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 June 30,March 31, 20222023

 

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3001 NW 25thAvenue, 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

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 filerSmaller 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 August 19, 2022,May 15, 2023, there were 409,774,099437,147,436 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.2724
   
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.3631
  
ITEM 4.CONTROLS AND PROCEDURES.3731
   
 PART II - OTHER INFORMATION 
   
ITEM 1.LEGAL PROCEEDINGS.3833
   
ITEM 1A.RISK FACTORS.3833
   
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.3833
  
ITEM 3.DEFAULTS UPON SENIOR SECURITIES.3833
   
ITEM 4.MINE SAFETY DISCLOSURES.3833
   
ITEM 5.OTHER INFORMATION.3833
   
ITEM 6.EXHIBITS.3833

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 SECSecurities and Exchange Commission (“SEC”) on AprilMarch 30 22, 2022,2023, 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

  

March 31, 2023

  December 31, 2022 
  (Unaudited)    
ASSETS        
Current Assets        
Cash $347,635  $484,427 
Accounts receivable - net  165,742   111,844 
Accounts receivable - related parties  99,833   55,428 
Accounts receivable        
Inventory, net  2,215,861   2,421,885 
Prepaid expenses and other current assets  134,860   192,130 
Total current assets  2,963,931   3,265,714 
Property, equipment and leasehold improvements, net  389,455   339,546 
Operating lease assets  1,057,327   1,133,092 
Intangible assets, net  628,305   646,422 
Goodwill  249,986   249,986 
Other assets  30,725   30,724 
Total assets $5,319,729  $5,665,484 
Liabilities and stockholders’ equity        
Current liabilities        
Accounts payable and accrued liabilities $696,523  $829,456 
Accounts payable - related parties  23,778   37,539 
Customer deposits and unearned revenue  229,946   167,534 
Other liabilities  307,498   372,943 
Operating lease liabilities, current  268,202   269,046 
Related party convertible demand note, net  49,213   49,147 
Current maturities long term debt  67,954   66,486 
Total current liabilities  1,643,114   1,792,151 
Loans payable, net of current portion  126,188   143,960 
Convertible notes, net of current portion  344,104   342,943 
Operating lease liabilities, net of current portion  792,502   864,057 
Total liabilities  2,905,908   3,143,111 
Commitments and contingent liabilities (see note 9)  -   - 
Stockholders’ equity        
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding as of March 31, 2023 and December 31, 2022.  425   425 
Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 437,147,436 shares issued and outstanding at March 31, 2023 and 425,520,662 shares issued and outstanding at December 31, 2022.  43,716   42,553 
Common stock payable 138,941 shares and 138,941 shares, as of March 31, 2023 and December 31, 2022, respectively.  14   14 
Additional paid-in capital  19,135,083   18,916,876 
Accumulated deficit  (16,765,417)  (16,437,495)
Total stockholders’ equity 2,413,821  2,522,373 
Total liabilities and stockholders’ equity $5,319,729  $5,665,484 

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

FOR THE THREE MONTHS ENDED MARCH 31,

(unaudited)

  2023  2022 
Revenues $1,639,053  $1,974,969 
Cost of revenues  1,225,028   1,299,209 
Gross profit  414,025   675,760 
Operating expenses        
Selling, general and administrative  726,220   1,105,739 
Research and development costs  529   3,920 
Total operating expenses  726,749   1,109,659 
Loss from operations  (312,724)  (433,899)
Other expense        
Interest expense  (15,198)  (10,193)
Total other expense - net  (15,198)  (10,193)
Loss income before provision for income taxes  (327,922)  (444,092)
Provision for income taxes  -   - 
Net loss $(327,922) $(444,092)
Other comprehensive income        
Unrealized gain on foreign currency contract  -   1,587 
Total other comprehensive income  -   1,587 
Comprehensive loss $(327,922) $(442,505)
Basic loss per common share $(0.00) $(0.00)
Diluted loss per common share $(0.00) $(0.00)
Basic weighted average common shares outstanding  427,289,742   401,483,605 
Diluted weighted average common shares outstanding  427,289,742   401,483,605 

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 MONTHS ENDED MARCH 31, 2023 AND 2022

