Brownie`s Marine Group Inc
Brownie`s Marine Group Inc details
Ticker:BWMG
Employees: 36
Filing
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
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 333-99393
BROWNIE’S MARINE GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 90-0226181
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3001 NW 25th Avenue, Suite 1
Pompano Beach , Florida 33069
(Address of principal executive offices) (Zip code)
(954) 462-5570
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. Yes ☒ No ☐
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). Yes ☒ No ☐
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 ☐
Non-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 ☐ No ☒
As of November 7 , 2022, there were 418,452,292 shares of common stock outstanding.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. 4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 38
ITEM 4. CONTROLS AND PROCEDURES. 38
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 39
ITEM 1A. RISK FACTORS. 39
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 39
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 39
ITEM 4. MINE SAFETY DISCLOSURES. 39
ITEM 5. OTHER INFORMATION. 39
ITEM 6. EXHIBITS. 39
NOTE REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs.
You should read thoroughly this Quarterly Report with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by risk factors included in our Annual Report on Form 10-K filed with the SEC on April 22, 2022, which risk factors could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by applicable law.
PART I
ITEM 1. FINANCIAL STATEMENTS
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2022 December 31, 2021
(unaudited)
ASSETS
Current Assets
Cash $ 577,076 $ 643,143
Accounts receivable - net 168,871 123,270
Accounts receivable - related parties 55,342 77,301
Inventory, net 2,458,641 1,895,260
Prepaid expenses and other current assets 315,309 227,458
Total current assets 3,575,239 2,966,432
Property, equipment and leasehold improvements, net 371,334 270,065
Right of use assets 1,197,829 454,475
Intangible Assets, Net 664,538 718,905
Goodwill 249,986 249,986
Other assets 19,998 14,098
Total assets $ 6,078,924 $ 4,673,961
Liabilities and stockholders’ equity
Current liabilities
Accounts payable and accrued liabilities $ 855,048 $ 744,383
Accounts payable - related parties 18,495 37,267
Customer deposits and unearned revenue 125,044 143,938
Other liabilities 229,374 187,924
Operating lease liabilities 267,684 232,283
Related party convertible demand note, net 47,543 -
Current maturities long term debt 48,183 50,402
Total current liabilities 1,591,371 1,396,197
Long term debt 110,692 87,956
Long term convertible debentures, net 342,021 339,254
Operating lease liabilities 930,378 222,899
Total liabilities 2,974,462 2,046,306
Commitments and contingencies (see note 9)
Stockholders’ equity
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding as of September 30, 2022 and December 31, 2021. 425 425
Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 418,452,292 shares issued and outstanding as of September 30, 2022 and 393,850,475 shares issued and outstanding as of December 31, 2021, respectively. 41,845 39,386
Common stock payable 138,941 shares and 138,941 shares, respectively, as of September 30, 2022 and December 31, 2021. 14 14
Additional paid-in capital 18,663,726 17,132,434
Accumulated deficit (15,601,548 ) (14,544,604 )
Total stockholders’ equity $ 3,104,462 $ 2,627,655
Total liabilities and stockholders’ equity $ 6,078,924 $ 4,673,961
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
Three months ended September 30 Nine months ended September 30
2022 2021 2022 2021
Net revenues
Net revenues $ 2,591,383 $ 1,288,792 $ 6,403,522 $ 3,394,890
Net revenues - related parties 217,421 269,922 781,489 827,511
Total net revenues 2,808,804 1,558,714 7,185,011 4,222,401
Cost of net revenues
Cost of net revenues 1,667,586 1,008,527 4,121,071 2,394,242
Cost of net revenues - related parties 106,693 130,821 365,892 405,951
Royalties expense - related parties 22,961 19,484 53,574 59,090
Royalties expense 54,708 24,854 149,024 79,809
Total cost of revenues 1,851,948 1,183,686 4,689,561 2,939,092
Gross profit 956,856 375,028 2,495,450 1,283,309
Operating expenses
Selling, general and administrative 1,224,718 882,937 3,508,059 2,443,579
Research and development costs 4,778 26,655 13,070 69,074
Total operating expenses 1,229,496 909,592 3,521,129 2,512,653
Loss from operations (272,640 ) (534,564 ) (1,025,679 ) (1,229,344 )
Other income (expense), net
Gain on settlement of debt - - - 10,000
Gain on the forgiveness of PPP loan - - - 159,600
Interest expense (11,549 ) (6,115 ) (31,265 ) (11,721 )
Total other income (expense), net (11,549 ) (6,115 ) (31,265 ) 157,879
Loss before provision for income taxes (284,189 ) (540,679 ) (1,056,944 ) (1,071,465 )
Provision for income taxes - - - -
Net Loss (284,189 ) (540,679 ) (1,056,944 ) (1,071,465 )
Gain on foreign currency contract 8,633 - - -
Comprehensive Loss (275,556 ) (540,679 ) (1,056,944 ) (1,071,465 )
Basic loss per common share $ (0.00 ) $ (0.00 ) $ (0.00 ) $ (0.00 )
Basic weighted average common shares outstanding 411,816,671 342,827,940 407,202,475 328,103,475
Diluted loss per common share $ (0.00 ) $ (0.00 ) $ (0.00 ) $ (0.00 )
Diluted weighted average common shares outstanding 411,816,671 342,827,940 407,202,475 328,103,475
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
Preferred Stock Common Stock Common Stock Payable Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholder’s Equity
Shares Amount Shares Amount Shares Amount Capital Income (Loss) Deficit (DEFICIT)
December 31, 2021 425,000 $ 425 393,850,475 $ 39,386 138,941 $ 14 $ 17,132,434 $ - $ ( 14,544,604 ) $ 2,627,655
Shares issued for the exercise of warrants - - 10,600,000 1,060 - - 263,940 - - 265,000
Shares issued for services - - 1,206,318 120 - - 35,380 - - 35,500
Stock Option Expense - - - - - - 230,034 - - 230,034
Net Loss - - - - - - - - ( 444,092 ) ( 444,092 )
Other Comprehensive Income - - - - - - - 1,587 - 1,587
March 31, 2022 (unaudited) 425,000 425 405,656,793 40,566 138,941 14 17,661,788 1,587 ( 14,988,696 ) 2,715,684
Stock Issued for Service - - 302,953 30 - - 11,970 - - 12,000
Stock Issued for Asset Purchase - - 3,084,831 308 - - 119,692 - - 120,000
Stock Issued for Accrued Interest on Convertible Notes - - 449,522 45 - - 23,003 - - 23,048
Stock Issued for Employee Bonus - - 280,000 28 - - 11,032 - - 11,060
Stock option expense - - - - - - 290,707 - - 290,707
Net Income - - - - - - - - ( 328,663 ) ( 328,663 )
Other Comprehensive Loss - - - - - - - ( 10,220 ) - ( 10,220 )
June 30, 2022 (unaudited) 425,000 425 409,774,099 $ 40,977 138,941 $ 14 $ 18,118,192 $ ( 8,633 ) $ ( 15,317,359 ) $ 2,833,616
Common Stock issued for the purchase of units - - 8,541,666 $ 854 - $ 204,146 - - $ 205,000
Stock Issued for Accrued Interest on Convertible Notes - - 136,527 14 - - 6,986 - - 7,000
Beneficial Conversion Feature - - - - - - 19,250 - - 19,250
Stock option expense - - - - - - 315,152 - - 315,152
Net Loss - - - - - - - - ( 284,189 ) ( 284,189 )
Other Comprehensive Income - - - - - - - 8,633 - 8,633
September 30, 2022 (unaudited) 425,000 $ 425 418,452,292 $ 41,845 138,941 $ 14 $ 18,663,726 $ - $ ( 15,601,548 ) $ 3,104,462
Preferred Stock Common Stock Common Stock Payable Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholder’s Equity
Shares Amount Shares Amount Shares Amount Capital Income (Loss) Deficit (DEFICIT)
December 31, 2020 425,000 $ 425 306,185,206 $ 30,620 138,941 $ 14 $ 13,508,882 $ - $ ( 12,956,137 ) $ 583,804
Common stock issued for Cash - - 27,500,000 2,750 - - 272,250 - - 275,000
Common stock issued for service - - 3,116,279 312 - - 124,688 - - 125,000
Stock option expense - - - - - - 218,505 - - 218,505
Common stock issued for conversion of convertible debentures and accrued interest - - 422,209 42 - - 14,735 - - 14,777
Net Loss - - - - - - - - ( 440,981 ) ( 440,981 )
March 31, 2021 (unaudited) 425,000 425 337,223,694 33,724 138,941 14 14,139,060 - ( 13,397,118 ) 776,105
Common stock issued for conversion of convertible debentures and accrued interest - - 6,055,358 606 - - 59,948 - - 60,554
Stock option expense - - - - - - 257,370 - - 257,370
Net Loss - - - - - - - - ( 89,805 ) ( 89,805 )
June 30, 2021 (unaudited) 425,000 $ 425 343,279,052 $ 34,330 138,941 $ 14 $ 14,456,378 $ - $ ( 13,486,923 ) $ 1,004,224
Common Stock issued for cash - - 14,600,000 1,460 - - 363,540 - - 365,000
Common stock issued for acquisition - - 27,305,442 2,731 - - 1,447,188 - - 1,449,919
Beneficial conversion features - - - - - - 12,480 - - 12,480
Common stock issued for services - - 1,190,476 119 - - 55,833 - - 55,952
Stock option expense - - - - - - 303,949 - - 303,949
Common stock issued for conversion of convertible debentures and accrued interest - - 6,114,516 611 - - 60,534 - - 61,145
Net Loss - - - - - - - - ( 540,679 ) ( 540,679 )
September 30, 2021 (unaudited) 425,000 $ 425 392,489,486 $ 39,251 138,941 $ 14 $ 16,699,902 $ - $ ( 14,027,602 ) $ 2,711,990
The accompanying condensed notes are an integral part of these consolidated unaudited financial statements
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2022 2021
Cash flows used in operating activities:
Net loss $ (1,056,944 ) (1,071,465 )
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 97,342 29,717
Amortization of debt discount 2,767 307
Amortization of right-of-use asset 177,258 89,087
Common stock issued for services 47,500 180,952
Reserve for bad debt 2,978 32,079
Reserve for slow moving inventory (82,446 ) -
Stock Based Compensation - Options 835,893 779,824
Stock based compensation - stock grant 11,060 -
Gain on Settlement of Debt - (10,000 )
Gain on forgiveness of PPP loan - (159,600 )
Changes in operating assets and liabilities
Change in accounts receivable, net (48,579 ) (172,246 )
Change in accounts receivable - related parties 21,959 (23,517 )
Change in inventory (371,514 ) (416,993 )
Change in prepaid expenses and other current assets (87,851 ) (262,666 )
Change in other assets (5,900 ) 18,089
Change in accounts payable and accrued liabilities 140,713 89,818
Change in customer deposits and unearned revenue (18,894 ) 368,613
Change in long term lease liability (177,732 ) (88,911 )
Change in other liabilities 31,450 65,195
Change in accounts payable - related parties (18,772 ) (17,425 )
Net cash used in operating activities (499,712 ) (569,142 )
Cash flows used in investing activities:
Cash used in asset acquisition (30,000 ) -
Cash Acquired in acquisition - 541,378
Cash used in purchase of fixed assets, net of debt (21,125 )
Purchase of fixed assets (9,165 ) (23,677 )
Net cash used in investing activities (60,290 ) 517,701
Cash flows from financing activities:
Proceeds from issuance of common stock - 275,000
Proceeds from issuance of units 205,000 365,000
Proceeds from exercise of warrants 265,000 -
Proceeds of debt – related party 66,793 -
Repayment on notes payable - (40,000 )
Repayment of debt (42,858 ) (33,030 )
Net cash provided by in financing activities 493,935 566,970
Net change in cash (66,067 ) 515,529
Cash, beginning balance 643,143 345,187
Cash, end of period $ 577,076 860,716
Supplemental disclosures of cash flow information:
Cash Paid for Interest $ 10,549 12,678
Cash Paid for Income Taxes $ - -
Supplemental disclosure of non-cash financing activities:
Operating lease obtained for operating lease liability $ 920,615 $ 160,182
Common Stock issued for asset acquisition $ 120,000 $ 1,449,919
Convertible notes issued for acquisition $ - $ 350,000
Beneficial conversion feature on convertible note, related party $ 19,250 $ 12,480
Common Stock issued for payment of convertible note interest $ 30,048 $ -
Fixed asset purchase through the issuance of debt $ 63,375 $ 76,448
Common stock issued for the conversion of convertible debentures and accrued interest $ - $ 136,476
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,2022
(UNAUDITED)
Note 1. Company Overview
Brownie’s Marine Group, Inc. (the “Company”) designs, tests, manufactures and distributes recreational hookah diving, scuba and water safety products through its wholly owned subsidiary, Trebor Industries, Inc., a Florida corporation, incorporated in 1981 (“Trebor” or “BTL”), manufactures and sells high pressure air and industrial compressor packages, yacht based scuba air compressor and nitrox generation systems through its wholly owned subsidiary, Brownie’s High Pressure Compressor Services, Inc., a Florida corporation incorporated in 2017 (“BHP”) and doing business as LW Americas (“LWA”) and develops and markets portable battery powered surface supplied air dive systems through its wholly owned subsidiary BLU3, Inc., a Florida corporation (“BLU3”). On September 3, 2021, the Company, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Submersible Acquisition, Inc., a Florida corporation incorporated in 2017, and wholly owned subsidiary of the Company (“Acquisition Sub”), Submersible Systems, Inc., a Florida corporation (“Submersible” or “SSI”), and Summit Holdings V, LLC, a Florida limited liability company (“Summit”) and Tierra Vista Group, LLC, a Florida limited liability company (“Tierra Vista” and, together with Summit, the “Sellers”), the owners of all of the capital stock of Submersible, pursuant to which Acquisition Sub merged with and into Submersible (the “Merger”), and Submersible, the surviving corporation, became a wholly owned subsidiary of the Company.
