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 _________ |
Commission
file number
(Exact name of registrant as specified in its charter)
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip code) |
(
Registrant’s telephone number, including area code
Not applicable
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of 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
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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 growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
As of November 14, 2023, 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. | 24 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | 35 |
| ITEM 4. | CONTROLS AND PROCEDURES. | 35 |
| PART II – OTHER INFORMATION | ||
| ITEM 1. | LEGAL PROCEEDINGS. | 37 |
| ITEM 1A. | RISK FACTORS. | 37 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | 37 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. | 37 |
| ITEM 4. | MINE SAFETY DISCLOSURES. | 37 |
| ITEM 5. | OTHER INFORMATION. | 37 |
| ITEM 6. | EXHIBITS. | 38 |
| 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 Securities and Exchange Commission (“SEC”) on March 30, 2023, 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, 2023 | December 31, 2022 | |||||||
| (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 | ||||||||
| Operating lease assets, net | ||||||||
| 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 portion of convertible notes | ||||||||
| Current maturities long term debt | ||||||||
| Total current liabilities | ||||||||
| Loans payable, net of current portion | ||||||||
| Convertible notes, net of current portion | ||||||||
| Operating lease liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingent liabilities (see Note 9) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock; $ par value: shares authorized; issued and outstanding as of September 30, 2023 and December 31, 2022. | ||||||||
| Common stock; $ par value; shares authorized; shares issued and outstanding at September 30, 2023 and shares issued and outstanding at December 31, 2022, respectively. | ||||||||
| Common stock payable shares and shares, respectively as of September 30, 2023 and December 31, 2022. | ||||||||
| 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 |
BROWNIES 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 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Revenues - related parties | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of revenues - related parties | ||||||||||||||||
| Royalties expense - related parties | ||||||||||||||||
| Royalties expense | ||||||||||||||||
| Total cost of revenues (exclusive of depreciation and amortization shown separately below) | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Research and development costs | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expense, net | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (Loss) income before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net Income (Loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on foreign currency contract | ||||||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic income (loss) per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Diluted income (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 SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER, 2023 AND 2022
(Unaudited)
| Preferred Stock | Common Stock | Common Stock Payable | Additional Paid-in | Accumulated Other Comprehensive Income | Accumulated | Total Stockholder’s Equity | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount |
Capital | (Loss) |
Deficit | (DEFICIT) | |||||||||||||||||||||||||||||||
| December 31, 2022 | $ | | $ | | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Shares issued for the purchase of units | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued for accrued interest on convertible notes | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock Option Expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| March 31, 2023 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | ||||||||||||||||||||||||||||||||
| Shares issued for accrued interest on convertible notes | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| June 30, 2023 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Common stock Issued for Accrued Interest on Convertible Notes | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock option expense | ||||||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| September 30, 2023 (unaudited) |
| $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Common Stock Payable | Additional Paid-in | Accumulated Other Comprehensive Income | Accumulated | Total Stockholder’s Equity | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount |
Capital | (Loss) | Deficit | (DEFICIT) | ||||||||||||||||||||||||||||||||
| December 31, 2021 | $ | | $ | | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Shares issued for the exercise of warrants | - | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued for service | - | - | |||||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | ||||||||||||||||||||||||||||||||||||||
| March 31, 2022 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
| Shares issued for service | - | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued for asset purchase | - | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued for accrued interest on convertible notes | - | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued for employee bonus | - | - | |||||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| 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 Income | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Other Comprehensive Loss | - | - | - | ||||||||||||||||||||||||||||||||||||||
| September 30, 2022 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements
| 6 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
| 2023 | 2022 | |||||||
| Cash flows provided by operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of right-of-use asset | ||||||||
| Shares issued for accrued interest in convertible notes | ||||||||
| Common stock issued for services | ||||||||
| Reserve for debt | ||||||||
| Reserve for slow moving inventory | ( | ) | ||||||
| Reserve for Nomad recall | ( | ) | ||||||
| Stock based compensation - Options | ||||||||
| Stock based compensation - stock grant | ||||||||
| 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 acquired (used) in investing activities: | ||||||||
| Cash used in asset acquisition | ( | ) | ||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of units | ||||||||
| Proceeds from exercise of Warrants | ||||||||
| Proceeds of debt - related party | ||||||||
| Repayment of debt | ( | ) | ( | ) | ||||
| Net cash acquired in financing activities | ||||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash, beginning balance | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash Paid for Interest | $ | $ | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Operating lease obtained for operating lease liability | $ | $ | ||||||
| Common Stock issued for asset 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 | $ | $ | ||||||
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, 2023
(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 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 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, 2022 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a broader discussion of the Company’s business and the risks inherent in such business. The results of operations for the nine months ended September 30, 2023, and are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending December 31, 2023.
| 8 |
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 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 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 $
Accounts receivable
The Company manufactures and sells its products to a broad range of customers, primarily retail stores. Few customers are provided with payment terms of 30 days. The Company has tracked historical loss information for its trade receivables and compiled historical credit loss percentages for different aging categories (current, 1–30 days past due, 31–60 days past due, 61–90 days past due, and more than 90 days past due).
