UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For
the quarterly period ended |
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from __________ to __________ |
Commission
file number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code
| Not applicable |
| Former name, former address and former fiscal year, if changed since last report |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | Not applicable | Not applicable |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
As of August 14, 2023, there were shares of common stock outstanding.
TABLE OF CONTENTS
Page No. | ||
| PART I - FINANCIAL INFORMATION | ||
| ITEM 1. | FINANCIAL STATEMENTS. | 4 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 24 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | 35 |
| ITEM 4. | CONTROLS AND PROCEDURES. | 35 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | LEGAL PROCEEDINGS. | 37 |
| ITEM 1A. | RISK FACTORS. | 37 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | 37 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. | 37 |
| ITEM 4. | MINE SAFETY DISCLOSURES. | 37 |
| ITEM 5. | OTHER INFORMATION. | 37 |
| ITEM 6. | EXHIBITS. | 38 |
| 2 |
NOTE REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs.
You should read thoroughly this Quarterly Report with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023, which risk factors could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by applicable law.
| 3 |
PART I
ITEM 1. FINANCIAL STATEMENTS
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable - net | ||||||||
| Accounts receivable - related parties | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, equipment and leasehold improvements, net | ||||||||
| Right of use assets, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Accounts payable - related parties | ||||||||
| Customer deposits and unearned revenue | ||||||||
| Other liabilities | ||||||||
| Operating lease liabilities, current | ||||||||
| Related party convertible demand note, net | ||||||||
| Current maturities long term debt | ||||||||
| Total current liabilities | ||||||||
| Loans payable, net of current portion | ||||||||
| Convertible notes, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingent liabilities (see note 9) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock; $ par value: shares authorized; issued and outstanding as of June 30, 2023 and December 31, 2022. | ||||||||
| Common stock; $ par value; shares authorized; shares issued and outstanding at June 30, 2023 and shares issued and outstanding at December 31, 2022. | ||||||||
| Common stock payable shares and shares, as of June 30, 2023 and December 31, 2022, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 4 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
(unaudited)
Three months ended June 30 | Six months ended June 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development costs | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense, net | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on foreign currency contract | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Basic income (loss)per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Diluted income (loss) per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted weighted average common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 5 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHARHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Unaudited)
| Preferred Stock | Common Stock | Common Stock Payable | Additional Paid-in | Accumulated | Total Stockholder’s | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | | |||||||||||||||||||||||||||
| Shares issued for the purchase of units | - | - | ||||||||||||||||||||||||||||||||||
| Shares issued for accrued interest on convertible notes | - | - | ||||||||||||||||||||||||||||||||||
| Stock Option Expense | - | - | - | |||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| March 31, 2023 (unaudited) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Shares issued for accrued interest on convertible notes | - | - | ||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| June 30, 2023 (unaudited) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Common Stock Payable | Additional Paid-in | Accumulated Other Comprehensive Income | Accumulated | Total Stockholder’s | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) | Deficit | Equity | |||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | | $ | $ | $ | ( | ) | $ | | |||||||||||||||||||||||||||||
| Shares issued for the exercise of warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued for service | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | |||||||||||||||||||||||||||||||||||||
| March 31, 2022 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Shares issued for service | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued for asset purchase | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued for accrued interest on convertible notes | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued for employee bonus | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock option expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| June 30, 2022 (unaudited) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 6 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(unaudited)
| 2023 | 2022 | |||||||
| Cash flows used in operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of right-of-use asset | ||||||||