Submersible is a manufacturer of high pressure tanks and redundant air systems for the military and recreational diving industries, based in Huntington Beach, California and sells its products to governments, militaries, private companies and the dive industry throughout the world.
On February 13, 2022 the Company filed with the Florida Department of State, the articles of incorporation for a new wholly owned subsidiary, Live Blue, Inc. (“LBI”). LBI utilizes technology developed by BLU3 to provide new users and interested divers a guided tour experience. On May 2, 2022, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Gold Coast Scuba, LLC, a Florida limited liability company (“Gold Coast Scuba”), Steven M. Gagas and William Frenier, the sole members of Gold Coast Scuba (together, the “LLC Members”) and LBI. Pursuant to the terms of the Asset Purchase Agreement, LBI acquired substantially all of Gold Coast Scuba’s assets and assumed certain non-material liabilities of the business associated with these assets. In addition, LBI assumed the lease for the premises for Gold Coast Scuba as part of this asset acquisition.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The following unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete annual financial statements. The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading. The balance sheet as of December 31, 2021 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2021 for a broader discussion of our business and the risks inherent in such business. The results of operations for the nine months ended September 30, 2022, are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending December 31, 2022.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Trebor, BHP, BLU3, SSI and LBI. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250,000 per EIN. At September 30, 2022 and December 31, 2021, the Company had approximately $ 27,405 and $ 205,500 , respectively in excess of the FDIC insured limit.
Foreign Currency Forward Contracts
We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings, and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies. As of September 30, 2022 the Company closed out it’s only forward contract and has no further obligation relating to such.
Accounts receivable
Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for doubtful accounts is estimated based on historical customer experience and industry knowledge. The allowances for doubtful accounts totaled $ 46,555 and $ 46,555 at September 30, 2022 and December 31, 2021, respectively.
Inventory
Inventory consists of the following:
September 30, 2022
(unaudited) December 31, 2021
In-Transit inventory $ 79,502 $ 130,000
Raw materials 1,260,756 1,144,190
Work in process 84,243 99,858
Finished goods 978,247 521,212
Rental Equipment 55,893 -
Inventory, net $ 2,458,641 $ 1,895,260
Revenue Recognition
We account for revenues in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive.
We recognize the sale of products under single performance obligations upon shipment of the products as that is when ownership is transferred and our performance is completed. Revenues from repair and maintenance activities is recognized when the repairs are completed and the products have been shipped.
Lease Accounting
We account for leases in accordance with ASC 842, “Leases”. The lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations.
We categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that would allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in property and equipment, net. All other leases are categorized as operating leases. We did not have any finance leases as of September 30, 2022. Our leases generally have terms that range from three years for equipment and five to twenty years for property. We elected the accounting policy to include both the lease and non-lease components of our agreements as a single component and account for them as a lease.
Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
When we have the option to extend the lease term, terminate the lease for the contractual expiration date, or purchase the leased asset, and it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.
For the three and nine months ended September 30, 2022, lease expenses were approximately $ 76,300 and $ 205,000 , respectively, and approximately $ 39,000 and $ 108,000 for the three and nine months ended September 30, 2021, respectively. Cash paid for operating liabilities for the nine months ended September 30, 2022 was approximately $ 204,500 and approximately $ 98,000 for the nine months ended September 30, 2021.
During the three months ended September 30, 2022, the Company entered into a five -year lease extension for the SSI lease in Huntington Beach, CA. This extension increased the operating asset and liability by approximately $ 897,300 .
Supplemental balance sheet information related to leases was as follows:
September 30, 2022
Operating Leases
(unaudited)
Right-of-use assets $ 1,197,829
Current lease liabilities $ 267,684
Non-current lease liabilities 930,378
Total lease liabilities $ 1,198,062
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee and non-employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee and non-employee are required to provide service in exchange for the award, usually the vesting period.
Derivatives
The accounting treatment of derivative financial instruments requires that the Company record certain warrants and embedded conversion options at their fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As a result of entering into certain note agreements, for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy, by earliest issuance date, in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors, as long as the certain variable issuance terms in certain convertible instruments exist.
Loss per common share
Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. At September 30, 2022 and September 30, 2021, 249,177,870 and 245,297,740 , respectively, of potentially dilutive shares were not recognized as their inclusion would be anti-dilutive. These shares reflect shares potentially issuable under convertible notes, outstanding warrants, outstanding stock options and the conversion of preferred stock.
Recent accounting pronouncements
ASU 2016-13 Current Expected Credit Loss (ASC326)
In December 2021, the FASB issued and update to ASU No. 2016-13 the Current Expected Credit Losses (CECL) standard (ASC 326), which is designed to provide greater transparency and understanding of credit risk by incorporating estimated, forward-looking data when measuring lifetime Estimated Credit Losses (ECL) and requires enhanced financial statement disclosures. This guidance is effective January 1, 2023. The Company is evaluating the changes from this standard to determine the impact on its consolidated financial statements and related disclosures.
ASU 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts on an Entity’s Own Equity.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts on an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exceptions. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption or are not applicable.
ASU 2019-12 Income Taxes (Topic 740)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company determined that the standard has no impact on its consolidated financial statements and related disclosures.
Note 3. Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these consolidated financial statements. For the nine months ended September 30, 2022, the Company incurred a net loss of $ 1,056,944 of which $ 894,453 is non-cash stock related compensation and shares issued for service. At September 30, 2022, the Company had an accumulated deficit of $ 15,601,548 . Despite a working capital surplus of approximately $ 1,983,868 at September 30, 2022, the continued losses and cash used in operations raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to increase revenues, control expenses, raise capital, and to continue to sustain adequate working capital to finance its operations. The failure to achieve the necessary levels of profitability and cash flows would be detrimental to the Company. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 4. Related Party Transactions
The Company sells products to Brownie’s Southport Divers, Brownie’s Yacht Toys and Brownie’s Palm Beach Divers, companies owned by the brother of Robert Carmichael, the Company’s President and Chief Financial Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers with similar sales volumes. These entities accounted for $ 22,261 or 7.7 % and $ 19,484 or 17.3 % of the net revenues for the three months ended September 30, 2022 and September 30, 2021, respectively, and $ 53,574 or 10.9 % and $ 59,090 or 19.6 % for the nine months ending September 30, 2022 and September 30, 2021, respectively. Accounts receivable from these entities totaled $ 54,656 and $ 75,161 , at September 30, 2022 and December 31, 2021, respectively.
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 $ 686 and $ 897 at September 30, 2022 and December 31, 2021, respectively.
The Company had accounts payable to related parties of $ 18,495 and $ 37,267 at September 30, 2022 and December 31, 2021, respectively. The balance payable at September 30, 2022 was comprised of $ 10,052 due to 940, LLC, $ 2,980 due to BGL and $ 5,463 due to Robert Carmichael. At December 31, 2021 the balance payable was comprised of $ 5,000 due to Robert Carmichael and $ 32,267 due to BGL.
The Company has exclusive license agreements with 940 A to license the trademark “Brownie’s Third Lung”, “Tankfill”, “Brownie’s Public Safety” and various other related trademarks as listed in the agreements. The agreements provide that the Company pay 940 A 2.5 % of gross revenues per quarter as a royalty. Total royalty expense for the three months ended September 30, 2022 and 2021 was $ 22,961 and $ 19,484 , respectively. For the nine months ending September 30, 2022 and 2021 royalty expense was $ 53,574 and $ 59,090 , respectively. The accrued royalty for September 30, 2022 was $ 3,942 and is included in other liabilities.
On February 2, 2022, the Company issued Charles Hyatt, a director, 10,000,000 shares from the exercise of a warrant at $ 0.025 per share in consideration of $ 250,000 .
On February 2, 2022, the Company issued Grace Hyatt, the adult child of Charles Hyatt, a director, 600,000 shares from the exercise of a warrant at $ 0.025 per share in consideration of $ 15,000 .
On September 30, 2022, the Company issued a convertible demand 8 % promissory note in the principal amount of $ 66,793 to Robert Carmichael for funds to meet the working capital needs of LBI. There is no amortization schedule for the note, and interest is payable in shares of common stock of the Company at a conversion price equal to the 90 day value weighted average price (“VWAP”) of the Company’s stock prior to the quarterly interest payment date. The note holder may demand payment or convert the outstanding principal at a conversion rate of $ .021 per share at any time. The conversion rate was calculated at a 35 % discount to the 90 day VWAP of the Company’s stock as of the date of the note. The Company recorded $ 19,250 for the beneficial conversion feature. As this conversion rate is a fixed rate, the embedded conversion feature is not a derivative liability.
Note 5. Convertible Promissory Notes and Notes Payable
Convertible Promissory Notes
Convertible promissory notes consisted of the following at September 30, 2022:
Origination Original Period Period Period Accrued
Origination Maturity Interest Principal Discount End End End Interest Reg.
Date Date Rate Balance Balance Principal Discount Balance, Balance
Balance Balance Net
12/01/17 12/31/21 6 % 50,000 (12,500 ) - - - - (1 )
12/05/17 12/31/21 6 % 50,000 (12,500 ) - - - - (2 )
9/03/21 9/03/24 8 % 346,500 (12,355 ) 346,500 (7,903 ) 338,597 - (3 )
9/03/21 9/03/24 8 % 3,500 (125 ) 3,500 (76 ) 3,424 - (4 )
9/30/22 Demand 8 % 66,793 (19,245 ) 66,793 (19,250 ) 47,543 - (5 )
$ 416,793 $ (27,229 ) $ 389,564 $ -
(1) On December 1, 2017, the Company issued a 6 % secured convertible promissory note in the principal amount of $ 50,000 , initially due December 1, 2018 , subject to extension, which was granted until the note was converted. The note is secured by the assets of the Company and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor and BHP and the personal guarantee of Robert Carmichael.