(Unaudited)

  Shares Outstanding  Par  Shares Outstanding  Par  Shares  Amount  Paid-in Capital  Accumulated Deficit  Stockholders Equity 
  Preferred Stock  Common Stock  Common Stock Payable  Additional     Total 
  Shares Outstanding  Par  Shares Outstanding  Par  Shares  Amount  Paid-in Capital  Accumulated Deficit  Stockholders’ Equity 
Balance, December 31, 2022  425,000  $425   425,520,662  $42,553   138,941  $14  $18,916,876- $(16,437,495) $2,522,373 
Shares issued for the purchase of units  -   -   11,428,570   1,143   -  -   198,857   -   200,000 
Shares issued for accrued interest in convertible notes  -   -   198,204   20   -   -   8,316   -   8,336 
Stock Option Expense                          11,034   -   11,034 
Net Loss                           -  (327,922)  (327,922)
Balance, March 31, 2023 (unaudited)  425,000  $425   437,147,436  $43,716   138,941  $14  $19,135,083- $(16,765,417) $2,413,821 
Balance  425,000  $425   437,147,436  $43,716   138,941  $14  $19,135,083- $(16,765,417) $2,413,821 

  Shares Outstanding  Par  Shares Outstanding  Par  Shares  Amount  Paid-in Capital  Comprehensive Income  Accumulated Deficit  Stockholders Equity 
  Preferred Stock  Common Stock  Common Stock Payable  Additional  

Accumulated

Other

     Total 
  Shares Outstanding  Par  Shares Outstanding  Par  Shares  Amount  Paid-in Capital  Comprehensive Income  Accumulated Deficit  Stockholders Equity 
Balance, December 31, 2021  425,000  $425   393,850,475  $39,386   138,941  $14  $17,132,434  $-  $(14,544,604) $2,627,655 
Balance  425,000  $425   393,850,475  $39,386   138,941  $14  $17,132,434  $-  $(14,544,604) $2,627,655 
Shares issued for 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 
Balance, 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 
Balance  425,000  $425   405,656,793  $40,566   138,941  $14  $17,661,788  $1,587  $(14,988,696) $2,715,684 

The accompanying notes are an integral part of these unaudited consolidated financial statements

6

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

         
  

June 30, 2022

(unaudited)

  December 31, 2021 
ASSETS        
Current Assets        
Cash $574,567  $643,143 
Accounts receivable - net  276,812   123,270 
Accounts receivable - related parties  75,122   77,301 
Inventory, net  2,323,468   1,895,260 
Prepaid expenses and other current assets  533,540   227,458 
Total current assets  3,783,509   2,966,432 
Property, equipment and leasehold improvements, net  292,038   270,065 
Operating Lease Assets  372,992   454,475 
Intangible Assets, Net  682,655   718,905 
Goodwill  249,986   249,986 
Other assets  17,831   14,098 
Total assets $5,399,011  $4,673,961 
Liabilities and stockholders’ equity        
Current liabilities        
Accounts payable and accrued liabilities $1,204,610  $744,383 
Accounts payable - related parties  31,437   37,267 
Customer deposits and unearned revenue  280,510   143,938 
Other liabilities  222,373   187,924 
Operating lease liabilities  214,061   232,283 
Current maturities long term debt  38,209   50,402 
Notes payable  -   - 
Convertible debentures, net  -   - 
Total current liabilities  1,991,200   1,396,197 
Long term debt  73,775   87,956 
Long term convertible debentures, net  341,098   339,254 
Operating lease liabilities  159,322   222,899 
Total liabilities  2,565,395   2,046,306 
Commitments and contingent liabilities (see note  -     
Stockholders’ equity        
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding as of June 30, 2022 and December 31, 2021.  425   425 
Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 409,774,099 shares issued and outstanding at June 30, 2022 and 393,850,475 shares issued and outstanding at December 31, 2021, respectively.  40,978   39,386 
Common stock payable 138,941 shares and 138,941 shares, respectively as of June 30, 2022 and December 31, 2021.  14   14 
Additional paid-in capital  18,118,191   17,132,434 
Accumulated deficit  (15,317,359)  (14,544,604)
Accumulated other comprehensive loss  (8,633)  - 
Total stockholders’ equity 2,833,616   2,627,655 
Total liabilities and stockholders’ equity $5,399,011  $4,673,961 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