| Common stock issued for services | ||||||||
| Reserve for slow moving inventory | ||||||||
| Reserve for Nomad recall | ( | ) | ||||||
| Stock Based Compensation - Options | ||||||||
| Stock based compensation - stock grant | ||||||||
| Shares issued for accrued interest in convertible notes | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Change in accounts receivable, net | ( | ) | ( | ) | ||||
| Change in accounts receivable - related parties | ( | ) | ||||||
| Change in inventory | ( | ) | ||||||
| Change in prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Change in other assets | ( | ) | ||||||
| Change in accounts payable and accrued liabilities | ( | ) | ||||||
| Change in customer deposits and unearned revenue | ||||||||
| Change in long term lease liability | ( | ) | ( | ) | ||||
| Change in other liabilities | ||||||||
| Change in accounts payable - related parties | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows used in investing activities: | ||||||||
| Cash used in asset acquisition | ( | ) | ||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of units | ||||||||
| Proceeds from exercise of Warrants | ||||||||
| Repayment of debt | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash, beginning balance | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash Paid for Interest | $ | $ | ||||||
| Cash Paid for Income Taxes | $ | $ | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Operating lease obtained for operating lease liability | $ | $ | ||||||
| Common Stock issued for asset acquisition | $ | $ | ||||||
| Equipment obtained through financing | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 7 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(UNAUDITED)
Note 1. Company Overview
Brownie’s Marine Group, Inc. (the “Company”) designs, tests, manufactures and distributes recreational hookah diving, scuba and water safety products through its wholly owned subsidiary, Trebor Industries, Inc., a Florida corporation, incorporated in 1981 (“Trebor” or “BTL”), manufactures and sells high pressure air and industrial. compressor packages, yacht based scuba air compressor and nitrox generation systems through its wholly owned subsidiary, Brownie’s High Pressure Compressor Services, Inc., a Florida corporation incorporated in 2017 (“BHP”) and doing business as LW Americas (“LWA”) and develops and markets portable battery powered surface supplied air dive systems through its wholly owned subsidiary BLU3, Inc., a Florida corporation (“BLU3”). On September 3, 2021, the Company, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Submersible Acquisition, Inc., a Florida corporation and wholly owned subsidiary of the Company (“Acquisition Sub”), Submersible Systems, Inc., a Florida corporation (“Submersible” or “SSI”), and Summit Holdings V, LLC, a Florida limited liability company (“Summit”) and Tierra Vista Group, LLC, a Florida limited liability company (“Tierra Vista” and, together with Summit, the “Sellers”), the owners of all of the capital stock of Submersible, pursuant to which Acquisition Sub merged with and into Submersible (the “Merger”), and Submersible, the surviving corporation, became a wholly owned subsidiary of the Company.
Submersible is a manufacturer of high pressure tanks and redundant air systems for the military and recreational diving industries, based in Huntington Beach, California and sells its products to governments, militaries, private companies and the dive industry throughout the world.
On February 13, 2022 the Company filed with the Florida Department of State, the articles of incorporation for a new wholly owned subsidiary, Live Blue, Inc. (“LBI”). LBI utilizes technology developed by BLU3 to provide new users and interested divers a guided tour experience. On May 2, 2022, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Gold Coast Scuba, LLC, a Florida limited liability company (“Gold Coast Scuba”), Steven M. Gagas and William Frenier, the sole members of Gold Coast Scuba (together, the “LLC Members”) and LBI. Pursuant to the terms of the Asset Purchase Agreement, LBI acquired substantially all of Gold Coast Scuba’s assets and assumed certain non-material liabilities of the business associated with these assets. In addition, LBI assumed the lease for the premises for Gold Coast Scuba as part of this asset acquisition.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete annual financial statements. The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading. The balance sheet as of December 31, 2022 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a broader discussion of the Company’s business and the risks inherent in such business. The results of operations for the six months ended June 30, 2023, are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending December 31, 2023.
| 8 |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Trebor, BHP, BLU3, SSI and LBI. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $
Accounts receivable
The Company manufactures and sells its products to a broad range of customers, primarily retail stores. Few customers are provided with payment terms of 30 days. The Company has tracked historical loss information for its trade receivables and compiled historical credit loss percentages for different aging categories (current, 1–30 days past due, 31–60 days past due, 61–90 days past due, and more than 90 days past due).