The conversion price of the note initially ranged from $ 0.02 per share if converted in the first year to $ 0.125 per share if converted in year five. The noteholder may convert the note at any time until the note plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not timely made by the Company. The lender was limited to maximum conversion of 9.99 % of the outstanding common stock of the Company at any one time. In 2019, the maturity date of the note was extended for one year to December 31, 2019 with a reduction in the conversion price to $ 0.01 per share. The Company recorded a loss on extinguishment of debt of $ 32,000 upon the modification of conversion price. On June 10, 2021, the note and accrued interest of $ 10,554 were converted by the holder into 6,055,358 shares of common stock in accordance with the terms of the note.
(2) On December 5, 2017, the Company entered into a 6 % secured convertible promissory note in the principal amount of $ 50,000 , initially due December 4, 2018 , subject to extension. The note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor and BHP and the personal guarantee of Robert Carmichael.
The conversion price under the note initially ranged from $ 0.02 per share if converted in the first year to $ 0.125 per share if converted in year five. The lender may convert at any time until the note plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender was limited to maximum conversion of 9.99 % of the outstanding common stock of the Company at any one time. In 2019, the note was extended for one year to December 31, 2019 with a reduction in the conversion price to $ 0.01 per share. The Company recorded a loss on extinguishment of debt of $ 99,000 upon the modification of conversion price. On August 18, 2021, this note and accrued interest of $ 11,145 were converted by the holder into 6,114,516 shares of common stock in accordance with the terms of the note.
(3) On September 3, 2021, the Company issued a three-year 8% convertible promissory note in the principal amount of $346,550 to Summit Holding V, LLC as part of the acquisition of SSI. The Company is required to make quarterly payments under the note in an amount equal to 50% of the adjusted net profit of SSI. Interest is payable quarterly in shares of common stock of the Company at a conversion price of $0.051272 per share. The note holder may convert outstanding principal and interest at a conversion price of $0.051272 per share at any time during the term of the note. The Company recorded $12,355 for the beneficial conversion feature. This note is classified as a long-term liability for this period.
(4) On September 3, 2021, the Company issued a three-year 8% promissory note in the principal amount of $3,500 to Tierra Vista Partners, LLC as part of the acquisition of SSI. The Company is required to make quarterly payments under the note in an amount equal to 50% of the adjusted net profit of SSI. Interest is payable quarterly in common stock of the Company at a conversion price of $0.051272 per share. The note holder may convert outstanding principal and unpaid interest at a conversion price of $0.051272 at any time up to the maturity date of the note. The Company recorded $125 for the beneficial conversion feature. This note is classified as a long-term liability for this period.
(5) On September 30, 2022, the Company issued a convertible demand 8% promissory note in the principal amount of $66,793 to Robert Carmichael for funds to meet the working capital needs of LBI. There is no amortization schedule for the note, and interest is payable in shares of common stock of the Company at a conversion price equal to the 90 day VWAP of the Company’s stock prior to the quarterly interest payment date. This note is classified as a current liability as the note holder may demand payment or convert the outstanding principal at a conversion rate of $0.021 per share at any time. The Company recorded $19,250 for the beneficial conversion feature.
Loan Payable
Marlin Note
On September 30, 2019 the Company, through its wholly owned subsidiary BLU3, executed an equipment finance agreement for the purchase of certain plastic molding equipment through Marlin Capital Solutions. The initial principal balance was $ 96,725 payable in 36 equal monthly installments of $ 3,144 . The equipment finance agreement contains customary events of default. The loan balance was $ 3,116 as of September 30, 2022.
Payment Amortization
2022 (3 months remaining) 3,116
Total Loan Payments $ 3,116
Current portion of Loan payable (3,116 )
Non-Current Portion of Loan Payable $ -
Mercedes Benz Note
On August 21, 2020, the Company executed an installment sales contract with Mercedes Benz Coconut Creek for the purchase of a 2019 Mercedes Benz Sprinter delivery van. The installment agreement was for $ 55,841 with a zero interest rate payable over 60 months with a monthly payment of $ 931 and is personally guaranteed by Robert Carmichael. The first payment was due on October 5, 2020. The loan balance was $ 33,815 as of September 30, 2022. .
Payment Amortization
2022 (3 months remaining) $ 2,793
2023 $ 11,168
2024 $ 11,168
2025 and thereafter $ 8,684
Total note payments $ 33,815
Current portion of note payable $ (11,168 )
Non-Current Portion of notes payable $ 22,647
Navitas Note
On May 19, 2021 the Company, through its wholly owned subsidiary BLU3, executed an equipment finance agreement for the purchase of certain plastic molding equipment through Navitas Credit Corp. (“Navitas”). The amount financed is $ 79,309 payable in 60 equal monthly installments of $ 1,611 . The equipment finance agreement contains customary events of default. The agreement was fully funded as of September 30, 2021.
Payment Amortization
2022 (3 months remaining) 3,386
2023 15,342
2024 16,629
2025 18,204
2026 6,007
Total Note Payments $ 58,568
Current portion of Note payable (15,036 )
Non-Current Portion of Note Payable $ 43,532
Alliance Lease
On January 19, 2022, SSI entered into a capital lease with Alliance Funding Group (“Lessor”) to secure a new piece of essential equipment for its operations. The lease has a 36 month term with a monthly payment of $ 3,522 . At the end of the lease SSI has the option to purchase the equipment for $3,522 plus applicable taxes. The total purchase price of the equipment was $108,675. The vendor was unable to supply the equipment, and the purchase order for this equipment was cancelled in May 2022. The Lessor initially funded 50% of the purchase price, or approximately $ 54,000 , directly to the vendor which the vendor has committed to return once properly instructed by the Lessor. This lease was cancelled effective June 29, 2022. For the nine months ended September 30, 2022, the Company wrote off approximately $ 6,300 related to fees for cancellation of this financing.
NFS Note
On June 29, 2022, SSI executed an equipment financing agreement with NFS Leasing (“NFS Leasing”) to secure replacement production molds. The total purchase price of the molds was $ 84,500 of which $ 63,375 was financed by NFS Leasing on August 15, 2022. The financing agreement has a 33 month term beginning in August 2022 with a monthly payment of $2,571. The financing agreement contains customary events of default, is guaranteed by the Company and NFS Leasing has a lien on all of the assets of SSI.
Payment Amortization
2022 (3 months remaining) 2,571
2023 22,197
2024 26,279
2025 (5 months) 12,329
Total Note Payments $ 63,376
Current portion of Note payable (18,863 )
Non-Current Portion of Note Payable $ 44,513
Note 6. Business Combination
Merger with Submersible Systems, Inc.
On September 3, 2020, the Company completed its merger with SSI. Under the terms of the Merger Agreement, the Company paid $ 1.79 million, consisting of the issuance of 27,305,442 shares of its common stock (valued at $ 1.4 million) and the issuance of 8 % unsecured convertible promissory notes in the aggregate principal amount of $ 350,000 in exchange for all of the equity of SSI. The 27,305,442 shares are subject to leak out agreements whereby the sell ers are unable to sell or transfer shares based upon the following:
Holding Period Percentage of shares
from Closing Date eligible to be sold or transferred
6 months Up to 12.5 %
9 months Up to 25.0 %
24 months Up to 75.0 %
36 months Up to 100.0 %
The leak-out restriction may be waived by the Company, upon written request by a s eller, if the Company’s common stock is trading on the NYSE American or Nasdaq, and has a rolling 30-day average trading volume of 50,000 shares per day; provided, however , that (i) only up to 5% of the previous days total volume can be sold in one day and (ii) only through executing trades “On the Offer.”
The transaction costs associated with the m erger were $ 65,000 in legal fees paid in $ 40,000 in cash, and 1,190,476 shares of the Company’s common stock with a fair value of $ 55,952 .
Fair Value of Consideration Transferred and Recording of Assets Acquired
The following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired, and liabilities assumed, including an amount for goodwill:
Common stock, 27,305,442 shares at fair market value $ 1,449,919
8% unsecured, convertible promissory note payable to seller 350,000
Total purchase price $ 1,799,919
Tangible assets acquired $ 1,101,604
Liabilities assumed (294,671 )
Net tangible assets acquired 806,933
Identified Intangible Assets
Customer relationships $ 600,000
Trademarks 121,000
Non-compete agreements 22,000
Total intangible assets 743,000
Goodwill $ 249,986
Total purchase price $ 1,799,919
The value of the stock was calculated based on the VWAP of a share of the Company’s common stock on the OTC Markets for (i) 180 days prior to the date of the parties’ execution and delivery of the binding term sheet for the merger or (ii) 180 days prior to the closing date of the merger, whichever results in a lower VWAP which resulted in a conversion price of $ 0.051271831 and the issuance of 27,305,442 shares of common stock with a fair value of $ 1,449,919 on the closing date.
Inventory was assessed at the time of closing as to its fair value, and it was determined that a step-up analysis was necessary in order to evaluate the fair value of the inventory at the time of closing. The step up represents the net profit that would be attained when the inventory is sold. The key assumptions used in this analysis is a gross margin of 38.3% and selling costs of 5.0%, The analysis resulted in a necessary step up of $31,000 at the time of closing.
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition is attributable to the value of the potential expanded market opportunity with new customers. The goodwill is not expected to be deductible for tax purposes.
As of September 30, 2022, the Company recorded an estimated fair value of the intangible assets and goodwill of $ 992,986 based on a preliminary purchase price allocation prepared by management. As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the preliminary purchase price allocation period, we record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined.
Asset acquisition Gold Coast Scuba, LLC
On May 2, 2022, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Gold Coast Scuba, LLC, a Florida limited liability company (“Gold Coast Scuba”), Steven M. Gagas and William Frenier, the sole members of Gold Coast Scuba (together, the “LLC Members”) and Live Blue, Inc. Pursuant to the terms of the Asset Purchase Agreement, Live Blue acquired substantially all of Gold Coast Scuba’s assets and assumed certain non-material liabilities of the business associated with these assets. In addition, LBI assumed the lease for the premises for Gold Coast Scuba as part of this asset acquisition.
In consideration for the assets purchased, the Company paid $ 150,000 to the LLC Members. The purchase price was paid by (a) the issuance to the LLC Members of an aggregate of 3,084,831 shares of the Company’s common stock (the “Consideration Shares”) with a fair market value of $ 120,000 ; and (b) a cash payment of $ 30,000 .
The Consideration Shares are subject to leak out agreements whereby the shareholders are unable to sell or transfer shares based upon the following:
Holding Period Percentage of shares
from Closing Date eligible to be sold or transferred
6 months Up to 25.0 %
9 months Up to 50.0 %
12 months Up to 100.0 %
The leak-out restriction may be waived by the Company, upon written request by a LLC Memb er, if the Company’s common stock is trading on the NYSE American or Nasdaq, and has a rolling 30-day average trading volume of 50,000 shares per day; provided, however, that (i) only up to 5% of the previous days total volume can be sold in one day and (ii) only through executing trades “On the Offer.”
The transaction costs associated with the acquisition were $ 10,000 in legal fees paid in cash.
Fair Value of Consideration Transferred and Recording of Assets Acquired
The following table summarizes the asset acquisition date fair value of the consideration paid, identifiable assets acquired, including an amount for overpayment and transaction fees:
Book Value Overpayment Allocation Transaction Cost Allocation Fair Value
Rental Inventory $ 23,408 $ 22,156 $ 3,038 $ 48,602
Fixed Assets 24,360 23,058 3,161 50,579
Retail Inventory 29,292 27,726 3,801 60,819
Total Cost $ 77,060 $ 72,940 $ 10,000 $ 160,000
Pro Forma Information
The following unaudited pro forma information assumes all business combinations occurred on January 1, 2021. For all of the business acquisitions depreciation and amortization have been included in the calculation of the below pro forma information based upon the actual acquisition costs.
Nine months ended
September 30, 2021
(unaudited)
Revenue $ 5,489,338
Net Loss $ (1,096,903 )
Basic and Diluted Loss per Share $ (0.00 )
Basic and Diluted Weighted Average Common Shares Outstanding 348,134,156
The information included in the pro forma amounts is derived from historical information obtained from the sellers of the businesses. The pro forma amounts above for basic and diluted weighted average shares outstanding have been adjusted to include the stock issued in connection with the acquisition of SSI and the assets of LBI.