4

STATEMENTS OF CASH FLOWS

BROWNIES MARINE GROUP, INC. AND SUBSIDIARIESFOR THE THREE MONTHS ENDED MARCH 31,

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(unaudited)

THREE AND SIX MONTHS ENDED JUNE 30

  2023  2022 
Cash flows provided by operating activities:        
Net loss $(327,922) $(444,092)
Adjustments to reconcile net loss to cash used in operating activities:        
Depreciation and amortization  36,966   33,859 
Amortization of debt discount  2,764   922 
Amortization of right-of-use asset  75,765   57,267 
Common stock issued for services  -   35,500 
Reserve for slow moving inventory  -   4,528 
Reserve for Nomad recall  (74,200)  - 
Stock Based Compensation - Options  11,034   230,034 
Shares issued for accrued interest in convertible notes  8,336   - 
Changes in operating assets and liabilities        
Change in accounts receivable, net  (53,898)  (68,168)
Change in accounts receivable - related parties  (44,405)  161 
Change in inventory  206,024   (138,460)
Change in prepaid expenses and other current assets  (6,419)  (166,342)
Change in other assets  -   (3,733)
Change in accounts payable and accrued liabilities  (132,934)  126,696 
Change in customer deposits and unearned revenue  62,412   104,495 
Change in long term lease liability  (72,399)  (57,425)
Change in other liabilities  8,756   13,656 
Change in accounts payable - related parties  (13,761)  (19,235)
Net cash used in operating activities  (313,881)  (290,337)
Cash flows used in investing activities:        
Purchase of fixed assets  (5,069)  (2,884)
Net cash used in investing activities  (5,069)  (2,884)
Cash flows from financing activities:        
Proceeds from issuance of units  200,000   - 
Proceeds from exercise of Warrants  -   265,000 
Repayment of debt  (17,842)  (10,648)
Net cash acquired in financing activities  182,158   254,352 
Net change in cash  (136,792)  (38,869)
Cash, beginning balance  484,427   643,143 
Cash, end of period $347,635  $604,274 
Supplemental disclosures of cash flow information:        
Cash paid for interest $6,860  $3,454 
Cash paid for income taxes $-  $- 
Supplemental disclosure of non-cash financing activities:        
Common Stock issued for payment of convertible note interest $8,336  $- 
Equipment obtained through financing $

63,689

  $- 

(UNAUDITED)

                 
  Three months ended June 30,  Six months ended June 30, 
  2022  2021  2022  2021 
Net revenues                
Net revenues $2,110,575  $1,359,745  $3,812,139  $2,106,098 
Net revenues - related parties  290,663   353,173   564,068   557,589 
Total net revenues  2,401,238   1,712,918   4,376,207   2,663,687 
Cost of net revenues                
Cost of net revenues  1,331,847   876,646   2,453,485   1,385,715 
Cost of net revenues - related parties  138,025   169,699   259,199   275,130 
Royalties expense - related parties  17,824   28,013   30,613   39,606 
Royalties expense  50,708   41,251   94,316   54,955 
Total cost of revenues  1,538,404   1,115,609   2,837,613   1,755,406 
Gross profit  862,834   597,309   1,538,594   908,281 
Operating expenses                
Selling, general and administrative  1,177,601   823,607   2,283,340   1,560,642 
Research and development costs  4,373   21,312   8,292   42,419 
Total operating expenses  1,181,974   844,919   2,291,632   1,603,061 
Income (Loss) from operations  (319,140)  (247,610)  (753,038)  (694,780)
Other (income) expense, net                
Gain on settlement of debt  -   -   -   10,000.00 
Gain on the forgiveness of PPP loan  -   159,600   -   159,600.00 
Interest expense  (9,523)  (1,795)  (19,716)  (5,606)
Income (Loss) income before provision for income taxes  (328,663)  (89,805)  (772,754)  (530,786)
Provision for income taxes  -   -   -   - 
Net Income (Loss)  (328,663)  (89,805)  (772,754)  (530,786)
Loss on foreign currency contract  (10,220)  -   (8,633)  - 
Comprehensive loss  (338,883)  (89,805)  (781,387)  (530,786)
Basic income (loss)per common share $(0.00) $(0.00) $(0.00) $(0.00)
Basic weighted average common shares outstanding  406,439,244   337,489,134   399,061,998   314,941,270 
Diluted income (loss) per common share $(0.00) $(0.00) $(0.00) $(0.00)
Diluted weighted average common shares outstanding  406,439,244   337,489,134   399,061,998   314,941,270 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