In
accordance with ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), management believes that the historical loss
information it has compiled is a reasonable base on which to determine expected credit losses for trade receivables held at
September 30, 2023, because the composition of the trade receivables at that date is consistent with that used in developing the
historical credit-loss percentages (i.e., the similar risk characteristics of its customers and its lending practices have not
changed significantly over time). As a result, management applied the applicable credit loss rates to determine the expected credit
loss estimate for each aging category. Accordingly, the allowance for expected credit losses at September 30, 2023 totaled $
Inventory
Inventory consists of the following:
| September 30, 2023 (unaudited) | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Rental Equipment | ||||||||
| Allowance reserve | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
As
of September 30, 2023 and December 31, 2022, the Company recorded allowances for obsolete or slow-moving inventory of $
| 9 |
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers. The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. The Company typically satisfies its performance obligations in contracts with customers upon shipment of the goods. Generally, payment is due upon receipt of the invoice and the contracts do not have significant financing components. Product sales occur once control or title is transferred based on the commercial terms. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Product sales are recorded net of variable consideration, such as provisions for returns, discounts and promotional allowances. Such provisions are calculated based on the actual allowances given. Management believes that adequate provision has been made for cash discounts, returns, spoilage and promotional allowances based on the Company’s historical experience.
A breakdown of the total revenue between related party and non-related party revenue is as follows:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Revenues - related parties | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
See further disaggregate revenue disclosures by segment and product type in Note 10.
Cost of Sales
Cost of sales consists of the cost of the components of finished goods, the costs of raw materials utilized in the manufacture of products, in-bound and out-bound freight charges, direct manufacturing labor as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacture of the Company’s finished products, inventory allowance for excess and obsolete products, and royalties paid on licensing agreements. Components account for the largest portion of the cost of sales. Components include plastic molded parts, gas powered engines, aluminum pressure bottles, electronic parts, batteries and packaging materials.
The breakdown of cost of sales to include cost of sales for related party and non-related party as well as the related party and non-related party royalty expense is as follows:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Cost of revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues - related parties | ||||||||||||||||
| Royalties expense - related parties | ||||||||||||||||
| Royalties expense | ||||||||||||||||
| Total cost of revenues | $ | $ | $ | $ | ||||||||||||
| 10 |
Lease Accounting
The Company accounts 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. The Company elected the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. The Company did not reassess whether any contracts entered into prior to adoption are leases or contain leases.
The
Company categorizes leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally
those leases that would allow the Company 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. The Company did
not have any finance leases as of September 30, 2023.
Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings available to the Company. 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.
When the Company has 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 the Company we will exercise the option, it considers 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, 2023, lease expenses were approximately $
Supplemental balance sheet information related to leases was as follows:
| Operating Leases | September 30, 2023 | |||
| (unaudited) | ||||
| Right-of-use assets | $ | |||
| Current lease liabilities | $ | |||
| Non-current lease liabilities | ||||
| Total lease liabilities | $ | |||
Stock-Based Compensation
The Company accounts 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.
The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is determined through use of the quoted stock price.
| 11 |
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. As of September 30, 2023, the Company did not have any derivative liabilities.
Basic loss 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 loss 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, 2023 and September 30, 2022, and shares, 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 an 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 was adopted on January 1, 2023, with no effect to the financial statements.
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.
| 12 |
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, 2023, 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 Chief Executive Officer 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
On
September 30, 2022, the Company issued a convertible demand
On
January 18, 2023 and February 18, 2023, the Company issued to Charles Hyatt, a Company director, an aggregate of units, 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 14, 2023, the Company issued a convertible demand
| 13 |
On
March 31, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible demand
note for the three months ending March 31, 2023. The fair value of these shares was $
On
June 30, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible demand
note for the three months ending June 30, 2023. The fair value of these shares was $
On
September 30, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible
demand note for the three months ending September 30, 2023. The fair value of these shares was $
Note 5. Convertible Promissory Notes and Loans Payable
Convertible Promissory Notes
Convertible promissory notes consisted of the following at September 30, 2023:
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) | ||||||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||
A breakdown of current and long-term amounts due are as follows for the convertible promissory notes as of September 30, 2023:
| Summit Holdings V, | Tierra Vista Partners, | Robert Carmichael | Robert Carmichael | |||||||||||||||||
| LLC Note | LLC Note | Note | Note | Total | ||||||||||||||||
| 2023 | $ | $ | $ | $ | |
$ | ||||||||||||||
| 2024 | ||||||||||||||||||||
| Discount | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total Loan Payments | $ | $ | $ | $ | $ | |||||||||||||||
| Current Portion of Loan Payable | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( |
) | $ | ( | ) | |||||
| Non-Current Portion of Loan Payable | $ | $ | $ | $ | $ | |||||||||||||||
| (1) | On
September 3, 2021, the Company issued a three-year |
| Payment Amortization | ||||
| 2023 (9 months) | $ | |||
| 2024 | ||||
| Total Note Payments | $ | |||
| Current portion of note payable | ( | ) | ||
| Non-Current Portion of Notes Payable | $ | |||
| (2) | On
September 3, 2021, the Company issued a three-year |
| Payment Amortization | ||||
| 2023 (9 months) | $ | |||
| 2024 | ||||
| Total Note Payments | $ | |||
| Current portion of note payable | ( | ) | ||
| Non-Current Portion of Notes Payable | $ | |||
| 14 |
| (3) | On
September 30, 2022, the Company issued a convertible demand |
| (4) | On
September 14, 2023, the Company issued a convertible demand |
| (5) |
Loans Payable
| Mercedes | Navitas | NFS | Navitas 2022 | |||||||||||||||||
| BMG (1) | BLU3 (2) | SSI (3) | BLU3 (4) | Total | ||||||||||||||||
| 2023 (9 months) | $ | $ | $ | $ | $ | |||||||||||||||
| 2024 | ||||||||||||||||||||
| 2025 | ||||||||||||||||||||
| 2026 | ||||||||||||||||||||
| Total Loan Payments | $ | $ | $ | $ | $ | |||||||||||||||
| Current Portion of Loan Payable | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Non-Current Portion of Loan Payable | $ | $ | $ | $ | $ | |||||||||||||||
| (1) |
| (2) |
| (3) |
| (4) |
Note 6. Business Combination
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.