In
accordance with ASU 2016-13, management believes that the historical loss information it has compiled is a reasonable base on which to
determine expected credit losses for trade receivables held at June 30, 2023 because the composition of the trade receivables at that
date is consistent with that used in developing the historical credit-loss percentages (i.e., the similar risk characteristics of its
customers and its lending practices have not changed significantly over time). As a result, management applied the applicable credit
loss rates to determine the expected credit loss estimate for each aging category. Accordingly, the allowance for expected credit losses
at June 30, 2023 totaled $
Inventory
Inventory consists of the following:
| June 30, 2023 (unaudited) | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Rental Equipment | ||||||||
| Inventory, net | $ | $ | ||||||
As of June 30, 2023 and December 31, 2022, the Company recorded allowances for obsolete or slow moving inventory
of approximately $
| 9 |
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers. The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. The Company typically satisfies its performance obligations in contracts with customers upon shipment of the goods. Generally, payment is due upon receipt of the invoice and the contracts do not have significant financing components. Product sales occur once control or title is transferred based on the commercial terms. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Product sales are recorded net of variable consideration, such as provisions for returns, discounts and promotional allowances. Such provisions are calculated based on the actual allowances given. Management believes that adequate provision has been made for cash discounts, returns, spoilage and promotional allowances based on the Company’s historical experience.
A breakdown of the total revenue between related party and non-related party revenue is as follows:
| Three months ended June 30 | Six months ended June 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Revenues - related parties | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
See further disaggregate revenue disclosures by segment and product type in Note 10.
Cost of Sales
Cost of sales consists of the cost of the components of finished goods, the costs of raw materials utilized in the manufacture of products, in-bound and out-bound freight charges, direct manufacturing labor as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacture of the Company’s finished products, inventory allowance for excess and obsolete products, and royalties paid on licensing agreements. Components account for the largest portion of the cost of sales. Components include plastic molded parts, gas powered engines, aluminum pressure bottles, electronic parts, batteries and packaging materials.
The breakdown of cost of sales to include cost of sales for related party and non-related party as well as the related party and non-related party royalty expense is as follows:
| Three months ended June 30 | Six months ended June 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Cost of revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues - related parties | ||||||||||||||||
| Royalties expense - related parties | ||||||||||||||||
| Royalties expense | ||||||||||||||||
| Total cost of revenues | $ | $ | $ | $ | ||||||||||||
| 10 |
Lease Accounting
The Company accounts for leases in accordance with ASC 842, Leases.
The lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. The Company elected the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. The Company did not reassess whether any contracts entered into prior to adoption are leases or contain leases.
The Company categorizes leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that would allow the Company to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in property and equipment, net. All other leases are categorized as operating leases. The Company did not have any finance leases as of June 30, 2023. The Company’s leases generally have terms that range from three years for equipment and five to twenty years for property. The Company elected the accounting policy to include both the lease and non-lease components of its 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 the Company has the option to extend the lease term, terminate the lease for the contractual expiration date, or purchase the leased asset, and it is reasonably certain that the Company we will exercise the option, it considers these options in determining the classification and measurement of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.
For
the three and six months ended June 30, 2023, lease expenses were approximately $
Supplemental balance sheet information related to leases was as follows:
| Operating Leases | June 30, 2023 | |||
| (unaudited) | ||||
| Right-of-use assets | $ | |||
| Current lease liabilities | $ | |||
| Non-current lease liabilities | ||||
| Total lease liabilities | $ | |||
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. ASC 718 requires companies to measure the cost of employee and non-employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee and non-employee are required to provide service in exchange for the award, usually the vesting period.
The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is determined through use of the quoted stock price.
| 11 |
Derivatives
The accounting treatment of derivative financial instruments requires that the Company record certain warrants and embedded conversion options at their fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As a result of entering into certain note agreements, for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy, by earliest issuance date, in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors, as long as the certain variable issuance terms in certain convertible instruments exist. As of June 30, 2023 the Company did not have any derivative liabilities.
Basic loss per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted loss per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. At June 30, 2023 and June 30, 2022, and shares, respectively, of potentially dilutive shares were not recognized as their inclusion would be anti-dilutive. These shares reflect shares potentially issuable under convertible notes, outstanding warrants, outstanding stock options and the conversion of preferred stock.
Recent accounting pronouncements
ASU 2016-13 Current Expected Credit Loss (ASC326)
In December 2021, the FASB issued an update to ASU No. 2016-13 the Current Expected Credit Losses (CECL) standard (ASC 326), which is designed to provide greater transparency and understanding of credit risk by incorporating estimated, forward-looking data when measuring lifetime Estimated Credit Losses (ECL) and requires enhanced financial statement disclosures. This guidance was adopted on January 1, 2023 with no effect to the financial statements.