57

BROWNIES MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(UNAUDITED)

                                         
                   Common Stock   Additional   Accumulated Other Comprehensive       Total 
  

Preferred Stock

   

Common Stock

   

Payable

   Paid-in   Income   Accumulated   Stockholder’s 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   Amount   

Capital

   

(Loss)

   

Deficit

   Equity

 
December 31, 2021  425,000  $425.00   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  $40,978   138,941  $14  $18,118,191  $(8,633) $(15,317,359) $2,833,616 

              Common Stock Additional        Total 
  

Preferred Stock

  

Common Stock

  

Payable

  Paid-in     Accumulated  Stockholders’ 
  Shares  Amount  Shares  Amount  Shares  Amount  Capital    Deficit  Equity 
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 
Beginning balance  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)
Net Income (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 
Ending balance  425,000  $425   343,279,052  $34,330   138,941  $14  $14,456,378  $-  $(13,486,923) $1,004,224 

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements

6

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWSFINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30,March 31, 2023

(UNAUDITED)

         
  2022  2021 
Cash flows provided by operating activities:        
Net loss $(772,754)  (530,786)
Adjustments to reconcile net loss to cash used in operating activities:        
Depreciation and amortization  66,802   13,396 
Amortization of debt discount  1,844   - 
Amortization of right-of-use asset  104,777   51,581 
Shares issued for services  47,501   125,000 
Reserve (recovery) for bad debt  -   28,554 
Reserve for slow moving inventory  26,217   - 
Stock Based Compensation - Options  520,739   475,875 
Stock based compensation - stock grant  11,060   - 
Shares issued for accrued interest in convertible notes  23,048   - 
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  (153,542)  (179,482)
Change in accounts receivable - related parties  2,179   (109,001)
Change in inventory  (345,004)  (120,940)
Change in prepaid expenses and other current assets  (306,081)  (250,909)
Change in other assets  (3,733)  3,000 
Change in accounts payable and accrued liabilities  460,227   217,684 
Change in customer deposits and unearned revenue  136,572   (7,787)
Change in long term lease liability  (105,093)  23,938 
Change in other liabilities  15,815   (51,581)
Change in accounts payable - related parties  (5,831)  84,220 
Net cash used in operating activities  (275,257)  (396,838)
Cash flows used in investing activities:        
Cash used in asset acquisition  (30,000)  - 
Purchase of fixed assets  (1,946)  (14,591)
Net cash used in investing activities  (31,946)  (14,591)
Proceeds from issuance of units  -   275,000 
Proceeds from exercise of Warrants  265,000   - 
Repayment on notes payable  -   (25,000)
Repayment of debt  (26,373)  (22,096)
Net cash provided by financing activities  238,627   227,904 
Net change in cash  (68,576)  (183,525)
Cash, beginning balance  643,143   345,187 
Cash, end of period $583,765   161,662 
Supplemental disclosures of cash flow information:        
Cash Paid for Interest $19,716   4,344 
Cash Paid for Income Taxes $-   - 
Supplemental disclosure of non-cash financing activities:        
Operating lease obtained for operating lease liability $23,294  $- 

Shares issued for asset acquisition

 $120,000   - 
Shares issued for payment of convertible note interest $23,048   - 
Fixed asset purchase down payment through the issuance of debt $-  $37,098 
Shares issued for the conversion of convertible debentures and accrued interest $-  $75,331 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

(UNAUDITED)

7

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 industrialindustrial. 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, 20212022 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 ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 for a broader discussion of ourthe Company’s business and the risks inherent in such business. The results of operations for the three months ended March 31, 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 accounting principles generally accepted in the United States of AmericaGAAP 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 $250,000per EIN. At June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company had approximately $22,700no and $205,500, respectivelyamount 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.