Pro Forma Information
The following unaudited pro forma information assumes all business acquisitions occurred on January 1, 2022. For all of the business acquisitions depreciation and amortization have been included in the calculation of the below pro forma information based upon the actual acquisition costs.
The information included in the pro forma amounts is derived from historical information obtained from the sellers of the businesses. The pro forma amounts for basic and diluted weighted average shares outstanding have been adjusted to include the stock issued in connection with the acquisition of Gold Coast Scuba.
Nine months ended
September 30, 2022
(unaudited)
Revenue $ 7,261,794
Net Loss $ (1,126,690 )
Basic and Diluted Loss per Share $ (0.00 )
Basic and Diluted Weighted Average Common Shares Outstanding 408,904,845
Note 7. Goodwill and Intangible Assets, Net
The following table sets for the changes in the carrying amount of the Company’ Goodwill for the quarter ended September 30, 2022.
2022
Balance, January 1 $ 249,986
Addition: -
Balance, September 30 $ 249,986
The following table sets for the components of the Company’s intangible assets at September 30, 2022:
Amortization Period (Years) Cost Accumulated Amortization Net Book Value
Intangible Assets Subject to amortization
Trademarks 15 $ 121,000 $ (8,695 ) $ 112,305
Customer Relationships 10 600,000 (65,000 ) 535,000
Non-Compete Agreements 5 22,000 (4,767 ) 17,233
Total $ 743,000 $ (78,462 ) $ 664,538
The aggregate amortization remaining on the intangible assets as of September 30, 2022 is a follows:
Intangible Amortization
2022 (3 months remaining) $ 18,108
2023 72,467
2024 72,467
2025 72,467
2026 71,367
Thereafter 357,662
Total $ 664,538
Note 8. Stock holders’ Equity
Common Stock
On January 17, 2022, the Company issued a law firm 1,000,000 shares of common stock with a fair value of $ 27,500 as part of the agreed upon compensation for a representation agreement.
On January 31, 2022, the Company issued a consultant 121,212 shares of common stock with a fair value of $ 4,000 for consulting services related to the dive industry.
On February 2, 2022, the Company issued Charles Hyatt, a director, 10,000,000 shares from the exercise of a warrant at $ 0.025 per share in consideration of $ 250,000 .
On February 2, 2022, the Company issued Grace Hyatt, the adult child of Charles Hyatt, a director, 600,000 shares from the exercise of a warrant at $ 0.025 per share in consideration of $ 15,000 .
On February 28, 2022, the Company issued a consultant, 85,106 shares of common stock with a fair value of $ 4,000 for consulting services related to the dive industry.
On May 3, 2022, the Company issued 3,084,831 shares of common stock pursuant to the asset purchase agreement with Gold Coast Scuba, LLC with a fair value of $ 120,000 .
On May 31, 2022, the Company issued a consultant, 302,953 shares of common stock with a fair value of $ 12,000 for consulting services related to the dive industry.
On June 17, 2022, the Company issued 280,000 shares of common stock to an employee as a retirement gift. The fair value of this stock was $ 11,060 .
On June 30, 2022, the Company issued 449,522 shares of common stock to the holders of convertible notes for payment of interest through June 30, 2022. The fair value of these shares were $ 23,048 .
On September 7, 2022, the Company issued to two accredited investors, 8,541,666 units of the Company, with each unit consisting of one share of common stock and a two-year common stock purchase warrant to purchase one share of common stock at an exercise price of $ 0.024 per share in consideration of $ 205,000 . The Company did not pay any fees or commissions in connection with the sale of the units.
On September 30, 2022, the Company issued 136,527 shares of common stock to the holders of convertible notes for payment of interest for the three months ending September 30, 2022. The fair value of these shares were $ 7,000 .
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 10,000,000 shares of blank check preferred stock. The blank check preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business Corporation Act. In April 2011, the Board of Directors designated 425,000 shares of the blank check preferred stock as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into a share of the Company’s common stock at any time at the option of the holder at a conversion price of $ 18.23 per share. Holders of shares of Series A Convertible Preferred Stock are entitled to 250 votes for each share held . The Company’s common stock and Series A Convertible Preferred Stock vote together on any matters submitted to our shareholders. As of September 30, 2022, and December 31, 2021, the 425,000 shares of Series A Convertible Preferred Stock are owned by Robert Carmichael.
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. 25,000,000 shares are reserved for issuance under the Plan. The term of the Plan is ten years.
Equity Compensation Plan Information as of September 30, 2022:
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 3,74 2,647 $ .0396 21,25 7,353
Equity Compensation Plans Not Approved by Security Holders — — —
Total 3,74 2,647 $ .0396 21,25 7,353
Options
On April 14, 2020, the Company entered into a Non-Qualified Stock Option Agreement with Robert Carmichael (the “Carmichael Option Agreement”). Under the terms of the Carmichael Option Agreement, as additional compensation, the Company granted Mr. Carmichael an option (the “Carmichael Option”) to purchase up to an aggregate of 125,000,000 shares of the Company’s common stock at an exercise price of $ 0.045 per share, of which the right to purchase 75,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase 50,000,000 shares of common stock is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
● the right to purchase 25,000,000 shares of the Company’s common stock shall vest at such time as the Company reports cumulative consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any subsequent acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively, “Net Revenues”), in excess of $ 3,500,000 in the aggregate over four consecutive fiscal quarters commencing May 1, 2020 and ending on April 30, 2023 (the “Net Revenue Period”);
● the right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $ 7,000,000 in the aggregate over four consecutive fiscal quarters during the Net Revenue Period; and
● the right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $ 10,500,000 in the aggregate over four consecutive quarters during the Net Revenue Period.
The Carmichael Option Agreement provides that the Carmichael Option is exercisable by Mr. Carmichael on a cashless basis. The Carmichael Option is not transferrable by Mr. Carmichael, and he must remain an employee of the Company as an additional term of vesting. Once a portion of the Carmichael Option vests, it is exercisable by Mr. Carmichael for 90 days. Any portion of the Carmichael Option which does not vest during the Net Revenue Period lapses and Mr. Carmichael has no further rights thereto.
The fair value of the Carmichael Option on the date of the grant was $ 4,370,109 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of .26 %, (ii) expected life of 1.5 years, (iii) dividend yield of 0 %, and (iv) expected volatility of 320 %. The Company analyzed the likelihood that the vesting qualifications would be met. As of December 31, 2021, 25,000,000 of options were vested as the targeted net revenues were reached and three quarters of Tranche 2 was also met and fully expensed through December 31, 2021. For the nine months ended September 30, 2022 the Company revenues reached the target revenues for Tranche 2, and an additional 25,000,000 shares of the option vested. Stock option expense recognized during the three and nine months ended September 30, 2022 for this option was $ 218,505 and $ 655,515 , respectively.
On November 5, 2020, the Company entered into a Non-Qualified Stock Option agreement with Christopher Constable (the “Constable Option Agreement”) as part of his employment agreement. As part of the Constable Option Agreement, the Company granted Mr. Constable an option (the “Bonus Option”) to purchase up to an aggregate of 30,000,000 shares of the Company’s common stock at an exercise price of $ 0.0184 per share, of which the right to purchase 10,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase 20,000,000 shares of common stock is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
As part of the Constable Option Agreement, the Company also granted Mr. Constable an option (the “Bonus Option”) to purchase up to an aggregate of 30,000,000 shares of the Company’s common stock at an exercise price of $ 0.0184 per share, of which the right to purchase 10,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase 20,000,000 shares of common stock is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
● the right to purchase 2,000,000 shares of the Company’s common stock shall vest at such time as the Company reports cumulative consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any subsequent acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively, “Net Revenues”), in excess of $ 5,000,000 in the aggregate over four consecutive fiscal quarters commencing January 1, 2021 and ending on April 30, 2023 (the “Net Revenue Period”);
● the right to purchase an additional 3,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $ 7,500,000 in the aggregate over four consecutive fiscal quarters during the Net Revenue Period; and
● the right to purchase an additional 5,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $ 10,000,000 in the aggregate over four consecutive quarters during the Net Revenue Period.
The Constable Option Agreement provides that the Compensation Options and Bonus Options are exercisable by Mr. Constable on a cashless basis. The Constable Option is not transferrable by Mr. Constable, and he must remain an employee of the Company as an additional term of vesting. Once a portion of the Constable Option vests, it is exercisable by Mr. Constable for four years.
The fair value of the Bonus Options on the date of the grant was $ 578,082 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of .14 %, (ii) expected life of 2.0 years, (iii) dividend yield of 0 %, and (iv) expected volatility of 312.2 %. The Company analyzed the likelihood that the vesting qualifications would be met, and as of September 30, 2022, it was deemed that the Company met the qualifications for four quarters for Tranches 1 and 2. For the three and nine months ended September 30, 2022, the Company recognized option expense related to these options of $ 24,333 and $ 63,266 , respectively.
On June 14, 2021, the Company issued options to purchase up to an aggregate of 1,125,000 shares of common stock to various employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at $ 0.036 per share for a period of four years from the date of issuance, with 12.5 % of the options vesting each fiscal quarter over a period of two years . The fair value of the options totaled $ 38,369 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of .21 %, (ii) expected life of 2 years, (iii) dividend yield of 0 %, (iv) expected volatility of 304.77 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ 4,142 and $ 12,426 , respectively.
On August 1, 2021 as part of the Blake Carmichael Employment Agreement (as defined below), the Company granted Blake Carmichael a five-year option to purchase 3,759,400 shares of the Company’s common stock at an exercise price of $ 0.0399 , (the “BC Compensation Options”). The BC Compensation Options vested 33.3% upon the execution of the agreement, 33% at the first anniversary date and 33% upon the second anniversary date . The fair value of the options on the date of the grant was $ 149,076 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of .25 %, (ii) expected life of 2.5 years, (iii) dividend yield of 0 %, and (iv) expected volatility of 346.36 %. The Company expensed $ 49,692 as for the three and nine months ended September 30, 2022.
As part of the Blake Carmichael Agreement, the Company granted Blake Carmichael a five-year option to purchase up to 18,000,000 shares of common stock which vest annually on a contract year basis, based upon the achievement of certain revenue and EBITA financial metrics. The fair value of the BC Bonus Options was $ 713,777 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of 0.25 %, (ii) expected life of 2.5 years, (iii) dividend yield of 0 %, (iv) expected volatility of 346.36 %, and (v) exercise price of 0.0399 per share. The Company analyzed the likelihood that the vesting qualifications would be met, and as of September 30, 2022, it was deemed that it was likely that 500,000 shares would be issued at the end of the first year, and accordingly was fully expensed as of December 31, 2021. For the three and nine months ended September 30, 2022 there were no material changes to vesting qualifications and no stock option expense was recognized.
During the third quarter of 2021, the Company issued options to purchase up to an aggregate of 175,000 shares of common stock to two employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $ .044 to $ .049 per share for a periods ranging from three to four years from the date of issuance, with quarterly vesting periods over one to two years . The fair value of the options totaled $ 7,149 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate from .155 % to .20 %, (ii) expected life of 1.5 to 2 years, (iii) dividend yield of 0 %, and (iv) expected volatility of 249.38 % to 287.12 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ 1,494 and $ 4,483 , respectively.
On September 3, 2021, the Company issued options to purchase up to an aggregate of 300,000 shares of common stock under the Plan to Christeen Buban, President of SSI. The options were issued pursuant to the Buban Employment Agreement and a stock option grant agreement and are exercisable at $ 0.053 per share for a period of five years from the date of issuance, with 12.5 % of the options vesting each fiscal quarter over a period of two years . The fair value of the options totaled $ 15,814 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of 0.315 %, (ii) expected life of 2.5 years, (iii) dividend yield of 0 %, and (iv) expected volatility of 339.21 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ 1,977 and $ 5,930 , respectively.