ASU 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts on an Entity’s Own Equity.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts on an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exceptions. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption or are not applicable.
| 12 |
Note 3. Going Concern
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates
realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the
date of these consolidated financial statements. For the six months ended June 30, 2023, the Company incurred a net loss of $
Note 4. Related Party Transactions
The
Company sells products to Brownie’s Southport Divers, Brownie’s Yacht Toys and Brownie’s Palm Beach Divers, companies
owned by the brother of Robert Carmichael, the Company’s Chief Executive Officer and Chief Financial Officer. Terms of sale are
no more favorable than those extended to any of the Company’s other customers with similar sales volumes. These entities accounted
for
The
Company sells products to BGL and 940 A, entities wholly-owned by Robert Carmichael. Terms of sale are more favorable than those extended
to the Company’s regular customers, but no more favorable than those extended to the Company’s strategic partners. Accounts
receivable from these entities totaled $
The
Company had accounts payable to related parties of $
The
Company has exclusive license agreements with 940 A to license the trademark “Brownie’s Third Lung”,
“Tankfill”, “Brownie’s Public Safety” and various other related trademarks as listed in the
agreements. The agreements provide that the Company pay
On
September 30, 2022, the Company issued a convertible demand
On
January 18, 2023 and February 18, 2023, the Company issued to Charles Hyatt, a Company director, an aggregate of units, with
each unit consisting of one share of common stock and a two-year common stock purchase warrant to purchase one share of common stock
at an exercise price of $
| 13 |
On
March 31, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible demand
note for the three months ending March 31, 2023. The fair value of these shares was $
On
June 30, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible demand
note for the three months ending June 30, 2023. The fair value of these shares was $
Note 5. Convertible Promissory Notes and Loans Payable
Convertible Promissory Notes
Convertible promissory notes consisted of the following at June 30, 2023:
| Origination Date | Maturity Date | Interest Rate | Origination Principal Balance | Original Discount Balance | Period End Principal Balance | Period End Discount Balance | Period End Balance, Net | Accrued Interest Balance | Reg. | |||||||||||||||||||||||||
| | % | ( | ) | $ | $ | ( | ) | $ | (1 | ) | ||||||||||||||||||||||||
| % | ( | ) | ( | ) | (2 | ) | ||||||||||||||||||||||||||||
| % | ( | ) | ( | ) | (3 | ) | ||||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||
A breakdown of current and long-term amounts due are broken down as follows for the convertible prommisory notes as of June 30, 2023:
| Summit Holdings V, LLC Note | Tierra Vista Partners, LLC Note | Robert Carmichael Note | Total | |||||||||||||
| 2023 | $ | $ | $ | $ | ||||||||||||
| 2024 | ||||||||||||||||
| Discount | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Loan Payments | $ | $ | $ | $ | ||||||||||||
| Current Portion of Loan Payable | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Non-Current Portion of Loan Payable | $ | $ | $ | $ | ||||||||||||
| (1) | On
September 3, 2021, the Company issued a three-year |
| Payment Amortization | ||||
| 2023 (6 months) | $ | |||
| 2024 | ||||
| Total Note Payments | $ | |||
| Current portion of note payable | ||||
| Non-Current Portion of Notes Payable | $ | |||
| (2) | On
September 3, 2021, the Company issued a three-year |
| Payment Amortization | ||||
| 2023 (6 months) | $ | |||
| 2024 | ||||
| Total Note Payments | $ | |||
| Current portion of note payable | ||||
| Non-Current Portion of Notes Payable | $ | |||
| 14 |
| (3) | On
September 30, 2022, the Company issued a convertible demand |
Loans Payable
Mercedes BMG (1) | Navitas BLU3 (2) | NFS SSI (3) | Navitas 2022 BLU3 (4) | Total | |||||||||||||||||
| 2023 (6 months) | $ | $ | $ | $ | $ | ||||||||||||||||
| 2024 | |||||||||||||||||||||
| 2025 | |||||||||||||||||||||
| 2026 | |||||||||||||||||||||
| Total Loan Payments | $ | $ | $ | $ | $ | ||||||||||||||||
| Current Portion of Loan Payable | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Non-Current Portion of Loan Payable | $ | $ | $ | $ | $ | ||||||||||||||||
| 1) |
| (2) | |
| (3) | |
| (4) |
Note 6. Business Combination
Asset acquisition Gold Coast Scuba, LLC
On May 2, 2022, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Gold Coast Scuba, LLC, a Florida limited liability company (“Gold Coast Scuba”), Steven M. Gagas and William Frenier, the sole members of Gold Coast Scuba (together, the “LLC Members”) and Live Blue, Inc. Pursuant to the terms of the Asset Purchase Agreement, Live Blue acquired substantially all of Gold Coast Scuba’s assets and assumed certain non-material liabilities of the business associated with these assets. In addition, LBI assumed the lease for the premises for Gold Coast Scuba as part of this asset acquisition.