The foreign currency forward hedging contracts outstanding as of June 30, 2022 have settlement dates within 6 months. The spot rate components of these foreign currency forward contracts are designated as cash flow hedges and any unrealized gains or losses are reported in other comprehensive income and reclassified to the Consolidated Statement of Income in the same periods during which the underlying hedged transactions affect earnings. If a hedging relationship is terminated with respect to a foreign currency forward contract, accumulated gains or losses associated with the contract remain in OCI until the hedged forecasted transaction occurs and are reclassified to operations in the same periods during which the underlying hedged transactions affect earnings.

Foreign currency forward contracts entered into to hedge cost of goods purchases were as follows as of June 30, 2022 and December 31, 2021:

Schedule of Foreign Currency Forward Contracts

         
  Notional Amount 
Foreign Currency June 30, 2022
(unaudited)
  December 31, 2021 
Euro $181,615   - 
Total $181,615  $     - 

9

Accounts receivable

 

Accounts receivable consist of amounts due from the sale of all of our

The Company manufactures and sells its products to wholesalea 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 retail customers. Thecompiled 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 March 31, 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 doubtful accounts is estimated based on historical customer experience and industry knowledge. The allowances for doubtful accountsexpected credit losses at March 31, 2023 totaled $46,55528,558 and $46,555 at June 30, 2022 and December 31, 2021, respectively..

 

Inventory

 

Inventory consists of the following:

 Schedule of Inventory

        March 31, 2023
(unaudited)
 

December 31,

2022

 
 June 30, 2022
(unaudited)
 December 31,
2021
      
     
In-Transit inventory $204,562  $130,000 
Raw materials 1,000,674 1,144,190  $892,859  $1,207,957 
Work in process 84,243 99,858   72,041   80,727 
Finished goods 985,387 521,212   1,195,068   1,077,308 
Rental Equipment  48,602  -   55,893   55,893 
Inventory, net $2,323,468 $1,895,260  $2,215,861  $2,421,885 

 

Revenue Recognition

 

We account for revenuesThe Company recognizes revenue in accordance with Accounting Standards Codification (ASC)ASC Topic 606 “RevenueRevenue from Contracts with Customers” and all the related amendments. This standards core principle is that a company should recognizeCustomers. The Company recognizes revenue when it transfers promised goodsperformance 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 services to customers in antitle is transferred based on the commercial terms. Revenue is measured as the amount that reflectsof consideration the consideration to which the companyCompany expects to receive.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.

9

A breakdown of the total revenue between related party and non-related party revenue is as follows:

Schedule of Total Revenue between Related Party and Non-Related Party Revenue

  

March 31, 2023

  

March 31, 2022

 
  (unaudited)  (unaudited) 
Revenues $1,427,963  $1,701,564 
Revenues - related parties  211,090   273,405 
Total Revenues $1,639,053  $1,974,969 

See further disaggregate revenue disclosures by segment and product type in Note 16.

 

We recognizeCost of Sales

Cost of sales consists of the salecost of the components of finished goods, the costs of raw materials utilized in the manufacture of products, under single performance obligations upon shipmentin-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 units as that is when ownership is transferredCompany’s finished products, inventory allowance for excess and our performance is completed. Revenues from repairobsolete products, and maintenance activities is recognized whenroyalties paid on licensing agreements. Components account for the repairs are completedlargest portion of the cost of sales. Components include plastic molded parts, gas powered engines, aluminum pressure bottles, electronic parts, batteries and the units have been shipped.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:

Schedule of Related Party and Non-Related Party Royalty Expense

  

March 31, 2023

  

March 31, 2022

 
  (unaudited)  (unaudited) 
Cost of revenues $1,071,068  $1,121,638 
Cost of revenues - related parties  108,925   121,174 
Royalty expense - related parties  10,212   12,789 
Royalty expense  34,823   43,608 
Total cost of revenues $1,225,028  $1,299,209 

Lease Accounting

 

We accountThe Company accounts for leases in accordance with ASC 842, “Leases”. 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.