| 15 |
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 $
While
the agreement was structured as an asset purchase agreement, we also assumed the operations of Gulf Coast Scuba resulting in the recognition
of a business combination. During 2022, we recognized revenue of $
| Fair Value | ||||
| Rental Inventory | $ | |||
| Fixed Assets | ||||
| Retail Inventory | ||||
| Right of use asset | ||||
| Lease liability | ( | ) | ||
| Net Assets Acquired | $ | |||
Note 7. Goodwill and Intangible Assets, Net
The following table sets for the changes in the carrying amount of the Company’s Goodwill for the nine months ended September 30, 2023.
| 2023 | ||||
| Balance, January 1 | $ | |||
| Addition: | ||||
| Balance, September 30 | $ | |||
The Company performed an evaluation of the value of goodwill at December 31, 2022. Based upon this evaluation it was determined that there should be no adjustment to goodwill. There has been nothing noted during the nine months ended September 30, 2023 that would indicate that the value of goodwill should change through that date.
| 16 |
The following table sets for the components of the Company’s intangible assets at September 30, 2023:
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, 2023 is a follows:
| Intangible Amortization | ||||
| 2023 (3 months remaining) | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
Amortization expense for amortizable intangible assets for both the three
months ended September 30, 2023 and 2022 was
Note 8. Stockholders’ Equity
Common Stock
On
January 18, 2023 and February 18, 2023, the Company issued to Charles Hyatt, an aggregate of units, 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
March 31, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible demand
note for the three months ending March 31, 2023. The fair value of these shares was $
On
March 31, 2023, the Company issued an aggregate of shares of common stock to the holders of convertible notes for payment of
interest for the three months ending December 31, 2022. The fair value of these shares was $
On
June 30, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible demand
note for the three months ending June 30, 2023. The fair value of these shares was $
On
June 30, 2023, the Company issued an aggregate of shares of common stock to the holders of convertible notes for payment of interest
for the three months ending June 30, 2023. The fair value of these shares was $
On
September 30, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible
demand note for the three months ending September 30, 2023. The fair value of these shares was $
On
September 30, 2023, the Company issued an aggregate of shares of common stock to the holders of convertible notes for payment
of interest for the three months ending September 30, 2023. The fair value of these shares was $
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 the 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 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 $
| 17 |
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.
The Company also issued options outside of the Plan that were not approved by the security holders. These options may be granted to employees, directors, and consultants in the form of incentive stock options or non-qualified stock options.
| 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 | $ | |||||||||||
Options
The Company has issued options to purchase approximately shares of its common stock at an average exercise price of $ with a fair value of approximately $. For the three and nine months ended September 30, 2023, the Company issued options to purchase shares.
For the three months ended September 30, 2023 and 2022, the Company recognized an expense of approximately $ and $, respectively and for the nine months ended September 30, 2023 and 2022, the Company recognized an expense of approximately $ and $, respectively, of non-cash compensation expense (included in General and Administrative expense in the accompanying Consolidated Statement of Operations) determined by application of a Black-Scholes option pricing model with the following inputs: exercise price, dividend yields, risk-free interest rate, and expected annual volatility. As of September 30, 2023, the Company had approximately $ of unrecognized pre-tax non-cash compensation expense related to performance based options to purchase shares, which the Company expects to recognize, based on a weighted-average period of years. The Company uses straight-line amortization of compensation expense over the requisite service period for time-based options. For performance-based options the Company evaluates the likelihood of a vesting qualification being met, and will establish the expense based on that evaluation. The maximum contractual term of the Company’s stock options is years. The Company recognizes forfeitures and expirations as they occur. Options to purchase approximately shares have vested as of September 30, 2023.
| 18 |
| Nine Months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Expected volatility | % - | % | – | % | ||||
| Expected term | – Years | – Years | ||||||
| Risk-free interest rate | % - | % | % - | % | ||||
| Forfeiture rate | % | % | ||||||
The expected volatility was determined with reference to the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant.
| Number of | Weighted Average Exercise | Weighted Average Remaining Contractual | Aggregate Intrinsic | |||||||||||||
| Options | Price | Life in Years | Value | |||||||||||||
| Outstanding at December 31, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Outstanding – December 31, 2022 | $ | |||||||||||||||
| Exercisable – December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Outstanding – September 30, 2023 | $ | |||||||||||||||
| Exercisable – September 30, 2023 | $ | $ | ||||||||||||||
| Range of Exercise Price | Number outstanding at September 30, 2023 | Weighted average remaining life | Weighted average exercise price | Number exercisable at September 30, 2023 | Weighted average exercise price | Weighted average remaining life | |||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| Outstanding options | |||||||||||||||||||||||||
At September 30, 2023, 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, 2023, 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 years.
