Company, calculated based on the amount due on said date divided by the Conversion Rate. The Company has the right to prepay amounts due under the Notes in whole or in part at any time without penalty or premium. Within 30 days after the end of each quarter, commencing on the first full quarter after the Closing, the Company will pay, as a reduction of the principal amount of the Notes, in cash, payments equal to 50% of Submersible’s net income before interest, taxes, depreciation and amortization (but expressly excluding any overhead cost allocation applied to Submersible by the Company). The final payment will be a balloon payment of the balance due upon the end of the term of the Notes. The holders of Notes have the right to convert the Notes, in whole or in part, at any time, within the 36-month term into shares of common stock of the Company at the Conversion Rate.
The unaudited pro forma condensed combined balance sheet as of June 30, 2021 is presented as if the Merger had occurred on June 30, 2021. The unaudited condensed combined statements of operations for the six months ended June 30, 2021 and for the year ended December 31, 2020 are presented as if the Merger had occurred on January 1, 2020.
The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of the Securities and Exchange Commission’s Regulation S-X. The unaudited pro forma adjustments reflecting the Merger have been prepared in accordance with the guidance for business combinations presented in ASC 805 and reflect the allocation of the preliminary purchase price to the assets acquired and liabilities assumed in the Merger based on their estimated fair values. The historical financial information has been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are: (i) directly attributable to the Merger; (ii) factually supportable; and (iii) with respect to the condensed combined statements of operations, expected to have a continuing impact on the combined results of operations.
The unaudited pro forma condensed combined financial information is presented for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Merger had been affected on the dates previously set forth, nor is it indicative of the future operating results or financial position in combination. The preliminary purchase price allocation was made using the Company’s best estimates of fair value, which are dependent upon certain valuation and other analyses that are not yet final. As a result, the unaudited pro forma purchase price adjustments related to the Merger are preliminary and subject to further adjustments as additional information becomes available and as additional analyses are performed during the applicable measurement period under ASC 805 (up to one year from the Merger date). There can be no assurances that any final valuations will not result in material adjustments to our preliminary estimated purchase price allocation. Further, the unaudited pro forma condensed combined financial information does not give effect to the potential impact of anticipated synergies, operating efficiencies, cost savings or transaction and integration costs that may result from the Merger.
The unaudited pro forma condensed combined financial information should be read in conjunction with our historical consolidated financial statements and their accompanying notes presented in our Annual Report on Form 10-K for the year ended December 31, 2020 and our Quarterly Report on Form 10-Q for the six months ended June 30, 2021, as well as the historical financial statements of Submersible for the years ended December 31, 2019 and 2020 and unaudited financial statements for the six month period ended June 30, 2021.
BROWNIE’S MARINE GROUP, INC. AND SUBMERSIBLE SYSTEMS, INC.
PROFORMA CONDENSED COMBINED BALANCE SHEETS
(UNAUDITED)
| Historical | ||||||||||||||||||
| Brownie’s
Marine Group, Inc. June 30, 2021 | Submersible Systems, Inc. June 30, 2021 | Adjustments | Adjustments Reference | Pro Forma Combined | ||||||||||||||
| ASSETS | ||||||||||||||||||
| CURRENT ASSETS | ||||||||||||||||||
| Cash | $ | 161,662 | $ | 485,320 | $ | - | $ | 646,982 | ||||||||||
| Accounts receivable, net | 232,179 | 46,545 | - | 278,724 | ||||||||||||||
| Accounts receivable, related parties | 176,645 | - | - | 176,645 | ||||||||||||||
| Inventory, net | 984,731 | 413,625 | 31,000 | G | 1,429,356 | |||||||||||||
| Other current assets | 399,171 | 26,229 | - | 425,400 | ||||||||||||||
| Total current assets | 1,954,388 | 971,719 | 31,000 | 2,957,107 | ||||||||||||||