 

We categorizeThe Company categorizes leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that would allow usthe 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. WeThe Company did not have any finance leases as of June 30, 2022. OurMarch 31, 2023. The Company’s leases generally have terms that range from three years for equipment and five to twenty years for property. WeThe Company elected the accounting policy to include both the lease and non-lease components of ourits 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.

 

10

When we havethe 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, we considerit 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, 2022 theMarch 31, 2023, lease expenses were approximately $64,500 and $128,70070,400, respectively, and approximately $43,000 and $78,00064,200 for the three and six months ended June 30, 2021, respectively.March 31, 2022. Cash paid for operating liabilities for the sixthree months ended June 30, 2022March 31, 2023 was approximately $128,40089,570 and approximately $32,90064,400 for the sixthree months ended June 30, 2021.March 31, 2022.

10

 

Supplemental balance sheet information related to leases was as follows:

Schedule of Supplemental Balance Sheet Information

Operating Leases 

March 31, 2023

 
     (unaudited) 
Operating Leases 

June 30, 2022

(unaudited)

 
Right-of-use assets $372,992  $1,057,327 
        
Current lease liabilities $214,061  $268,202 
Non-current lease liabilities  159,322   792,502 
Total lease liabilities $373,383  $1,060,704 

 

Stock-Based Compensation

 

We accountThe Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”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.

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 earningsloss 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 earningsloss 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,March 31, 2023 and March 31, 2022, and June 30, 2021, 245,847,251274,150,814 and 205,855,020244,052,947, 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.

 

11

Recent accounting pronouncements

 

ASU 2016-13 Current Expected Credit Loss (ASC326)

In December 2021, the FASB issued andan 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 effectivewas adopted on January 1, 2023. The Company is evaluating2023 with no effect to the changes from this standard to determine the impact on its consolidated financial statements and related disclosuresstatements.

ASU 2019-12 Income Taxes (Topic 740)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 December 2019,August 2020, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the2020-06, 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 Income Taxes (“Convertible Instruments and Contracts on an Entity’s Own Equity. The ASU 2019-12”), which is intended to simplify various aspects related tosimplifies accounting for income taxes.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 2019-12 removes certain exceptionssettlement conditions that are required for equity contracts to qualify for the general principlesderivative 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 Topic 740 and also clarifies and amends existing guidance to improve consistent application. Thiscertain areas. The new guidance is effective for fiscal years andbeginning after December 15, 2023, including interim periods within those fiscal years, beginning after December 15, 2020, withand early adoption is permitted. The Company determined thatis currently evaluating the impact of the adoption of the standard has noon 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 its consolidatedour financial statements and related disclosures.upon adoption or are not applicable.

 

Note 3. Going Concern

 

The accompanying condensed 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 sixthree months ended June 30, 2022,March 31, 2023, the Company incurred a net loss of $772,754327,922 of which $520,739 is non-cash stock related compensation and shares issued for service.. At June 30, 2022,March 31, 2023, the Company had an accumulated deficit of $15,317,35916,765,417. Despite a working capital surplus of approximately $1,792,3091,320,817 at June 30, 2022,March 31, 2023, the continued losses and cash used in operations raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to 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 condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

11

 

Note 4. Related Party Transactions

 

The Company sells products to BrowniesBrownie’s Southport Divers, BrowniesBrownie’s Yacht Toys and BrowniesBrownie’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 $12.1211,090 or 12.9% and $20.6273,405 or 13.8% of the net revenues for the three months ended June 30,March 31, 2023 and March 31, 2022, and June 30, 2021, respectively and 12.9% and 20.9% for the six months ending June 30 2022 and 2021, respectively. Accounts receivable from these entities totaled $72,34497,484 and $75,79239,180, at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.

12

 

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 $4462,349 and $1,5092,408 at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.