| 19 |
Warrants
On
January 18, 2023 and February 18, 2023, the Company issued to Charles Hyatt, an aggregate of units, 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 $
A summary of the Company’s warrants as of December 31, 2022 and changes during the nine months ended September 30, 2023 is presented below:
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or Expired | ||||||||||||||||
| Outstanding – September 30, 2023 | $ | |||||||||||||||
| Exercisable – September 30, 2023 | $ | $ | ||||||||||||||
Note 9. Commitments and contingencies
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, among other things, provides that STS provide 30 hours per week of commercialization support for its NextGen licensed
products without charge. In consideration therefor, the Company agreed to an increased minimum yearly royalty payment of $
| 20 |
Consulting and Employment Agreements
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 served 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 received
(i) an annual base salary of $
In
addition, Mr. Constable was entitled to receive stock options to purchase shares of common stock at an exercise price of $
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
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 served as Chief Executive Officer of BLU3. In consideration for his services, Blake
Carmichael received (i) an annual base salary of $
On
September 3, 2021, SSI and Christeen Buban entered into a three-year employment agreement (the “Buban Employment Agreement”)
pursuant to which Ms. Buban shall serve as the President of SSI. In consideration for her services, Mrs. Buban shall receive (i) an annual
base salary of $
In addition, Mrs. Buban shall be entitled to receive a stock option to purchase up to shares of common stock of the Company at an exercise price of $ per share, which vests upon the attainment of certain defined annual financial metrics, as set forth in the Buban Employment Agreement. A measurement was made for the three and nine months ended September 30, 2023 and no expense was recorded based upon the vesting criteria not being met.
| 21 |
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 therefore, 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 of a three year lease for the property located at 259 Commercial Blvd., Suites 2 and 3 in Lauderdale-By-The Sea, Florida
for $
On
September 14, 2022, SSI entered into a sixty-month lease renewal for its facility in Huntington Beach, California commencing on February
1, 2022 with 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 $
On
December 22, 2022, the U.S. Consumer Products Safety Commission (the “CPSC”) issued a voluntary recall notice for the Nomad
tankless dive system, which is distributed by BLU3, Inc. As part of the recall procedure, the CPSC has approved the Company’s proposed
remedy for the recall and BLU3 will begin to receive units back from consumers to repair affected Nomad units. The Company has evaluated
the costs of this recall and has deemed it necessary to set an allowance of $
Note 10. Segment Reporting
The Company has five operating segments as described below:
| 1. | SSA Products, which sells recreational multi-diver surface supplied air diving systems. | |
| 2. | High Pressure Gas Systems, which sells high pressure air and industrial gas compressor packages. | |
| 3. | Ultra-Portable Tankless Dive Systems, which sells next generation electric surface supply air diving systems and electric shallow dive systems that are battery operated and completely portable to the user. | |
| 4. | Redundant Air Tank Systems, which manufactures and distributes a line of high pressure tanks and redundant air systems for the military and recreational diving industries. | |
| 5. | Guided Tour and Retail, which provides guided tours using the BLU3 technology, and also operates as a retail store for the diving community. |
| 22 |
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 | |||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| Net Revenues | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Cost of Revenue | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Depreciation/Amortization | ||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Profit | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| Net Revenues | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Cost of Revenue | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Depreciation/Amortization | ||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | ||||||||||||||||||
| Total Assets | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
Note 11. Subsequent Events
On
November 14, 2023, the Company borrowed funds through the issuance of a promissory note (the Note) in the principal amount of $
| 23 |
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. Actual future results may be materially different from what we expect. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by 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. In addition, the Company is 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 includes 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.
| 24 |
Results of Operations
Net Revenues, Costs of Net Revenues and Gross Profit
Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
Net revenues decreased 18.8% for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 as a result of a decrease in revenues in LWA and BLU3. Net revenue for BLU3 decreased 51.3% as a direct result of the recall of the NOMAD dive system during the fourth quarter of 2022 and the loss of sales momentum as well as a soft demand in many areas of BLU3’s market. The decrease in LWA’s revenue can be attributed to manufacturing delays in production. The decrease in LWA and BLU3’s revenues was partially offset by increased revenues in LBI, BTL and SSI. SSI’s increase can be attributed to the continued momentum of the Company’s newest product, HEED3 as well as increased demand from international users of their Spare Air product line.
For the three months ended September 30, 2023, cost of net revenues was 67.7% as compared with the cost of net revenues of 65.9% for the three months ended September 30, 2022. The cost increase as a percentage of revenue, can be directly attributed to the cost of direct labor, which accounted for a larger portion of costs and significantly impacted the profit margin. Included in cost of net revenues are royalty expenses paid to Robert Carmichael which decreased 2.6% for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.
Gross profit margin was 32.3% for the three months ended September 30, 2023 as compared to gross profit margin of 34.1% for the three months ended September 30, 2022. The reduction in gross margin, is directly attributable to BTL’s margin of 27.3% and LWA’s margin of (6.4)%.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Net revenues decreased 16.6% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 as a result of a decrease in revenues in BTL, LWA and BLU3. Net revenues for BLU3 decreased 42.1% as a direct result of the recall of the NOMAD dive system during the fourth quarter of 2022 and the slow ramp in production while repairing recalled units as well as the loss of sales momentum due to the recall. Both BLU3 and BTL’s sales showed weakness due to soft demand at the distribution levels as we believe their customer base was in a conservative posture over concerns for the US and world economy. BTL’s revenue decreased 12.5% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. LWA’s revenue decreased 27.4% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The decrease in LWA’s revenues can be attributed to delays in production by our manufacturer which has impacted LWA’s ability to deliver certain lines of product. The decrease in revenues in BLU3, LWA and BTL was partially offset by increased revenue in LBI and SSI attributable to the continued momentum of the Company’s newest product, HEED3 as well as increased demand from international users of their Spare Air product line.
| 25 |
For the nine months ended September 30, 2023, cost of net revenues was 70.4% as compared with the cost of net revenues of 65.3% for the nine months ended September 30, 2022. The cost increase as a percentage of revenue, can be directly attributed to the cost of direct labor, which accounted for a larger portion of costs and significantly impacted the profit margin. Included in cost of net revenues are royalty expenses paid to Robert Carmichael which decreased 8.0% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
Gross profit margin was 29.6% for the nine months ended September 30, 2023 as compared to gross profit margin of 34.7% for the nine months ended September 30, 2022. The reduction in gross margin is directly attributable to reduced margins across all companies primarily attributed to reduced sales volume thereby increasing the weight of manufacturing labor negatively impacting gross margin.