| Property, equipment and leasehold improvements, net | 144,608 | 52,564 | - | 197,172 | ||||||||||||||
| Operating lease assets | 395,400 | - | - | 395,400 | ||||||||||||||
| Intangible assets, net | - | - | 706,767 | E,H | 706,767 | |||||||||||||
| Goodwill | - | - | 231,208 | D | 231,208 | |||||||||||||
| Other assets | 10,649 | 9,834 | - | 20,483 | ||||||||||||||
| TOTAL ASSETS | $ | 2,505,045 | $ | 1,034,117 | $ | 968,975 | $ | 4,508,137 | ||||||||||
| LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||||||
| Accounts payable and accruals | $ | 589,330 | $ | 110,738 | $ | 14,000 | B | $ | 714,068 | |||||||||
| Accounts payable - related parties | 94,573 | - | - | 94,573 | ||||||||||||||
| Customer deposits and unearned revenue | 44,291 | 556 | - | 44,847 | ||||||||||||||
| Current maturities of long-term debt | 65,248 | - | - | 65,248 | ||||||||||||||
| Current maturities operating lease liabilities | 112,771 | - | - | 112,771 | ||||||||||||||
| Notes payable | 15,000 | - | - | 15,000 | ||||||||||||||
| Convertible debentures, net | 50,000 | - | - | 50,000 | ||||||||||||||
| Other liabilities | 185,037 | 11,952 | - | 196,989 | ||||||||||||||
| Total current liabilities | 1,156,250 | 123,246 | 14,000 | 1,293,496 | ||||||||||||||
| LONG -TERM RIGHT OF USE LIABILITY | 282,629 | 282,629 | ||||||||||||||||
| LONG -TERM DEBT | 61,942 | 116,160 | 350,000 | B | 528,102 | |||||||||||||
| TOTAL LIABILITIES | 1,500,821 | 239,406 | 364,000 | 2,104,227 | ||||||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||||||
| STOCKHOLDER’S EQUITY | ||||||||||||||||||
| Series A 8% cumulative convertible preferred stock | 425 | 425 | ||||||||||||||||
| Common stock, | 34,330 | - | 2,850 | A,C | 37,180 | |||||||||||||
| Common stock payable | 14 | - | - | 14 | ||||||||||||||
| Additional paid-in capital | 14,456,378 | - | 1,503,021 | A,C,F | 15,959,399 | |||||||||||||
| Accumulated deficit | (13,486,923 | ) | 794,711 | (900,896 | ) | B,C,H | (13,593,108 | ) | ||||||||||
| TOTAL STOCKHOLDER’S EQUITY | 1,004,224 | 794,711 | 604,975 | 2,403,910 | ||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 2,505,045 | $ | 1,034,117 | $ | 968,975 | $ | 4,508,137 | ||||||||||
See Notes to Unaudited Pro Forma Combined Financial Statements.
BROWNIE’S MARINE GROUP, INC. AND SUBMERSIBLE SYSTEMS, INC.
PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2021
(UNAUDITED)
| Historical | ||||||||||||||||||
| Brownie’s Marine Group, Inc. June 30, 2021 | Submersible Systems, Inc. June 30, 2021 | Adjustments | Adjustments Reference | Pro Forma Combined June 30, 2021 | ||||||||||||||
| Net revenues | ||||||||||||||||||
| Net revenues | $ | 2,106,098 | $ | 779,604 | - | $ | 2,885,702 | |||||||||||
| Net revenues - related parties | 557,589 | - | - | 557,589 | ||||||||||||||
| Total net revenues | 2,663,687 | 779,604 | - | 3,443,291 | ||||||||||||||
| Cost of net revenues | ||||||||||||||||||
| Cost of net revenues | 1,385,715 | 639,668 | - | 2,025,383 | ||||||||||||||
| Cost of net revenues - related parties | 275,130 | - | - | 275,130 | ||||||||||||||
| Royalties expense - related parties | 39,606 | - | - | 39,606 | ||||||||||||||
| Royalties expense | 54,955 | - | - | 54,955 | ||||||||||||||
| Total cost of revenues | 1,755,406 | 639,668 | - | 2,395,074 | ||||||||||||||
| Gross profit | 908,281 | 139,936 | - | 1,048,217 | ||||||||||||||
| Operating expenses | ||||||||||||||||||
| Selling, general and administrative | 1,560,642 | 185,341 | 92,185 | C,H | 1,838,168 | |||||||||||||
| Research and development costs | 42,419 | 3,292 | - | 45,711 | ||||||||||||||
| Total operating expenses | 1,603,061 | 188,633 | 92,185 | 1,883,879 | ||||||||||||||
| Loss from operations | (694,780 | ) | (48,697 | ) | (92,185 | ) | (835,662 | ) | ||||||||||
| Other income (expense) | - | |||||||||||||||||
| Gain on settlement of debt | 10,000 | - | - | 10,000 | ||||||||||||||
| Gain on forgiveness of PPP loan | 159,600 | 116,160 | - | 275,760 | ||||||||||||||
| Other income (expense) | - | 4,450 | - | 4,450 | ||||||||||||||
| Interest expense | (5,606 | ) | (812 | ) | (14,000 | ) | B | (20,418 | ) | |||||||||
| Total other income (expense) - net | 163,994 | 119,798 | (14,000 | ) | 269,792 | |||||||||||||
| Net (loss) income | $ | (530,786 | ) | $ | 71,101 | $ | (106,185 | ) | $ | (565,870 | ) | |||||||
| Basic and diluted loss per share of common stock | $ | (0.00) | $ | (0.00 | ) | |||||||||||||
| Basic and diluted weighted average common stock outstanding | 314,941,270 | 358,872,782 | ||||||||||||||||
See Notes to Unaudited Pro Forma Combined Financial Statements.