In connection with the Buban Employment Agreement, the Company granted Ms. Buban that will grant Ms. Buban a five-year option (the “Buban Bonus Option”) to purchase up to 7,110,000 shares of the Company’s common stock which vest annually on a contract year basis, based upon the achievement of certain revenue and EBITA financial metrics. The fair value of the Buban Bonus Option was $ 374,786 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of .3150 %, (ii) expected life of 2.5 years, (iii) dividend yield of 0 %, (iv) expected volatility of 339.21 %, and (v) exercise price of $ 0.0531 per share. The measurement period for the Buban Bonus Option began on September 3, 2021. The Company analyzed the likelihood that vesting qualifications would be met during the contract year and deemed that there was no option expense to be recognized for the nine months ended September 30, 2022.
On September 3, 2021 the Company issued options to purchase up to an aggregate of 500,000 shares of common stock to various employees of SSI under the Plan. The options were issued pursuant to a stock option grant agreement and is exercisable at $ 0.0531 per share for a period of four years from the date of issuance, with 12.5 % of the options vesting each fiscal quarter over a period of two years . The fair value of the options totaled $ 25,201 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of 0.21 %, (ii) expected life of 2 years, (iii) dividend yield of 0 %, (iv) expected volatility of 276.1 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ 3,150 and $ 9,450 , respectively.
During the fourth quarter of 2021, the Company issued options to purchase up to an aggregate of 100,000 shares of common stock to two employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $ .040 to $ .0419 per share for a period of four years of from the date of issuance, with quarterly vesting periods over two years. The fair value of the options totaled $ 3,863 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of .204 % (ii) expected life of 2 years, (iii) dividend yield of 0 %, (iv) expected volatility of 249.38 % to 287.12 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ 483 and $ 1,449 , respectively.
On November 5, 2021, the Company entered into a non-qualified stock option agreement with Christopher Constable (the “Constable Option Agreement”) as part of his employment agreement. Under the terms of the option agreement, the Company granted Mr. Constable an immediately exercisable five-year option to purchase 2,403,846 shares of the Company’s common stock at an exercise price of $ 0.041 (the “Compensation Option”). The fair value of the Compensation Option on the date of the grant was $ 98,976 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of .53 %, (ii) expected life of 2.5 years, (iii) dividend yield of 0 %, and (iv) expected volatility of 269.12 %. The Compensation Option was fully expensed as of December 31, 2021.
On January 21, 2022, the Company issued options to purchase up to an aggregate of 75,000 shares of common stock to an employee under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at $ 0.032 per share for a period of four years from the date of issuance, with quarterly vesting periods over two years . The fair value of the options totaled $ 2,259 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of 1.016 % (ii) expected life of 2 years, (iii) dividend yield of 0 %, and (iv) expected volatility of 266.8 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ 283 and $ 847 , respectively.
During the three months ended June 30, 2022, the Company issued options to purchase up to an aggregate of 217,647 shares of common stock to three employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $ .038 to $ .045 per share for a period of four years of from the date of issuance, with quarterly vesting periods over two years. The fair value of the options totaled $ 8,239 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate ranging from 2.495 % to 2.602 % (ii) expected life of 2 years, (iii) dividend yield of 0 %, (iv) expected volatility of 228.7 % to 232.7 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ 1,030 and $ 2,060 , respectively.
On April -8, 2022, the Company issued an option to purchase up to 300,000 shares of common stock to one contractor under the Plan. The option was issued pursuant to a stock option grant agreement and is exercisable at $ .0406 per share for a period of four years of from the date of issuance. The options vested immediately. The fair value of the options totaled $ 10,988 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of 2.469 % (ii) expected life of 2 years, (iii) dividend yield of 0 %, (iv) expected volatility of 232.41 %. The stock options expense of $ 10,988 was fully recognized as of the three and nine months ended September 30, 2022.
On May 16, 2022, the Company issued an option to purchase up to 1,000,000 shares of common stock to one employee under the Plan. The option was issued pursuant to a stock option grant agreement and is exercisable at $ .0325 per share for a period of four years of from the date of issuance, with quarterly vesting periods over three quarters. The fair value of the options totaled $ 29,161 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of 2.590 % (ii) expected life of 2 years, (iii) dividend yield of 0 %, (iv) expected volatility of 228.97 %. The stock options expense recognized for the three and nine months ended September 30, 2022 was $ 9,720 and $ 19,440 , respectively.
In August, 2022, the Company issued options to purchase up to 100,000 shares of common stock to two employees under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $.0302 to $.0320 per share for a period of four years of from the date of issuance, with quarterly vesting periods over two years. The fair value of the options totaled $2,736 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate ranging from 3.178% to 3.4330% (ii) expected life of 2 years, (iii) dividend yield of 0%, (iv) expected volatility of 216.84% to 218.13%. The stock options expense recognized for the three and nine months ended September 30, 2022 was $342 and $342, respectively
On September 27, 2022, the Company issued options to purchase up to 50,000 shares of common stock to one employee under the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at $.0225 per share for a period of four years of from the date of issuance, with quarterly vesting periods over two years. The fair value of the options totaled $987 using the Black-Scholes option pricing model with the following assumptions: (i) risk free interest rate of 4.287% (ii) expected life of 2 years, (iii) dividend yield of 0%, (iv) expected volatility of 215.16%. There was no stock option expense recognized for the three and nine months ended September 30, 2022.
A summary of the Company’s outstanding stock options as of December 31, 2021, and changes during the nine months ended September 30, 2022 is presented below:
Weighted Weighted
Number of Average Average Aggregate
Options Exercise Remaining Intrinsic
Price Contractual Value
Life in Years
Outstanding – December 31, 2021 233,128,266 $ 0.0362 2.23 $ 795,201
Granted 1,742,647 0.0353
Forfeited (125,000 ) 0.0360
Exercised - -
Outstanding – September 30, 2022 (unaudited) 234,745,913 $ 0.0362 1.50
Exercisable – September 30, 2022 (unaudited) 107,076,836 $ 0.0322 1.35 $ 548,121
At September 30, 2022, there was approximately $ 3,689,900 of unrecognized stock option expense which may be recognized only if the full vesting requirements for these options are met.
At September 30, 2022, there was approximately $ 98,500 of total unrecognized stock option expense which is expected to be recognized on a straight-line basis over a weighted-average period of 1.8 years.
Warrants
On September 1, 2021, the Company issued Charles Hyatt 10,000,000 units, each unit consisted of one share of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $ 0.025 per share in consideration of $ 250,000 .
On September 1, 2021, the Company issued Grace Hyatt, the adult child of Charles Hyatt, 600,000 units, each unit consisted of one share of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $ 0.025 per share in consideration of $ 15,000 .
In September, 2021, the Company issued 4,000,000 units to three accredited investors, each unit consisting of one share of common stock and a two-year warrant to purchase one share of common stock at $ 0.025 per share in consideration of $ 100,000 .
On February 2, 2022, the Company issued Charles Hyatt 10,000,000 shares of common stock upon the exercise of a warrant at $ 0.025 per share in consideration of $ 250,000 .
On February 2, 2022, the Company issued Grace Hyatt, the adult child of Charles Hyatt, 600,000 shares of common stock upon the exercise of a warrant at $ 0.025 per share in consideration of $ 15,000 .
On September 7, 2022, the Company issued to two accredited investors, 8,541,666 units of the Company, with the unit consisting of one share of common stock and a two-year common stock purchase warrant to purchase one share of common stock at an exercise price of $0.024 per share in consideration of $205,000.
A summary of the Company’s warrants as of December 31, 2021 and changes during the nine months ended September 30, 2022 is presented below:
Weighted
Number of Weighted Average Aggregate
Warrants Average Exercise Remaining Intrinsic
Price Contractual Value
Life in Years
Outstanding – December 31, 2021 14,600,000 $ 0.025 1.67 $ 153,300
Granted 8,541,666 $ 0.024
Exercised (10,600,000 ) $ 0.025
Forfeited or Expired -
Outstanding – September 30, 2022 12,541,666 $ 0.0243 1.62
Exercisable – September 30, 2022 12,541,666 $ 0.0243 1.62 $ 64,979
Note 9. Commitments and contingencies
Leases
On August 14, 2014, the Company entered into a thirty-seven month lease for its facilities in Pompano Beach, Florida, commencing on September 1, 2014. Terms included payment of a $ 5,367 security deposit; base rent of approximately $ 4,000 per month over the term of the lease plus sales tax; and payment of 10.76 % of annual operating expenses (common areas maintenance), which was approximately $ 2,000 per month subject to periodic adjustment. On December 1, 2016, the Company entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term of the lease for an additional eighty-four months, expiring September 30, 2024 . The base rent was increased to $ 4,626 per month with a 3 % annual escalation throughout the amended term.
On January 4, 2018, the Company entered into a sixty-one month lease renewal for its facility in Huntington Beach, California commencing on February 1, 2018. Terms included base rent of approximately $ 9,300 per month for the first 12 months with an annual escalation clause of 2.5 % thereafter. The Company paid a security deposit of $ 8,450 upon entering into the lease.
On November 11, 2018, the Company entered a sixty-nine month lease commencing on January 1, 2019 for approximately 8,025 square feet adjoining its existing facility in Pompano Beach, Florida. Terms of the new lease include a $ 6,527 security deposit; initial base rent of approximately $ 4,848 per month escalating at 3 % per year during the term of the lease plus Florida state sales tax and 10.11 % of the buildings annual operating expenses (common area maintenance) which is approximately $ 1,679 per month, subject to adjustment as provided in the lease.
Royalty Agreement
On June 30, 2020, the Company entered into Amendment No. 2 to its Patent License Agreement with Setaysha Technical Solutions, LLC (“STS”). The amendment set certain limits and expectations of the assistance from STS related to designing and commercializing certain diving products and revised the royalty payments due to STS as consideration for uncompensated services. The Company is obligated to pay STS a minimum yearly royalty of $ 60,000 , or $ 15,000 per fiscal quarter, beginning in December 2019 and increasing by 2.15 % per year. The minimum royalty was temporarily increased to $ 60,000 for fiscal years 2022, 2023 and 2024, with a fourth quarter true up against earned royalties. In addition, if the Company terminates the Agreement with STS prior to December 31, 2023, the Company is obligated to pay STS $ 180,000 , less cumulative royalties paid in excess of $ 200,174 for the years 2019 through 2024. In accordance with the amendment, the Company will pay additional minimum royalties of $ 60,000 per year or $ 15,000 per quarter for the years 2022 through 2024. Royalty recorded under this Agreement was $ 54,708 and $ 24,854 for the three months ended September 30, 2022 and 2021, respectively, and $ 149,024 and $ 79,809 for the nine months ended September 30, 2022 and 2021, respectively.
Consulting and Employment Agreements
On June 9, 2020, the Company entered into a one-year advertising and marketing agreement with Figment Design for $ 8,840 per month which agreement terminated on July 31, 2021.
On November 5, 2020, the Company entered into a three-year employment agreement with Christopher Constable (the “Constable Employment Agreement”) pursuant to which Mr. Constable serves as Chief Executive Officer of the Company. Previously, Mr. Constable had provided advisory services to the Company through an agreement with Brandywine LLC. In consideration for his services, Mr. Constable shall receive (i) an annual base salary of $ 200,000 , payable in accordance with the customary payroll practices of the Company, and (ii) upon execution of the Employment Agreement and on each anniversary of the date of the Agreement during the term, a non-qualified immediately exercisable five-year option to purchase that number of shares equal to $ 100,000 of the value of the Company’s common stock at an exercise price equal to the market price of the Company’s common stock on the date of issuance. Accordingly, on November 5, 2020, Mr. Constable was issued an option to purchase 5,434,783 shares of the common stock at an exercise price of $ 0.0184 per share and on November 5, 2021, Mr. Constable was issued an option to purchase 2,403,846 shares of the Company’s common stock at an exercise price of $ 0.0401 per share.