The following tables provides net revenues, total costs of net revenues and gross profit margins for our segments for the periods presented.
Revenues
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, | % of | September 30, | % of | |||||||||||||||||||||
| 2023 | 2022 | Change | 2022 | 2021 | Change | |||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||
| Legacy SSA Products | $ | 942,411 | $ | 913,785 | 3.1 | % | $ | 2,005,718 | $ | 2,291,916 | (12.5 | )% | ||||||||||||
| High Pressure Gas Systems | 76,093 | 350,839 | (78.3 | )% | 651,579 | 897,849 | (27.4 | )% | ||||||||||||||||
| Ultra-Portable Tankless Dive Systems | 476,963 | 980,169 | (51.3 | )% | 1,540,298 | 2,659,027 | (42.1 | )% | ||||||||||||||||
| Redundant Air Tank Systems | 667,191 | 471,051 | 41.6 | % | 1,539,675 | 1,192,986 | 29.1 | % | ||||||||||||||||
| Guided Tour Retail | 119,348 | 92,959 | 28.4 | % | 255,501 | 143,233 | 78.4 | % | ||||||||||||||||
| Total net revenues | $ | 2,282,006 | $ | 2,808,803 | (18.8 | )% | $ | 5,992,771 | $ | 7,185,011 | (16.6 | )% | ||||||||||||
Cost of revenues as a percentage of net revenues
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Legacy SSA Products | 75.9 | % | 63.3 | % | 80.4 | % | 69.8 | % | ||||||||
| High Pressure Gas Systems | 101.4 | % | 72.6 | % | 67.8 | % | 61.9 | % | ||||||||
| Ultra-Portable Tankless Dive Systems | 68.1 | % | 60.0 | % | 67.9 | % | 59.2 | % | ||||||||
| Redundant Air Tank Systems | 52.8 | % | 68.4 | % | 61.9 | % | 70.2 | % | ||||||||
| Guided Tour Rental | 62.8 | % | 117.3 | % | 63.6 | % | 86.0 | % | ||||||||
Gross profit (loss) margins
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Legacy SSA Products | 24.1 | % | 36.7 | % | 19.6 | % | 30.2 | % | ||||||||
| High Pressure Gas Systems | (1.4 | )% | 27.4 | % | 32.2 | % | 38.1 | % | ||||||||
| Ultra-Portable Tankless Dive Systems | 31.9 | % | 40.0 | % | 32.1 | % | 40.8 | % | ||||||||
| Redundant Air Tank Systems | 47.2 | % | 31.6 | % | 38.1 | % | 29.8 | % | ||||||||
| Guided Tour Rental | 37.2 | % | (17.3 | )% | 36.4 | % | 14.0 | % | ||||||||
| 26 |
SSA Products
Revenues decreased 12.5% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The decrease in revenue can be attributed to both the dealer and direct to consumer revenue channels decreasing 20.2% and 4.2% for the nine months ended September 30, 2023 and September 30, 2022, respectively. This decrease may likely be attributable to economic concerns that were lingering from late 2022. Our dealers have indicated that they were taking a conservative approach in the offseason to conserve cash for the season. BTL was able to stimulate some demand during the nine months ended September 30, 2023 with a discounting program. Affiliate sales, while the smallest segment of revenue increased 40.8% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
The costs of revenues as a percentage of net revenues in this segment increased from 69.8% to 80.4% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 due to a decrease in margins in the Direct to Consumer and Dealer revenue channels, as a result of the discounting to stimulate revenue.
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, 2023 | Three Months Ended September 30, 2022 | % change | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||||||||||||||||||
| Dealers | $ | 515,868 | $ | 514,566 | 0.3 | % | 75.2 | % | 70.3 | % | 24.8 | % | 29.7 | % | ||||||||||||||
| Direct to Consumer (website included) | 404,636 | 375,680 | 7.2 | % | 81.7 | % | 55.3 | % | 18.3 | % | 44.7 | % | ||||||||||||||||
| Affiliates | 21,907 | 23,539 | (6.9 | )% | 48.9 | % | 36.5 | % | 51.1 | % | 63.5 | % | ||||||||||||||||
| Total | $ | 942,411 | $ | 913,785 | 3.1 | % | 64.1 | % | 63.3 | % | 35.9 | % | 36.7 | % | ||||||||||||||
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Nine months ended September 30, | Nine months ended September 30, | % | Nine months ended | Nine months ended September 30, | Nine months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | change | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Dealers | $ | 1,103,526 | $ | 1,383,321 | (20.2 | )% | 88.1 | % | 74.8 | % | 11.9 | % | 25.2 | % | ||||||||||||||
| Direct to Consumer (website included) | 801,693 | 837,214 | (4.2 | )% | 72.2 | % | 59.4 | % | 27.8 | % | 40.6 | % | ||||||||||||||||
| Affiliates | 100,499 | 71,381 | 40.8 | % | 67.0 | % | 92.3 | % | 33.0 | )% | 7.7 | % | ||||||||||||||||
| Total | $ | 2,005,718 | $ | 2,291,916 | (12.5 | )% | 78.9 | % | 69.8 | % | 21.1 | % | 30.2 | % | ||||||||||||||
| 27 |
High Pressure Gas Systems
Sales of high-pressure breathing air compressors decreased 27.4% for the nine months ended September 30, 2023 from the nine months ended September 30, 2022, with the three months ended September 30, 2023 decreaseing 78.3% from the three months ended September 30, 2022. The decrease in revenues can be directly attributed to delays in the manufacturing from our supply chain.