NOTES AND ASSUMPTIONS TO PROFORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
| The pro-forma adjustments to unaudited pro-forma combined financial statements are as follows: |
| (A) To book issuance of 27,305,442 shares of common stock as part of the purchase price to the shareholders of Submersible Systems, Inc. with a fair value of $1,449,919. |
| (B) To book the issuance of notes payable to shareholders of Submersible Systems, Inc. in the amount of $350,000 and accrued interest of $14,000. |
| (C) To book 1,190,476 shares of common stock for service providers related to acquisition with a fair market value of $55,952. |
| (D) To book goodwill related to the acquisition price of Submersible Systems, Inc. |
| (E) To book allocation of purchase price to an intangible asset of Submersible Systems, Inc. |
| (F) To eliminate members’ equity upon acquisition |
| (G) To book inventory valuation step up related to the acquisition of Submersible Systems, Inc. |
| (H) To book amortization of the intangible asset related to the acquisition of Submersible Systems, Inc. |
The unaudited pro forma combined financial statements do not include any adjustment for non-recurring costs incurred or to be incurred after June 30, 2021 by the Company and Submersible to consummate the Merger, except as noted above. Merger costs include legal fees and accounting fees estimated to be approximately $50,000. Such costs will be expensed as incurred.
BROWNIE’S MARINE GROUP, INC. AND SUBMERSIBLE SYSTEMS, INC.
PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
| Historical | ||||||||||||||||||
| Brownie’s Marine Group, Inc. December 31, 2020 | Submersible Systems, Inc. December 31, 2020 | Adjustments | Adjustments Reference | Pro Forma Combined December 31, 2020 | ||||||||||||||
| Net revenues | $ | 3,717,556 | $ | 1,425,343 | - | $ | 5,142,899 | |||||||||||
| Net revenues - related parties | 838,417 | - | - | 838,417 | ||||||||||||||
| Total net revenues | 4,555,973 | 1,425,343 | - | 5,981,316 | ||||||||||||||
| Cost of net revenues | ||||||||||||||||||
| Cost of net revenues | 2,537,922 | 1,100,107 | - | 3,638,029 | ||||||||||||||
| Cost of net revenues - related parties | 431,925 | - | - | 431,925 | ||||||||||||||
| Royalties expense - related parties | 67,808 | - | - | 67,808 | ||||||||||||||
| Royalties expense | 53,929 | - | - | 53,929 | ||||||||||||||
| Total cost of revenues | 3,091,584 | 1,100,107 | - | 4,191,691 | ||||||||||||||
| Gross profit | 1,464,389 | 325,236 | - | 1,789,625 | ||||||||||||||
| Operating expenses | ||||||||||||||||||
| Selling, general and administrative | 2,682,293 | 319,110 | 156,419 | A, C | 3,157,822 | |||||||||||||
| Research and development costs | 115,156 | 17,590 | - | 132,746 | ||||||||||||||
| Total operating expenses | 2,797,449 | 336,700 | 156,419 | 3,290,568 | ||||||||||||||
| Loss from operations | (1,333,060 | ) | (11,464 | ) | (156,419 | ) | (1,500,943 | ) | ||||||||||
| Other expense, net | - | |||||||||||||||||
| Interest expense | (18,559 | ) | (1,038 | ) | (28,000 | ) | B | (47,597 | ) | |||||||||
| Total expense | (18,559 | ) | (1,038 | ) | (28,000 | ) | (47,597 | ) | ||||||||||
| Loss income before provision for income taxes | (1,351,619 | ) | (12,502 | ) | (184,419 | ) | (1,548,540 | ) | ||||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||||
| Net loss | $ | (1,351,619 | ) | $ | (12,502 | ) | $ | (184,419 | ) | $ | (1,548,540 | ) | ||||||
| Basic and diluted loss per common share | $ | (0.00 | ) | $ | (0.00 | ) | ||||||||||||
| Basic and diluted weighted average common shares outstanding | 288,295,422 | 316,756,045 | ||||||||||||||||
See Notes to Unaudited Pro Forma Combined Financial Statements.