| 15 |
In
consideration for the assets purchased, the Company paid $
| Holding Period from Closing Date | Percentage of shares eligible to be sold or transferred | |||
| Up to % | ||||
| Up to % | ||||
| Up to % |
The
transaction costs associated with the acquisition were $
While
the agreement was structured as an asset purchase agreement, we also assumed the operations of Gulf Coast Scuba resulting in the
recognition of a business combination. During 2022 we recognized revenue of $
| Fair Value | ||||
| Rental Inventory | $ | |||
| Fixed Assets | ||||
| Retail Inventory | ||||
| Right of use asset | ||||
| Lease liability | ( | ) | ||
| Net Assets Acquired | $ | |||
Note 7. Goodwill and Intangible Assets, Net
The following table sets for the changes in the carrying amount of the Company’ Goodwill for the six months ended June 30, 2023.
| 2023 | ||||
| Balance, January 1 | $ | |||
| Addition: | ||||
| Balance, June 30 | $ | |||
The Company performed an evaluation of the value of goodwill at December 31, 2022. Based upon this evaluation it was determined that there should be no adjustment to goodwill. There has been nothing noted during the six months ended June 30, 2023 that would indicate that the value of goodwill should change through that date.
| 16 |
The following table sets for the components of the Company’s intangible assets at June 30, 2023:
| Amortization Period (Years) | Cost | Accumulated Amortization | Net Book Value | |||||||||||||
| Intangible Assets Subject to amortization | ||||||||||||||||
| Trademarks | $ | $ | ( | ) | $ | |||||||||||
| Customer Relationships | ( | ) | ||||||||||||||
| Non-Compete Agreements | ( | ) | ||||||||||||||
| Total | $ | $ | ( | ) | $ | |||||||||||
The aggregate amortization remaining on the intangible assets as of June 30, 2023 is a follows:
| Intangible Amortization | ||||
| 2023 (6 months remaining) | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
Note 8. Stockholders’ Equity
Common Stock
On
January 18, 2023 and February 18, 2023, the Company issued to Charles Hyatt, an aggregate of units, with each unit consisting
of one share of common stock and a two-year common stock purchase warrant to purchase one share of common stock at an exercise price
of $
On
March 31, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible demand
note for the three months ending March 31, 2023. The fair value of these shares was $
On
March 31, 2023, the Company issued an aggregate of
shares of common stock to the holders of convertible notes for payment of interest for the three months ending December 31, 2022.
The fair value of these shares was $
On
June 30, 2023, the Company issued shares of common stock to Robert Carmichael for payment of interest on the convertible demand
note for the three months ending June 30, 2023. The fair value of these shares was $
On
June 30, 2023, the Company issued an aggregate of
shares of common stock to the holders of convertible notes for payment of interest for the three months ending June 30, 2023. The
fair value of these shares was $
Preferred Stock
During
the second quarter of 2010, the holders of the majority of the Company’s outstanding shares of common stock approved an amendment
to the Company’s Articles of Incorporation authorizing the issuance of shares of blank check preferred stock. The blank
check preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights
as may be determined by the Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business
Corporation Act. In April 2011, the Board of Directors designated shares as Series A Convertible
Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into a share of the Company’s common stock at
any time at the option of the holder at a conversion price of $
| 17 |
Equity Incentive Plan
On May 26, 2021 the Company adopted an Equity Incentive Plan (the “Plan”). Under the Plan, stock options may be granted to employees, directors, and consultants in the form of incentive stock options or non-qualified stock options, stock purchase rights, time vested and/performance invested restricted stock, and stock appreciation rights and unrestricted shares may also be granted under the Plan. shares are reserved for issuance under the Plan. The term of the Plan is ten years.