In addition, Mr. Constable shall be entitled to receive four-year stock options to purchase shares of common stock at an exercise price equal to $ 0.0184 per share in the following amounts based upon the following performance milestones during the term of the Constable Employment Agreement: (i) 2,000,000 shares – if the Company’s total net revenues, as reported in its statement of operations in its financial statements in its filings with the SEC, including as a result of a stock or asset acquisition of a third party (“Net Revenues”) are in excess of $ 5,000,000 , in the aggregate, for four consecutive fiscal quarters; (ii) 3,000,000 shares – if the Company’s Net Revenues are in excess of $ 7,500,000 , in the aggregate, for four consecutive fiscal quarters; (iii) 5,000,000 shares – if the Company’s Net Revenues are in excess of $ 10,000,000 , in the aggregate, for four consecutive fiscal quarters; and (iv) 20,000,000 shares – if the Company’s common stock is listed on the NASDAQ or New York Stock Exchange.
On March 1, 2021, the Company entered into an investor relations consulting agreement with BGM Equity Partners, LLC. The term of the agreement is twelve months. As compensation, the Company issued 3,000,000 shares of its common stock valued at $ 120,000 to BGM Equity Partners. The agreement expired on March 1, 2022.
On August 1, 2021, the Company and Blake Carmichael entered into a three-year employment agreement (the “Blake Carmichael Employment Agreement”) pursuant to which Mr. Carmichael shall serve as Chief Executive Officer of BLU3. In consideration for his services, Blake Carmichael shall receive (i) an annual base salary of $ 120,000 , payable in accordance with the customary payroll practices of the Company, and (ii) a cash bonus equal to 5% of the net income of BLU3 payable quarterly, beginning with the first full calendar quarter after the execution of the agreement. (iii) upon execution of the Employment Agreement, a non-qualified five-year stock option to purchase 3,759,400 shares at $ 0.0399 , 33.3% of which shares vest immediately, 33.3% vest on the second anniversary, and 33.3% vest on the third anniversary of the agreement .
In addition, Blake Carmichael shall be entitled to receive a five-year stock option to purchase up to 18,000,000 shares of common stock at an exercise price of $ 0.0399 per share that will vest upon annual financial metrics based upon a revenue measurement, expediency measurement and an EBITDA measurement.
On August 6, 2021, the Company entered into a six-month, non-exclusive mergers and acquisitions services agreement with Newbridge Securities Corporation which provides for a 7 % commission for the first $ 2,000,000 paid in aggregate purchase price consideration and 6 % on an aggregate purchase price in excess of $ 2,000,000 for any merger or acquisition target sourced by Newbridge, to be paid in common stock of the Company. Such agreement expired by its terms.
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 $ 110,000 , payable in accordance with the customary payroll practices of the Company, (ii) a car allowance and cell phone allowance of $ 10,800 per year, (iii) a five-year option issued under the Plan to purchase 300,000 shares of common stock of the Company at $ 0.0531 per share, which option vests quarterly over the eight calendar quarters.
In addition, Mrs. Buban shall be entitled to receive a five-year stock option to purchase up to 7,110,000 shares of common stock of the Company at an exercise price of $ 0.0531 per share, which vests upon the attainment of certain defined annual financial metrics, as set forth in the Buban Employment Agreement,
On January 17, 2022, the Company entered into an agreement with The Crone Law Group, PC (“CLG”) for the provision of legal services. In consideration therefor, the Company will pay CLG a monthly flat fee of $ 3,000 per month for the SEC reporting work, and its normal hourly rate for any other legal work and issued 1,000,000 shares of common stock with a fair market value of $ 27,500 to CLG.
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 $ 50,000 .
On May 2, 2022, LBI, entered into a lease assignment agreement with Gold Coast Scuba, LLC and Vicnsons Realty Group, LLC whereby LBI is the assignee to the remainder of the lease for the property located at 259 Commercial Blvd., Suites 2 and 3 in Lauderdale-By-The Sea, Florida. The lease is in its third year of a three year term and has a $ 2,816 per month base rent. The lease provides an option to renew for an additional term of two years with an increase of base rent by 3.5 %
On September 14, 2022, SSI entered into a sixty-month lease renewal for its facility in Huntington Beach, California commencing on February 1, 2022. Terms included base rent of approximately $ 17,550 per month for the first 24 months with an annual escalation clause of 3.0 % thereafter. Obligations under the lease are guaranteed by the Company. The Company paid an additional security deposit of $ 10,727 upon entering into the lease.
On September 30, 2022, SSI entered into a sublease of its facility in Huntington Beach, California with Camburg Engineering, Inc.(“Tenant”) commencing October 1, 2022, The term of the sublease is through December 31, 2023 with a base monthly rent of $ 2,247 for the first twelve months with an 3% annual escalation thereafter. The Tenant also pays a monthly common area maintenance of $ 112 . The Tenant provided a security deposit of $ 2,426 upon entering into the sublease.
Legal
The Company was a defendant in an action, Basil Vann, as Personal Representative of the Estate of Jeffrey William Morris v. Brownie’s Marine Group, Inc., filed on May 6, 2019 in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida. The complaint, which relates to consulting services provided to the Company by the deceased between 2005 and 2017, alleges breach of contract and quantum meruit and is seeking $ 15,870.97 in unpaid consulting fees together with interest. In April 2020, the Company filed a Motion to Dismiss, and at a hearing held in May 2021, the Court struck certain allegations contained in the complaint, the parties agreed that the quantum meruit allegation is deemed to be an alternative to the breach of contract allegation, but permitted certain other allegations to stand. The parties entered mediation pursuant to the Court’s order. This action was settled for $ 10,000 on July 12, 2021. The Company paid monthly installments of $ 1,000 . The settlement was fully paid during the second quarter of 2022.
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 system that are battery operated and completely portable to the user.
4. Redundant Air Tank Systems, which manufactures and distributes a line of high pressure tanks and redundant air systems for the military and recreational diving industries.
5. Guided Tour and Retail, which provides guided tours using the BLU3 technology, and also operates as a reteal store for the diving community.
Three Months Ended
September 30
(unaudited)
Legacy SSA Products High Pressure Gas Systems Ultra Portable Tankless Dive Systems Redundant Air Tank Systems Guided Tour Retail Total Company
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
Net Revenues $ 913,785 $ 976,904 $ 350,839 $ 119,392 $ 980,169 $ 341,287 $ 471,051 $ 121,131 $ 92,960 $ - $ 2,808,804 $ 1,558,714
Cost of Revenue $ (578,234 ) (644,525 ) (254,649 ) (84,532 ) (587,997 ) (362,566 ) (321,984 ) (92,063 ) (109,084 ) - (1,851,948 ) (1,183,686 )
Gross Profit 335,551 332,379 96,190 34,860 392,172 (21,279 ) 149,067 29,068 (16,124 ) - 956,856 375,028
Depreciation 4,370 4,517 - - 4,479 5,165 19,054 6,639 2,637 - 30,540 16,321
Income (loss) from Operations $ (154,666 ) $ (312,790 ) $ 6,904 $ (3,155 ) $ 14,699 $ (202,594 ) $ (91,169 ) $ (16,025 ) $ (48,408 ) $ - (272,640 ) (534,504 )
Nine Months Ended
September 30
(unaudited)
Legacy SSA High Pressure Gas Systems Ultra Portable Tankless Dive Systems Redundant Air Tank Systems Guided Tour Retail Total Company
Products
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
Net Revenues $ 2,291,916 $ 2,419,920 $ 897,849 $ 477,085 $ 2,659,027 $ 1,204,265 $ 1,192,986 $ 121,131 $ 143,233 $ - $ 7,185,011 $ 4,222,401
Cost of Revenue (1,598,618 ) (1,682,597 ) (555,688 ) (279,209 ) (1,574,982 ) (885,223 ) (837,054 ) (92,063 ) (123,219 ) - (4,689,561 ) (2,939,092 )
Gross Profit 693,298 737,323 342,161 197,876 1,084,045 319,042 355,932 29,068 20,014 - 2,495,450 1,283,309
Depreciation 13,109 13,077 - - 13,435 10,001 68,161 6,639 2,637 - 97,342 29,717
Income (loss) from operations $ (859,224 ) $ (1,071,220 ) $ 89,068 $ 46,435 $ 48,922 $ (188,534 ) $ (259,274 ) $ (16,025 ) $ (45,171 ) $ - (1,025,679 ) $ (1,229,344 )
-
Total Assets $ 1,511,872 $ 1,679,021 $ 383,827 $ 314,514 $ 1,193,570 $ 904,386 $ 2,739,757 $ 2,210,009 $ 249,898 $ - $ 6,078,924 $ 5,107,930
Note 11. Subsequent Events
Effective as of October 10, 2022, Liggett & Webb, P.A. (“Liggett & Webb”) resigned as the independent registered public accounting firm engaged to audit the financial statements of the Company. Also on such date, the Company’s Board of Directors engaged Assurance Dimensions, Inc. to serve as its independent registered public accounting firm to review its Quarterly Report on Form 10-Q for the quarter ended September 30, 2022.
The reports of Liggett & Webb on the financial statements of the Company for the fiscal years ended December 31, 2021 and December 31, 2020, did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that such reports included an explanatory paragraph with respect to the Company’s ability to continue as a going concern.
During the years ended December 31, 2021 and December 31, 2020, and the subsequent interim periods from January 1, 2022 through the date of this report, there were no (a) disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K) with Liggett & Webb on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Liggett & Webb’s satisfaction, would have caused Liggett & Webb to make reference to the subject matter thereof in connection with its reports for such years; or (b) reportable events, as described under Item 304(a)(1)(v) of Regulation S-K .
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by applicable law.
The management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Overview
The Company owns and operates a portfolio of companies with a concentration in the industrial and recreational diving industry. The Company, through its subsidiaries, designs, tests, manufactures, and distributes recreational hookah diving, yacht-based scuba air compressors and nitrox generation systems and scuba and water safety products in the United States and internationally.
The Company has five subsidiaries focused on various sub-sectors:
● Brownie’s Third Lung - Surface Supplied Air (“SSA”)
● BLU3, Inc. - Ultra-Portable Tankless Dive Systems
● LW Americas - High Pressure Gas Systems
● Submersible Systems, Inc. - Redundant Air Tank Systems
● Live Blue, Inc. – Guided Tours and Retail
Our wholly owned subsidiaries do business under their respective trade names on both a wholesale and retail basis from our headquarters and manufacturing facility in Pompano Beach, Florida, a manufacturing facility in Huntington Beach, California, and a retail facility in Lauderdale-By-The-Sea, Florida.
The Company, through its wholly owned subsidiaries, designs, tests, and manufactures tankless dive systems, rescue air systems and yacht-based self-contained underwater breathing apparatus (“SCUBA”) air compressor and nitrox generation fill systems and acts as the exclusive distributor for North and South America for Lenhardt & Wagner GmbH (“L&W”) compressors in the high-pressure breathing air and industrial gas markets. The Company is also building a guided tour operation that also include dive retail. Lastly, The Company is the exclusive United States and Caribbean distributor for Chrysalis Trading CC, a South African manufacturer of fitness and dive equipment, doing business as Bright Weights (“Bright Weights”), of a dive ballast system produced in South Africa.
Impact of COVID-19 Pandemic
The Company has previously been affected by temporary manufacturing closures and employment and compensation adjustments. The market continues to suffer from the impacts of the pandemic via supply chain shortages and freight delays. The continued freight delays have and will likely continue to result in additional expenses to expedite delivery of critical parts. Additionally, increased demand for personal electronics has created a shortfall of microchip supply which are used in our battery powered products, and it is yet unknown how we may be impacted.
We continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly.