NOTES AND ASSUMPTIONS TO PROFORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
| The pro-forma adjustments to the unaudited pro-forma combined financial statements are as follows: |
| (A) To book amortization of the intangible asset related to the acquisition of Submersible Systems, Inc. |
| (B) To book accrued interest of $28,000 related to the issuance of notes payable to shareholders of Submersible Systems, Inc. |
| (C) To book 1,190,476 shares of common stock for service providers related to acquisition with a fair market value of $55,952. |
| 1. | Basis of Pro Forma Presentation |
On September 3, 2021, the Company entered into an Agreement and Plan of Merger and Reorganization with Submersible Systems, Inc. and Submersible Acquistion, Inc., a Florida corporation and newly-formed, wholly-owned subsidiary of the Company (the “Acquisition Subsidiary”), which merger was consummated on September 3, 2021, (the “Merger”) The unaudited pro forma condensed combined balance sheet at June 30, 2021 combines the Company’s historical condensed consolidated balance sheet with the historical condensed balance sheet of Submersible as if the Merger had occurred on that date. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2021 and for the year ended December 31, 2020 combine the Company’s historical condensed consolidated statements of operations with the condensed statements of operations of Submersible as if the Merger had occurred on January 1, 2020. The historical financial information is adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are: (i) directly attributable to the Merger; (ii) factually supportable; and (iii) with respect to the condensed combined statements of operations, expected to have a continuing impact on the Company’s combined results.
| 2. | Preliminary Consideration Transferred |
Pursuant to the terms of the Merger Agreement, the Company paid $1,799,919 in consideration consisting of three year 8% unsecured promissory notes in the aggregate principal amount of $350,000 and the issuance of 27,305,442 shares of common stock with a fair value on the date of issuance of $1,449,919.
| 3. | Preliminary Purchase Price Allocation |
Under the acquisition method of accounting outlined in ASC 805, the identifiable assets acquired and liabilities assumed in the Merger are recorded at their Merger date at fair values and are included in the Company’s consolidated financial position. The Company’s unaudited pro forma adjustments are preliminary in nature and based on the estimates of fair value for all assets acquired and liabilities assumed to illustrate the estimated effect of the Merger on the Company’s condensed consolidated balance sheet at June 30, 2020. Accordingly, the unaudited pro forma purchase price allocation is subject to further adjustments as additional information becomes available and as additional analyses are performed. The primary areas that are not yet finalized relate to estimated fair values for inventory and identifiable intangible assets. There can be no assurances that any final valuations will not result in material adjustments to our preliminary estimated purchase price allocation.
The following table summarizes the preliminary purchase price allocation for the assets acquired and liabilities assumed in connection with the Merger:
| Amount | Weighted Average Life (Years) | |||||||
| Tangible Assets Acquired | $ | 1,089,382 | ||||||
| Liabilities Assumed | (294,671 | ) | ||||||
| Inventory Step Up | 31,000 | |||||||
| Trademarks | 121,000 | 15 | ||||||
| Non-compete Agreements | 22,000 | 5 | ||||||
| Customer Relationships | 600,000 | 10 | ||||||
| Goodwill | 231,208 | Indefinite | ||||||
| $ | 1,799,919 | |||||||
Our unaudited pro forma purchase price allocation includes certain identifiable intangible assets with an estimated fair value of approximately $743,000. The fair value of the identifiable intangible assets acquired was estimated using a combination of asset-based and income-based valuation methodologies. The asset-based valuation methodology established a fair value estimate based on the cost of replacing the asset, less amortization from functional use and economic obsolescence, if present and measurable. The income-based valuation methodology utilizes a discounted cash flow technique where the expected future economic benefits of ownership of an asset are discounted back to present value. This valuation technique requires us to make certain assumptions about, including, but not limited to, future operating performance and cash flow, and other such variables which are discounted to present value using a discount rate that reflects the risk factors associated with future cash flow, the characteristics of the assets acquired, and the experience of the acquired business. Such estimates are subject to change, possibly materially, as additional information becomes available and as additional analyses are performed.