The Company also issued options outside of the Plan that were not approved by the security holders. These options may be granted to employees, directors, and consultants in the form of incentive stock options or non-qualified stock options.
| Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted – average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a) (c) | ||||||||||
| Equity Compensation Plans Approved by Security Holders | $ | |||||||||||
| Equity Compensation Plans Not Approved by Security Holders | ||||||||||||
| Total | $ | |||||||||||
Options
The Company has issued options to purchase approximately shares of its common stock at an average exercise price of $ with a fair value of approximately $. For the three and six months ended June 30, 2023, the Company issued options to purchase shares.
For the three months ended June 30, 2023 and 2022, the Company recognized an expense of approximately $ and $, respectively and for the six months ended June 30, 2023 and 2022, the Company recognized an expense of approximately $ and $, respectively, of non-cash compensation expense (included in General and Administrative expense in the accompanying Consolidated Statement of Operations) determined by application of a Black-Scholes option pricing model with the following inputs: exercise price, dividend yields, risk-free interest rate, and expected annual volatility. As of June 30, 2023, the Company had approximately $ of unrecognized pre-tax non-cash compensation expense related to options to purchase shares, which the Company expects to recognize, based on a weighted-average period of years. The Company uses straight-line amortization of compensation expense over the requisite service period for time-based options. For performance-based options the Company evaluates the likelihood of a vesting qualification being met, and will establish the expense based on that evaluation. The maximum contractual term of the Company’s stock options is years. The Company recognizes forfeitures and expirations as they occur. Options to purchase approximately shares have vested as of June 30, 2023.
| 18 |
| Six Months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Expected volatility | % - | % | – | % | ||||
| Expected term | – Years | – Years | ||||||
| Risk-free interest rate | % - | % | % - | % | ||||
| Forfeiture rate | % | % | ||||||
The expected volatility was determined with reference to the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant.
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
Number of Options | Exercise Price | Contractual Life in Years | Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Outstanding – December 31, 2022 | $ | |||||||||||||||
| Exercisable – December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Outstanding – June 30, 2023 | $ | |||||||||||||||
| Exercisable – June 30, 2023 | $ | $ | ||||||||||||||
| Range of Exercise Price | Number outstanding at June 30, 2023 | Weighted average remaining life | Weighted average exercise price | Number exercisable at June 30, 2023 | Weighted average exercise price | Weighted average remaining life | |||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| $ | - $ | $ | $ | ||||||||||||||||||||||
| Outstanding options | |||||||||||||||||||||||||
At June 30, 2023, there was approximately $ of unrecognized stock option expense which may be recognized only if the full vesting requirements for these options are met.
At June 30, 2023, there was approximately $ of total unrecognized stock option expense which is expected to be recognized on a straight-line basis over a weighted-average period of years.
| 19 |
Warrants
On
January 18, 2023 and February 18, 2023, the Company issued to Charles Hyatt, an aggregate of units, with each unit consisting
of one share of common stock and a two-year common stock purchase warrant to purchase one share of common stock at an exercise price
of $
A summary of the Company’s warrants as of December 31, 2022 and changes during the six months ended June 30, 2023 is presented below:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or Expired | ||||||||||||||||
| Outstanding – June 30, 2023 | $ | |||||||||||||||
| Exercisable – June 30, 2023 | $ | $ | ||||||||||||||
Note 9. Commitments and contingencies
Leases
On
August 14, 2014, the Company entered into a month lease for its facilities in Pompano Beach, Florida, commencing on September
1, 2014. Terms included payment of a $
On
January 4, 2018, the Company entered into a month lease renewal for its facility in Huntington Beach, California commencing
on February 1, 2018. Terms included base rent of approximately $
On
November 11, 2018, the Company entered a month lease commencing on January 1, 2019 for approximately
Royalty Agreement
On
June 30, 2020, the Company entered into Amendment No. 2 to its Patent License Agreement with Setaysha Technical Solutions, LLC (“STS”).