Costs of revenues as a percentage of net revenues in this segment increased to 63.3% for the nine months ended September 30, 2023 from 61.9% for the nine months ended September 30, 2022. This increase in cost as a percentage of revenue can be attributed to volume discounting for the large reseller in Mexico, which caused reseller cost of sales for the three months ended September 30, 2023 to decreased to 70.5% as compared to 72.5% for the three months ended September 30, 2022.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | % change | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||||||||||||||||||
| Resellers | $ | 8,579 | $ | 316,914 | (97.3 | )% | 72.0 | % | 76.1 | % | 28.0 | % | 23.9 | % | ||||||||||||||
| Direct to Consumers | 85,657 | 20,903 | 309.8 | % | 64.0 | % | 28.1 | % | 36.0 | % | 71.9 | % | ||||||||||||||||
| Original Equipment Manufacturers | (18,143 | ) | 12,022 | (250.9 | )% | 68.4 | % | 57.4 | % | 31.6 | % | 42.6 | % | |||||||||||||||
| Total | $ | 76,093 | $ | 349,839 | (78.3 | )% | 70.5 | % | 72.6 | % | 29.5 | % | 27.4 | % | ||||||||||||||
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Nine months ended September 30, | Nine months ended September 30, | % | Nine months ended September 30, | Nine months ended September 30, | Nine months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | change | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Resellers | $ | 372,760 | $ | 556,454 | (33.0 | )% | 69.3 | % | 65.6 | % | 30.7 | % | 34.4 | % | ||||||||||||||
| Direct to Consumers | 196,516 | 216,148 | (9.1 | )% | 40.5 | % | 55.3 | % | 59.5 | % | 44.7 | % | ||||||||||||||||
| Original Equipment Manufacturers | 82,303 | 125,247 | (10.5 | )% | 66.8 | % | 57.0 | % | 33.2 | % | 43.0 | % | ||||||||||||||||
| Total | $ | 651,579 | $ | 897,849 | (27.4 | )% | 63.3 | % | 61.9 | % | 36.7 | % | 38.1 | % | ||||||||||||||
| 28 |
Ultra Portable Tankless Dive Systems
Revenue for the nine months ended September 30, 2023 in the Ultra Portable Tankless Dive System segment decreased 42.1% as compared to the nine months ended September 30, 2022 as a result of the loss of sales momentum from the recall of the NOMAD dive system in the fourth quarter of 2022. Revenue was down across all channels with the largest lost to the dealer channel with a drop of 64.6% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
Cost of revenues from this segment as a percentage of net revenues for the nine months ended September 30, 2023 increased to 67.8% from 59.2% for the nine months ended September 30, 2022. The increase in cost of revenue as compared to revenue was impacted by increased direct labor costs in connection with the recalled product. In addition, BLU3 discounted its selling price in order to stimulate demand in all of its diving systems during the nine months ended September 30, 2023.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | % change | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||||||||||||||||||
| Direct to Consumer | $ | 140,153 | $ | 366,178 | (61.7 | )% | 74.2 | % | 67.3 | % | 25.8 | % | 32.7 | % | ||||||||||||||
| Dealers | 49,857 | 410,513 | (87.9 | )% | 53.6 | % | 44.6 | % | 46.4 | % | 55.4 | % | ||||||||||||||||
| Amazon | 286,953 | 203,478 | 41.0 | % | 55.9 | % | 78.0 | % | 44.1 | % | 22.0 | % | ||||||||||||||||
| Total | $ | 476,963 | $ | 980,169 | (51.3 | )% | 64.2 | % | 60.0 | % | 35.8 | % | 40.0 | % | ||||||||||||||
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin as a % of Net Revenue | ||||||||||||||||||||||||||
| Nine months ended September 30, 2023 | Nine months ended September 30, 2022 | % change | Nine months ended September 30, 2023 | Nine months ended September 30, 2022 | Nine months ended September 30, 2023 | Nine months ended September 30, 2022 | ||||||||||||||||||||||
| Direct to Consumer | $ | 770,727 | $ | 906,133 | (14.9 | )% | 71.2 | % | 57.6 | % | 28.8 | % | 42.4 | % | ||||||||||||||
| Dealers | 304,109 | 859,633 | (64.6 | )% | 76.0 | % | 54.1 | % | 24.0 | % | 45.9 | % | ||||||||||||||||
| Amazon | 465,462 | 893,261 | (47.9 | )% | 56.4 | % | 65.8 | % | 43.6 | % | 34.2 | % | ||||||||||||||||
| Total | $ | 1,540,298 | $ | 2,659,027 | (42.1 | )% | 67.8 | % | 59.2 | % | 32.2 | % | 40.8 | % | ||||||||||||||
| 29 |
Redundant Air Tank Systems
Revenue in the Redundant Air Tank Systems System segment increased 29.1% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. This increase can be attributed to increases in the Commercial, Government and Repairs sales channels increasing 203.4%, 81.8% and 93.3%, respectively, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. These channels are drivers of sales volume for the new HEED3 product line and have also seen increased quantity orders from the scuba related dealer base on the Spare Air product. These increases were offset by a decrease in the direct to consumer channel of 31.4% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
The margins for the nine months ended September30, 2023 increased to 38.1% as compared to 29.8% for the nine months ended September 30, 2022 as the margins across all channels improved. This improvement can be attributed to the increased revenue from the HEED3 product which provides higher margins than SSI’s traditional product Spare Air, as well as a price increase implemented for 2023.