Results of Operations
Net Revenues, Costs of Net Revenues and Gross Profit
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Net revenues increased 80.2% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 as a result of a 187.2% increase in revenue for BLU3, Inc. from the continued expansion of its customer base as well as the addition of NOMAD to its product line, an increase in LWA’s revenues of 193.9% as a result of the addition of a new distributor in Mexico during the three months ended September 30, 2022 and the addition of revenue from both SSI and LBI. SSI was acquired in September, 2021, therefore SSI revenue for the three months ended September 30, 2021 reflected only a partial month of revenue activity. For the three months ended September 30, 2022, cost of net revenues was 65.9% as compared with the cost of revenues of 75.9% for the three months ended September 30, 2021. Included in cost of net revenues are royalty expenses paid to Robert Carmichael which increased 17.8% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Gross profit margin was 34.1% for the three months ended September 30, 2022 as compared to gross profit margin of 24.1% for the three months ended September 30, 2021. The improvement in gross margin, is directly attributable to improvement in BLU3’s margin from a negative 6.2% margin for the three months ended September 30, 2021 to a 40.0% margin for the three months ended September 30, 2022.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Net revenues increased 70.2% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This increase is a result of a 120.8% increase in revenue for BLU3, Inc. from the continued expansion of its customer base as well as the addition of NOMAD to its product line, an increase in LWA’s revenues of 88.2% as a result of the expansion of its customer base with the addition of a new distributor in Mexico during the nine months ended September 20, 2022 and the addition of SSI and LBI revenue. SSI was acquired in September, 2021 therefore SSI revenue for the three months ended September 30, 2021 reflected only a partial month of revenue activity. These revenue increases were offset by a decrease of 5.3% in revenue for BTL. For the nine months ended September 30, 2022, cost of net revenues was 65.3% as compared with the cost of revenues of 69.6% for the nine months ended September 30, 2021. Included in cost of net revenues are royalty expenses paid to a third party which increased 86.7% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Gross profit margin was 34.7% for the nine months ended September 30, 2022 as compared to gross profit margin of 30.4% for the nine months ended September 30, 2021. The improvement in gross margin, of 4.3% of revenue is a result of a 14.3% margin increase in the BLU3 product line.
The following tables provides net revenues, total costs of net revenues and gross profit margins for our segments for the periods presented.
Net Revenues
Nine Months Ended
Three Months Ended % of % of
September 30, September 30,
2022 2021 Change 2022 2021 Change
(unaudited) (unaudited)
Legacy SSA Products $ 913,785 $ 976,904 (6.5 )% $ 2,291,916 $ 2,419,920 (5.3 )%
High Pressure Gas Systems 350,839 119,392 193.9 % 897,849 477,085 88.2 %
Ultra-Portable Tankless Dive Systems 980,169 341,287 187.2 % 2,659,027 1,204,265 120.8 %
Redundant Air Tank Systems 471,051 121,131 288.9 % 1,192,986 121,131 884.9 %
Guided Tour Retail 92,960 - 100.0 % 143,233 - 100.0 %
Total net revenues $ 2,808,804 $ 1,558,714 80.2 % $ 7,185,011 $ 4,222,401 70.2 %
Cost of revenues as a percentage of net revenues
Three Months Nine Months Ended
Ended September 30, September 30,
2022 2021 2022 2021
(unaudited) (unaudited)
Legacy SSA Products 63.3 % 66.0 % 69.8 % 69.5 %
High Pressure Gas Systems 72.6 % 70.8 % 61.9 % 58.5 %
Ultra-Portable Tankless Dive Systems 60.0 % 106.2 % 59.2 % 73.5 %
Redundant Air Tank Systems 68.4 % 76.0 % 70.2 % 76.0 %
Guided Tour Rental 117.3 % - 86.0 % -
Gross profit (loss) margins
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(unaudited) (unaudited)
Legacy SSA Products 36.7 % 34.0 % 30.2 % 30.5 %
High Pressure Gas Systems 27.4 % 29.2 % 38.1 % 41.5 %
Ultra-Portable Tankless Dive Systems 40.0 % (6.2 )% 40.8 % 26.5 %
Redundant Air Tank Systems 31.6 % 24.0 % 29.8 % 24.0 %
Guided Tour Rental (17.3 )% - 14.0 % -
SSA Products
Net revenues decreased 5.3% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The decrease can be primarily attributed to a 12.3% decrease in the dealer segment for the nine months ended September 30, 2022 as compared to the same period in 2021. The decrease in dealer orders can be attributed to the 22.1% net revenue decrease during the three months ended September 30, 2022 as compared the same period in 2021 as a result of, we believe, many dealers increasing purchases during the first quarter of 2022 for the summer season and holding with restocking orders due to trepidation regarding the economy. Affiliate sales, while the smallest segment of revenue increased 348.7% for the three months ending September 30, 2022 as compared to the three months ended September 30 30, 2021 and increased 56.0% for the nine months ended September 30, 2022 compared to the nine month ended September 30, 2021. Direct to consumer sales increased 5.1% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 as direct consumer demand continues to shift to online sales.
The costs of revenues as a percentage of net revenues in this segment increased slightly from 69.5% to 69.8% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 due to a decrease in margins in the direct to consumer and dealer segments.
A breakdown of the revenue channels for this segment are below. Direct to Consumer represents items sold via our website, trade shows and walk-ins to our factory store. Dealer revenue represents sales to customers under dealer agreements which typically have lower margins. Affiliates are resellers of our products with which we do not have formal dealer arrangements.
Net Revenue Cost of Sales as a % of Net Revenue Margin
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 % change Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Dealers $ 514,566 $ 660,180 (22.1 )% 70.3 % 70.4 % 29.7 % 29.6 %
Direct to Consumer (includes website ) 375,680 311,479 20.6 % 55.3 % 54.8 % 44.7 % 45.2 %
Affiliates 23,539 5,245 348.7 % 36.5 % 173.4 % 63.5 % (73.4 )%
Total $ 913,785 $ 976,904 (6.5 )% 63.3 % 66.0 % 36.7 % 34.0 %
Net Revenue Cost of Sales as a % of Net Revenue Margin
Nine months ended September 30, 2022 Nine months ended September 30, 2021 % change Nine months ended September 30, 2022 Nine months ended September 30, 2021 Nine months ended September 30, 2022 Nine months ended September 30, 2021
Dealers $ 1,383,321 $ 1,577,607 (12.3 )% 74.8 % 75.3 % 25.2 % 24.7 %
Direct to Consumer (includes website ) 837,214 796,565 5.1 % 59.4 % 57.2 % 40.6 % 42.8 %
Affiliates 71,381 45,748 56.0 % 92.3 % 85.8 % 7.7 % 14.2 %
Total $ 2,291,916 $ 2,419,920 (5.3 )% 69.8 % 69.5 % 30.2 % 30.5 %
High Pressure Gas Systems
Sales of high-pressure breathing air compressors increased 88.2% for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021 as LWA was able to continue to supply its customers with their needs despite industry supply chain issues. The reseller segment revenues increased significantly by 205.7% and 73% for the three and nine months ended September 30, 2022 as compared to the same periods in the prior year with the addition of a new distributor in Mexico in July 2022. The Original Equipment Manufacturer segment continued to show growth of 156.0% through the nine months ended September 30, 2022 due to international orders to boat manufacturers but decreased 280.3% for the three months ended September 30, 2022 as compared to the same period in the prior year, as OEM volume has proven to be sporadic. The direct to consumer segment, which includes yacht owners and direct to dive stores, increased 69.9% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 and increased 102.8% for the nine months ended September 30, 2022 as compared to September 30, 2021, as this segment has become more active post-COVID, and we believe these customers are beginning to re-invest in their operations.
Costs of revenues as a percentage of net revenues in this segment increased to 61.9% for the nine months ended September 30, 2022 as compared to 58.5% for the nine months ended September 30, 2021. This increase is attributed increased revenue in the reseller segment during the three months ended September 30, 2022, which yields a lower margin than that of the segments as these customers are typically larger volume customers and are given volume discounts.
Net Revenue Cost of Sales as a % of Net Revenue Margin
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 % change Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Resellers $ 316,914 $ 103,667 205.7 % 76.1 % 73.6 % 23.9 % 26.4 %
Direct to Consumers 20,903 12,301 69.9 % 28.1 % 53.4 % 71.9 % 46.6 %
Original Equipment Manufacturers 13,022 3,424 280.3 % 57.4 % 48.1 % 42.6 % 51.9 %
Total $ 350,839 $ 119,392 193.9 % 72.6 % 70.8 % 27.4 % 29.2 %
Net Revenue Cost of Sales as a % of Net Revenue Margin
Nine months ended September 30, 2022 Nine months ended September 30, 2021 % change Nine months ended September 30, 2022 Nine months ended September 30, 2021 Nine months ended September 30, 2022 Nine months ended September 30, 2021
Resellers $ 556,454 $ 321,590 73.0 % 65.6 % 73.0 % 34.4 % 27.0 %
Direct to Consumers 216,148 106,564 102.8 % 55.3 % 49.1 % 44.7 % 50.9 %
Original Equipment Manufacturers 125,247 48,931 156.0 % 57.0 % 83.9 % 43.0 % 16.1 %
Total $ 897,849 $ 477,085 88.2 % 61.9 % 58.5 % 38.1 % 41.5 %
Ultra Portable Tankless Dive Systems
Net revenue for the nine months ended September 30, 2022 in the Ultra Portable Tankless Dive System segment increased 120.8% as compared to the nine months ended September 30, 2021 as a result of the addition of the Nomad product line. The 146.2% increase in the Dealers segment represents the continued expansion of the international dealer base. The addition of Nomad to the Amazon segment during the three months ended September 30, 2022 resulted in a 334.1% growth in that segment as compared to the three months ended September 30, 2021.
Cost of revenues from this segment as a percentage of net revenues for the three and nine months ended September 30, 2022 showed improvement over both the three and nine months ended September 30, 2021, primarily due to the impact of the cost and production efficiencies of the Nomad dive system and the resulting increase in margin as a percentage of revenue for the same periods in 2022 as compared to 2021.
Net Revenue Cost of Sales as a % of Net Revenue Margin
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 % change Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Direct to Consumer 366,178 146,901 149.3 % 67.3 % 82.4 % 32.7 % 17.6 %
Amazon 410,513 94,569 334.1 % 44.6 % 106.8 % 55.4 % (6.8 )%
Dealers 203,478 99,817 103.9 % 78.0 % 82.9 % 22.0 % 17.1 %
Total $ 980,169 $ 341,287 187.2 % 60.0 % 106.2 % 40.0 % (6.2 )%
Net Revenue Cost of Sales as a % of Net Revenue Margin
Nine months ended September 30, 2022 Nine months ended September 30, 2021 % change Nine months ended September 30, 2022 Nine months ended September 30, 2021 Nine months ended September 30, 2022 Nine months ended September 30, 2021
Direct to Consumer 906,133 487,566 85.8 % 57.6 % 61.3 % 42.4 % 38.7 %
Amazon 859,633 353,834 142.9 % 54.1 % 90.1 % 45.9 % 9.9 %
Dealers 893,261 362,865 146.2 % 65.8 % 73.6 % 34.2 % 26.4 %
Total $ 2,659,027 $ 1,204,265 120.8 % 59.2 % 73.5 % 40.8 % 26.5 %
Redundant Air Tank Systems
Net revenue in the Redundant Air Tank Systems System segment was $1,192,986 and $471,051 for the nine and three months ended September 30, 2022, respectively. The margins for the three months ended September 30, 2022 increased 31.6% as compared to 29.8% for the nine months ended September 30, 2022 as the margin for dealer sales improved during the three months ended September 30, 2022 to 30.9% as compared to 25.7% for the nine months ended September 30, 2022. Except for the margin for repairs, dealer margins continue to be the lowest margin segment as SSI sees this segment as the volume driver and sets prices help enable dealers to also generate profits. SSI has a worldwide customer base that includes (1) commercial accounts with aircraft requiring redundant air systems for their pilots and passengers, such as helicopters flying to oil rigs located in bodies of water (2) government accounts that are typically domestic and international military customers with egress systems (3) dealer accounts that are resellers including, international distributors to the military, commercial account or dive shops, and domestic and international dive shops that carry a spare air product (4) direct to consumer sales which are online sales and sales via trade shows direct to consumer and (5) Company provided repairs and warranty repairs to all segments.