The Amendment set certain limits and expectations of the assistance from STS related to designing and commercializing certain diving
products and revised the royalty payments due to STS as consideration for uncompensated services. The Company is obligated to pay STS
a minimum yearly royalty of $
| 20 |
Consulting and Employment Agreements
On
November 5, 2020, the Company entered into a three-year employment agreement with Christopher Constable (the “Constable
Employment Agreement”) pursuant to which Mr. Constable served as Chief Executive Officer of the Company. Previously, Mr.
Constable had provided advisory services to the Company through an agreement with Brandywine LLC. In consideration for his services,
Mr. Constable received (i) an annual base salary of $
In
addition, Mr. Constable was entitled to receive
stock options to purchase shares of common stock at an exercise price of $
per share in the following amounts based upon the following performance milestones during the term of the Constable Employment
Agreement: (i)
shares, if the Company’s total net revenues, as reported in its statement of operations in its financial statements in its
filings with the SEC, including as a result of a stock or asset acquisition of a third party (“Net Revenues”) are in
excess of $
On
August 1, 2021, the Company and Blake Carmichael entered into a three-year employment agreement (the “Blake Carmichael Employment
Agreement”) pursuant to which Mr. Carmichael served as Chief Executive Officer of BLU3. In consideration for his services,
Blake Carmichael received (i) an annual base salary of $
On
September 3, 2021, SSI and Christeen Buban entered into a three-year employment agreement (the “Buban Employment Agreement”)
pursuant to which Ms. Buban shall serve as the President of SSI. In consideration for her services, Mrs. Buban shall receive (i) an annual
base salary of $
In addition, Mrs. Buban shall be entitled to receive a stock option to purchase up to shares of common stock of the Company at an exercise price of $ per share, which vests upon the attainment of certain defined annual financial metrics, as set forth in the Buban Employment Agreement. A measurement was made for the three and six months ended June 30, 2023 and no expense was recorded based upon the vesting criteria not being met.
| 21 |
On
January 17, 2022, the Company entered into an agreement with The Crone Law Group, PC (“CLG”) for the provision of legal services.
In consideration therefor, the Company will pay CLG a monthly flat fee of $
On
May 2, 2022, the Company entered into a two-year employment agreement with Steven Gagas (the “Gagas Employment Agreement”)
pursuant to which Mr. Gagas shall serve as the General Manager of the dive shop currently operating within LBI. In consideration for
his services Mr. Gagas shall receive an annual salary of $
On
May 2, 2022, LBI, entered into a lease assignment agreement with Gold Coast Scuba, LLC and Vicnsons Realty Group, LLC whereby LBI is
the assignee of a three year lease for the property located at 259 Commercial Blvd., Suites 2 and 3 in Lauderdale-By-The Sea, Florida
for $
On
September 14, 2022, SSI entered into a sixty-month lease renewal for its facility in Huntington Beach, California commencing on February
1, 2022 with base rent of approximately $
On
September 30, 2022, SSI entered into a sublease of its facility in Huntington Beach, California with Camburg Engineering, Inc. (“Tenant”)
commencing October 1, 2022, The term of the sublease is through December 31, 2023 with a base monthly rent of $
On
December 22, 2022, the U.S. Consumer Products Safety Commission (the “CPSC”) issued a voluntary recall notice for the Nomad
tankless dive system, which is distributed by BLU3, Inc. As part of the recall procedure, the CPSC has approved the Company’s proposed
remedy for the recall and BLU3 will begin to receive units back from consumers to repair affected Nomad units. The Company has evaluated
the costs of this recall and has deemed it necessary to set an allowance of $
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 $
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 retail store for the diving community. |
| 22 |
Three Months Ended
June 30
(unaudited)
Legacy SSA Products | High Pressure Gas Systems | Ultra Portable Tankless Dive Systems | Redundant Air Tank Systems | Guided Tour Retail | Total Company | |||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| Net Revenues | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Cost of Revenue | ( | |||||||||||||||||||||||||||||||||||||||||||||||