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, including 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.
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | % change | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||||||||||||||||||
| Commercial | $ | 390,681 | $ | 73,691 | 430.2 | % | 47.1 | % | 45.8 | % | 55.8 | % | 54.2 | % | ||||||||||||||
| Dealers | 206,482 | 329,739 | (37.4 | )% | 69.6 | % | 69.1 | % | 36.5 | % | 30.9 | % | ||||||||||||||||
| Government | 32,205 | 14,017 | 129.8 | % | 29.9 | % | 76.5 | % | 64.3 | % | 23.5 | % | ||||||||||||||||
| Repairs | 5,316 | 2,620 | 50.7 | % | 257.4 | % | 569.6 | % | (139.2 | )% | (469.6 | )% | ||||||||||||||||
| Direct to Consumers (Website) | 32,507 | 50,984 | (36.2 | )% | 36.0 | % | 68.0 | % | 64.0 | % | 32.0 | % | ||||||||||||||||
| Total | $ | 667,191 | $ | 471,051 | 41.6 | % | 54.3 | % | 68.4 | % | 45.7 | % | 31.6 | % | ||||||||||||||
| Revenue | Cost of Revenue as a % of Revenue | Margin | ||||||||||||||||||||||||||
| Nine months ended September 30, | Nine months ended September 30, | % | Nine months ended September 30, | Nine months ended September 30, | Nine months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | change | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Commercial | $ | 536,566 | $ | 176,847 | 203.4 | % | 47.0 | % | 44.5 | % | 53.0 | % | 55.5 | % | ||||||||||||||
| Dealers | 747,534 | 792,081 | (5.6 | )% | 68.6 | % | 74.3 | % | 31.4 | % | 25.7 | % | ||||||||||||||||
| Government | 121,282 | 66,729 | 81.8 | % | 29.5 | % | 45.1 | % | 70.5 | % | 54.9 | % | ||||||||||||||||
| Repairs | 41,510 | 21,478 | 93.3 | % | 267.3 | % | 276.8 | % | (167.3 | )% | (176.8 | )% | ||||||||||||||||
| Direct to Consumers (Website) | 93,156 | 135,851 | (31.4 | )% | 45.9 | % | 59.2 | % | 54.1 | % | 40.8 | % | ||||||||||||||||
| Total | $ | 1,540,048 | $ | 1,192,986 | 29.1 | % | 61.9 | % | 70.2 | % | 38.1 | % | 29.8 | % | ||||||||||||||
| 30 |
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.
Revenue for this segment for the nine months ended September 30, 2023 increased 78.4% as compared to the nine months ended September 30, 2022. This increase is attributable to the inclusion of two months’ revenue included in the nine months ending September 30, 2023, as the GCS acquisition was completed in May 2022. For the three months ended September 30, 2023 revenue increased 28.4% as compared to the three months ended September 30, 2022, primarily from the service segment which includes lessons and charters.
The increasing margin for the three and nine months ended September 30, 2023 to 21.5% and 35.6%, respectively, is attributable to the normalization of the retail product costing in the GCS inventory to reflect a more accurate cost of goods.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | % change | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||||||||||||||||||
| Retail Sales | $ | 53,099 | 55,693 | (4.7 | )% | 83.2 | % | 119.4 | % | 16.8 | % | (19.4 | )% | |||||||||||||||
| Tours and Lessons | 66,249 | 37,267 | 77.8 | % | 74.7 | % | 114.3 | % | 25.3 | % | (14.3 | )% | ||||||||||||||||
| Total | $ | 119,348 | 92,960 | 28.4 | % | 78.5 | % | 117.3 | % | 21.5 | % | (17.3 | )% | |||||||||||||||
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin as a % of Net Revenue | ||||||||||||||||||||||||||
| Nine months ended September 30, | Nine months ended September 30, | % | Nine months ended September 30, | Nine months ended September 30, | Nine months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | change | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Retail Sales | $ | 132,982 | 90,241 | 47.4 | % | 65.3 | % | 77.1 | % | 34.7 | % | 22.9 | % | |||||||||||||||
| Tours and Lessons | 122,519 | 52,992 | 193.5 | % | 61.8 | % | 101.3 | % | 38.2 | % | (1.3 | )% | ||||||||||||||||
| Total | $ | 255,501 | 143,233 | 78.4 | % | 64.4 | % | 86.0 | % | 35.6 | % | 14.0 | % | |||||||||||||||
| 31 |
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 decreased 31.9% and 32.9%, respectively, for the three and nine months ended September 30, 2023 as compared to the same periods in the prior year.