Net Revenue Cost of Sales as a % of Net Revenue Margin
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 % change Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Commercial $ 73,691 $ 7,020 949.7 % 45.8 % 53.2 % 54.2 % 46.8 %
Dealers 329,739 95,191 246.4 % 69.1 % 88.5 % 30.9 % 11.5 %
Government 14,017 14,302 -2.0 % 76.5 % 19.7 % 23.5 % 80.3 %
Repairs 2,620 - 100.0 % 569.6 % - -469.6 % -
Direct to Consumers (Website) 50,984 4,618 1004.0 % 68.0 % 28.3 % 32.0 % 71.7 %
Total $ 471,051 $ 121,131 288.9 % 68.4 % 76.0 % 31.6 % 24.0 %
Net Revenue Cost of Sales as a % of Net Revenue Margin
Nine months ended September 30, 2022 Nine months ended September 30, 2021 % change Nine months ended September 30, 2022 Nine months ended September 30, 2021 Nine months ended September 30, 2022 Nine months ended September 30, 2021
Commercial $ 176,847 $ 7,020 2419.2 % 44.5 % 53.2 % 55.5 % 46.8 %
Dealers 792,081 95,191 732.1 % 74.3 % 88.5 % 25.7 % 11.5 %
Government 66,729 14,302 366.6 % 45.1 % 19.7 % 54.9 % 80.3 %
Repairs 21,478 - 100.0 % 276.8 % 0.0 % -176.8 % -
Direct to Consumers (Website) 135,851 4,618 2841.8 % 59.2 % 28.3 % 40.8 % 71.7 %
Total $ 1,192,986 $ 121,131 884.9 % 70.2 % 76.0 % 29.8 % 24.0 %
Guided Tours and Retail
The guided tour and retail segment is a new segment and is derived from LBI. Revenue in this segment currently primarily includes retail sales, and tours and lessons. Retail sales represent the sales of product at the retail facility, while tours and lessons represent revenue derived from diving excursions and lessons.
Net Revenue Cost of Sales as a % of Net Revenue Margin
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 % change Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Retail Sales $ 55,693 - 100.0 % 119.4 % - (19.4 )% -
Tours and Lessons 37,267 - 100.0 % 114.3 % - (14.3 )% -
Total $ 92,960 - 100.0 % 117.3 % - (17.3 )% -
Net Revenue Cost of Sales as a % of Net Revenue Margin
Nine months ended September 30, 2022 Nine months ended September 30, 2021 % change Nine months ended September 30, 2022 Nine months ended September 30, 2021 Nine months ended September 30, 2022 Nine months ended September 30, 2021
Retail Sales $ 90,241 - 100.0 % 77.1 % - 22.9 % -
Tours and Lessons 52,992 - 100.0 % 101.3 % - (1.3 )% -
Total $ 143,233 - 100.0 % 86.0 % - 14.0 % -
Operating Expenses
Operating expenses, consist of selling, general and administrative (“SG&A”) expenses and research and development costs and are reported on a consolidated basis for our operating segments. Operating expenses increased 35.1% for the three months ended September 30, 2022 and 40.1% for the nine months ended September 30, 2022 as compared to the same periods in the prior year.
Selling, General & Administrative Expenses (SG&A Expenses)
SG&A increased by 38.7% for the three months ended September 30, 2022 and 43.6% for the nine months ending September 30, 2022 as compared to the same periods in the prior year. SG&A expenses were comprised of the following:
Expense Item Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 % Change Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 % Change
Payroll, Selling & Administrative $ 536,383 $ 276,262 94.2 % $ 1,476,868 $ 737,791 100.2 %
Non-Cash Stock Compensation Expense 315,152 312,946 .7 % 894,453 811,821 10.2 %
Professional Fees 72,144 121,470 (40.6 )% 297,175 276,998 7.3 %
Advertising 125,456 64,317 95.1 % 383,029 178,158 115.0 %
Other 175,583 107,942 62.7 % 456,534 438,811 4.0 %
Total SG&A $ 1,224,718 $ 882,937 38.7 % $ 3,508,059 $ 2,443,579 43.6 %
Payroll increases for the nine months ended September 30, 2022 can be attributed primarily to the addition of SSI payroll which accounted for 47.1% of the increase. Additional payroll expenses for BLU3 made up 23.4% of the change with additions of customer service and engineering personnel. The BTL payroll increased 13.7% with the addition of marketing and social media personnel, and LWA payroll made up 12.0% of the change with increases in the pay structure of the primary operator of the business unit, and the addition of accounting personnel.
Non-Cash Stock Compensation expenses increased 10.2% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase can be primarily attributed the issuance of options under the plan to employees and contractors for a total of approximately 1,742,600 shares with 300,000 of those shares vesting immediately upon issuance during the nine months ended September 30, 2022.
Professional fees, including legal, accounting and other professional fees which the Company has paid with a combination of cash and common stock increased 7.3% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase can be attributed to an increase in accounting fees related to the year-end audit. For the three months ended September 30, 2022, professional fees decreased 40.6% as compared to the prior year, due to the lack of acquisition related legal fees paid during 2022.
The increase in advertising expense for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was 115.0%, attributable to BLU3’s focus on social media, Google and trade show advertising. SSI added 32.9% to the increase in advertising expense attributed to a full nine months of advertising expenses as compared to the same period in the prior year. BTL’s decrease in advertising expense by approximately 50% as compared to the prior year reduced the overall change in advertising expense by 22.5% for the nine months ended September 30, 2022 as compared to the same period in the prior year.
Other expenses increased 62.7% and 4.0% for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in the prior year, The primary driver of this increase was rent expense which accounted for 92.3% of the increase for the nine months ended September 30, 2022. The Company also obtained directors and officers insurance for the fiscal year ending December 31, 2022 which expense accounted for 28.8% of the increase for the nine months ended September 30, 2022.
Research & Development Expenses (R&D Expenses)
R&D expenses for the three months ended September 30, 2022 decreased 82.1% and 81.1% for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The decrease can be primarily attributed to the completion of the R&D for BLU3’s NOMAD, as it moved into production in the third quarter of 2021.
Other Income/Expense
For the nine months ended September 30, 2022, other expenses totaled approximately $31,300 of interest expense as compared to other income of approximately $157,900 for the nine months ended September 30, 2021. Other income for the nine months ended September 30, 2021 consisted of a gain due to the settlement of debt of $10,000, the forgiveness of a PPP loan less interest expense of approximately $11,700. The increase in interest expense can be attributed to the Navitas loan that was funded in the second quarter of 2021, and the interest on the debt related to the acquisition of SSI.
Liquidity and Capital Resources
We had cash of $577,076 as of September 30, 2022. The following table summarizes total current assets, total current liabilities and working capital at September 30, 2022 as compared to December 31, 2021.
September 30, December 31, %
2022 2021 change
(unaudited)
Total current assets $ 3,575,239 $ 2,966,432 20.5 %
Total current liabilities $ 1,591,371 $ 1,396,197 14.0 %
Working capital $ 1,983,868 $ 1,570,235 26.3 %
The increase in our current assets at September 30, 2022 from December 31, 2021 primarily reflects an increases in inventory purchases reflected by an increase in inventory and prepaid assets which includes prepayments of inventory, as the Company has experienced revenue growth and ramped up purchasing and production to account for potential supply chain issues. The increase in total current liabilities primarily reflects a significant increase in account payable of 14.9% and a related party convertible demand note issued in September 2022.
Summary Cash Flows
Nine Months Ended
September 30,
2022 2021
(unaudited)
Net cash used in operating activities $ (499,713 ) $ (569,142 )
Net cash provided by (used in) investing activities $ (60,290 ) $ 517,701
Net cash provided by financing activities $ 493,935 $ 566,970
Net cash used in operating activities for the nine months ended September 30, 2022 was due to the net loss of approximately $1,056,444 which is primarily attributable to non-cash stock compensation expenses of approximately $894,453. The non-cash stock compensation expense for the nine months ended September 30, 2022 is attributable to stock options and grants issued to our executive officers and various employees as well as common stock issued to consultants and professionals for services. Net cash used in operating activities is also the result of increases in current assets, including, accounts receivable, inventory, net, and prepaid expenses that utilized approximately $486,000, a net decrease in liabilities which also utilized cash with decreases in customer deposits, long term lease liability and accounts payable-related party utilizing approximately $215,400 offset by increases in accounts payable and accrued liabilities as well as other liabilities of approximately $142,100.
Net cash used in investing activities for the nine months ended September 30, 2022 of approximately $60,300 consists of $30,000 used in an asset acquisition and fixed asset purchases, net of debt of approximately $30,200.
Net cash provided by financing activities for the nine months ended September 30, 2022 reflects proceeds from the exercise of warrants of approximately $265,000, the issuance of new units of $205,000, related party debt of approximately $66,800, less the repayment of debt of approximately $42,900.
Going Concern
Our unaudited consolidated financial statements included in this Quarterly Report were prepared assuming we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of issuance of these consolidated financial statements. The report of our independent registered public accounting firm on our audited consolidated financial statements for the year ended December 31, 2021 includes an explanatory paragraph stating the Company has net losses and an accumulated deficit which raises substantial doubt about its ability to continue as a going concern.
We have a history of losses, and an accumulated deficit of $15,601,548 as of September 30, 2022. Despite a working capital surplus of $1,983,868 at September 30, 2022, the continued losses and cash used in operations raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to continue to increase revenues, control expenses, raise capital, and continue to sustain adequate working capital to finance its operations. The failure to achieve the necessary levels of profitability and cash flows would be detrimental to the Company. We are continuing to engage in discussions with potential sources for additional capital, however, our ability to raise capital is somewhat limited based upon our revenue levels, net losses and limited market for our common stock. If we fail to raise additional funds when needed, or if we do not have sufficient cash flows from operations, we may be required to scale back or cease certain of our operations.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, valuation of inventory, allowance for doubtful accounts, and equity-based transactions. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited consolidated financial statements contained in this Quarterly Report.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company’s operations, financial position or cash flows.
These recent accounting pronouncements are described in Note 2 to our unaudited consolidated financial statements contained in this Quarterly Report.
Off Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company and is not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under Exchange Act. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluations as of September 30, 2022 , our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of continuing material weaknesses in our internal control over financial reporting described below. A material weakness is a deficiency, or combination of deficiencies, that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected.
Our management, including our Principal Executive Officer and Principal Financial Officer, have evaluated the effectiveness of the design and operations of our disclosure controls and procedures (defined in Exchange Act Rules 13a-15(c) and 15d-15(e)) as of September 30, 2022 and based upon the such evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to the material weaknesses set forth below.
● Insufficient number and lack of qualified accounting department and administrative personnel and support;
● Insufficient written policies and procedures to ensure the correct application of accounting and financial reporting with respect to GAAP and SEC disclosure requirements;
● Insufficient segregation of duties, oversight of work performed and lack of controls in our finance and accounting functions due to limited personnel;
● Company’s systems that impact financial information and disclosures have ineffective information technology controls;
● Inadequate controls surrounding revenue recognition, to ensure that all material transactions and developments impacting the financial statements are reflected and properly recorded; and
● Evaluation of disclosure controls and procedures was not sufficiently comprehensive due to limited personnel.
Subject to sufficient resources, management expects to remediate the material weaknesses identified above as follows:
● Management has leveraged and will continue to leverage experienced consultants to assist with ongoing GAAP and SEC compliance requirements. We intend to expand our finance department through the hiring of a certified public accountant to strengthen the segregation of duties, internal controls and enhance our current staff.
● Segregation of duties is being analyzed and adjusted Company-wide, where possible. The Company is in the process of hiring additional personnel in the accounting department, as well as the documentation of controls and procedures.
● The Company plans on evaluating various accounting systems to enhance its system controls.
We will continue to monitor and evaluate the effectiveness of our internal control over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow. We do not, however, expect that the material weaknesses in our disclosure controls will be remediated until such time as we have added to our accounting and administrative staff allowing improved internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEEDINGS
There are no pending legal proceedings to which we are a party or in which any director, officer or affiliate of ours, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.
ITEM 1A. RISK FACTORS
The Company is a smaller reporting company and is not required to provide this information.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of equity securities during the period covered by this Quarterly Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company .
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Number Exhibit
31.1 Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
101.INS Inline XBRL INSTANCE DOCUMENT
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 8 , 2022 BROWNIE’S MARINE GROUP, INC.
By: /s/ Christopher H. Constable
Christopher H. Constable
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert M. Carmichael
Robert M. Carmichael
Chief Financial Officer
(Principal Financial and Accounting Officer)