Selling, General & Administrative Expenses (SG&A Expenses)
SG&A decreased by 34.0% for the three months ended September 30, 2023 and 33.7% for the nine months ended September 30, 2023 when compared to the same periods in the prior year. SG&A expenses were comprised of the following:
| Expense Item | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | % Change | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | % Change | ||||||||||||||||||
| Payroll, Selling & Administrative | $ | 459,444 | $ | 536,383 | (14.3 | )% | $ | 1,336,543 | $ | 1,476,868 | (9.5 | )% | ||||||||||||
| Stock Compensation Expense | 7,185 | 315,152 | (97.7 | )% | 25,404 | 894,453 | (97.2 | )% | ||||||||||||||||
| Professional Fees | 20,568 | 72,144 | (71.5 | )% | 120,427 | 297,175 | (59.5 | )% | ||||||||||||||||
| Advertising | 129,970 | 125,456 | 3.6 | % | 330,989 | 383,029 | (13.6 | )% | ||||||||||||||||
| All Other | 190,622 | 175,583 | 8.6 | % | 513,027 | 456,534 | 12.4 | % | ||||||||||||||||
| Total SG&A | $ | 807,789 | $ | 1,224,718 | (34.0 | )% | $ | 2,326,390 | $ | 3,508,059 | (33.7 | )% | ||||||||||||
| 32 |
Payroll for the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022 decreased 14.3% and 9.5%, respectively. The decrease reflects reductions in production personnel in BLU3, as well as a reallocation of SSI direct labor from payroll expense to cost of sales for the nine months ended September 30, 2023.
Non-Cash Stock Compensation expenses decreased by 97.7% and 97.2%, for the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022, as a result of vesting milestones not being met due to the reduction in revenue for the three months and nine months ended September 30, 2023.
Professional fees, including legal, accounting and other professional fees decreased 71.5% and 59.5%, respectively, for the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022. The decrease for the nine months ended September 30, 2023 can be attributed to a decrease in legal fees of 59.9% and other professional fees of 73.3% and a decrease in accounting fees of 36.4%. The decrease in the Company’s acquisition activities in 2023 resulted in a decrease in legal fees. Additionally, the decrease in professional fees is attributable to the conversion of consultants to employees late in 2022 and the decrease in accounting fees can be attributed to new auditors who offer fixed priced services.
Advertising expenses increased by 3.6% for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, respectively. The decrease in advertising expense for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was 13.6%, respectively. This decrease is attributable to BLU3’s decrease in advertising during its recall process. BLU3’s decrease in advertising expense was offset slightly by an increase in advertising expense for SSI.
Other expenses increased by 8.6% and 12.4% for the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022, due primarily to a decrease in the reserve for recall expenses.
Research & Development Expenses (R&D Expenses)
R&D expenses for the three months ended September 30, 2023, increased 53.9% as compared to the three months ended September 30, 2022, respectively. R&D expenses for the nine months ended September 30, 2023, decreased by 17.5%, as compared to the nine months ended September 30, 2022, respectively. The decrease was attributable to a decrease in new product development activity.
Other Income/Expense
For the three and nine months ended September 30, 2023 and 2022, other income/expense consisted solely of interest expense. For the three months ended September 30, 2023, interest expense increased 79.9% from the three months ended September 30, 2022 to approximately $20,800 as compared to approximately $11,500 in the three months ended September 30, 2022. The increase in interest expense can be attributed to the NFS loan, the Navitas 2022 loan, and the convertible demand note from Robert Carmichael that were funded in the third and fourth quarters of 2022.
Liquidity and Capital Resources
We had cash of $287,868 as of September 30, 2023. The following table summarizes total current assets, total current liabilities and working capital at September 30, 2023 as compared to December 31, 2022.
September 30, 2023 | December 31, 2022 | % change | ||||||||||
| (unaudited) | ||||||||||||
| Total current assets | $ | 2,851,964 | $ | 3,265,714 | (12.7 | )% | ||||||
| Total current liabilities | $ | 2,127,203 | $ | 1,792,151 | (18.1 | )% | ||||||
| Working capital | $ | 724,761 | $ | 1,473,563 | (50.8 | )% | ||||||
The decrease in our current assets at September 30, 2023 from December 31, 2022 primarily reflected by a decrease in inventory as the Company decreased its inventory purchases to match the reduction in current demand. The decrease in current liabilities reflects a decrease in accounts payable and accrued liabilities.
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Summary Cash Flows
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| Net cash used in operating activities | $ | (367,628 | ) | $ | (499,712 | ) | ||
| Net cash used in investing activities | $ | (28,671 | ) | $ | (60,290 | ) | ||
| Net cash provided by financing activities | $ | 199,740 | $ | 493,935 | ||||
Net cash used in operating activities for the nine months ended September 30, 2023 was due to the net loss of approximately $616,315. Net cash used in operating activities is also the result of a decrease in current assets, including inventory, offset by an increase in accounts receivable and accounts receivable related party which generated approximately $129,000. A net decrease in liabilities which generated approximately $29,500 primarily from an increase in customer deposits offset by a decrease in accounts payable, and related party accounts payable.
Net cash used in investing activities for the nine months ended September 30, 2023 of approximately $52,000 consists of fixed asset purchases.
Net cash provided by financing activities for the nine months ended September 30, 2023 reflects proceeds of $223,000 from the sale of units, and issuance of debt to related party, partially offset by the payment of debt of approximately $50,260.
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, 2022 includes an explanatory paragraph stating the Company has net losses and an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. If the Company is unable to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back, delay or cease operations, liquidate assets and possibly seek bankruptcy protection.
We have a history of losses, and an accumulated deficit of $17,053,810 as of September 30, 2023. Despite a working capital surplus of $724,761 at September 30, 2023, 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.
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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.
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, 2023, 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.
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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, 2023 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. |
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 intends to hire 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.
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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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
None.
ITEM 5. OTHER INFORMATION
None.
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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 20, 2023 | BROWNIE’S MARINE GROUP, INC. | |
| By: | /s/ Robert M. Carmichael | |
| Robert M. Carmichael 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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