 

The Company has an outstanding accounts receivable to Charles Hyatt for $2,332 as of June 30, 2022 and $0 at December 31, 2021. This amount was paid in full on August 19, 2022.

had

The Company had accounts payable to related parties of $31,43718,571 and $37,26715,614 at June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The balance payable at June 30, 2022 isMarch 31, 2023 was comprised of $18,40510,074 due to 940 A, $2,980 due to BGL, $5,441 due to Robert Carmichael and $10,051.9276, due to 940, LLC and $2,980 to BGL.Blake Carmichael. At December 31, 2021 this account2022, the balance payable was comprised of $7,635 due to 940 A, $2,980 due to BGL and $5,000 due to Robert Carmichael, and $32,267 due to BGL.Carmichael.

 

The Company has exclusive license agreements with 940 A to license the trademark “Brownies“Brownie’s Third Lung”, “Tankfill”, “Brownies“Brownie’s Public Safety” and various other related trademarks as listed in the agreements. The agreements provide that the Company pay 940 A2.5% of gross revenues per quarter as a royalty. Total royalty expense for the three months ended June 30,March 31, 2023 and March 31, 2022 and 2021 werewas $17,82410,212 and $28,031, respectively. For the six months ending June 30, 2022 and 2021 royalty expense for this entity totaled $30,613 and $39,60612,789, respectively. The accrued royalty for June 30, 2022March 31, 2023 was approximately $11,8004,785 and is included in other liabilities.

 

On February 2,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. There were payments totaling $1,537 made with products in kind during the three months ended March 31, 2023.

On January 18, 2023 and February 18, 2023, the Company issued to Charles Hyatt, a Company director, an aggregate of 10,000,00011,428,570 shares from theunits, 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 warrant at $0.0250.0175 per share in consideration of $250,000200,000.

 

On February 2,March 31, 2022, the Company issued Grace Hyatt, the adult child of Charles Hyatt, a director, 600,00061,204 shares fromof common stock to Robert Carmichael for payment of interest on the exerciseconvertible demand note for the three months ending March 31, 2022. The fair value of a warrant atthese shares was $0.025 per share in consideration of $15,0001,336.

 

Note 5. Convertible Promissory Notes and NotesLoans Payable

 

Convertible Promissory Notes

 

Convertible promissory notes consisted of the following at June 30, 2022:March 31, 2023:

 Schedule of Convertible Debentures

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.  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. 
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   (8,815)  337,685   -   (3) 9/03/24  8%  346,500   (12,355) $346,500  $(5,834) $340,666   -   (1)
9/03/21 9/03/24  8%  3,500   (125)  3,500   (87)  3,413   -   (4) 9/03/24  8%  3,500   (125)  3,500   (62)  3,438   -   (2)
9/30/22 Demand  8%  66,793   (19,245)  65,256   (16,043)  49,213   -   (3)
               $350,000  $(8,902) $341,098  $-                    $415,256  $(21,939) $393,317  $-     

 

(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. 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.

12

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 done timely by the Company. The lender will be 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 will be 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. Payments onThe Company is required to make quarterly payments under the note are to be equivalentin an amount equal to 50% of the adjusted net profit of SSI payable calendar quarterly.SSI. Interest is payable quarterly in shares of common stock of the Company at a conversion price of $0.051272 per share, to be paid quarterly.share. The note holder may convert outstanding principal and interest into shares of common stock 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.

 

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Schedule of Future Amortization of Notes Payable

  Payment Amortization 
2023 (9 months) $- 
2024  346,500 
Total Note Payments $346,500 
Current portion of note payable  - 
Non-Current Portion of Notes Payable $346,500 

(4)(2)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. Payments onThe Company is required to make quarterly payments under the note are to be equivalentin an amount equal to 50% of the adjusted net profit of SSI payable calendar quarterly.SSI. Interest is payable quarterly in common stock of the Company at a conversion price of $0.051272 per share, to be paid quarterly.share. The note holder may convert outstanding principal and unpaid interest into shares of common stock 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.

Schedule of Future Amortization of Notes Payable

  Payment Amortization 
2023 (9 months) $- 
2024  3,500 
Total Note Payments $3,500 
Current portion of note payable  - 
Non-Current Portion of Notes Payable $3,500 

(3)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.

 

LoanLoans 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 “Marlin Note”). The equipment finance agreement contains customary events of default. The loan balance was $12,305 as of June 30, 2022.

 Schedule of Future Amortization of Loans Payable

     

Mercedes BMG

(1)

 

Navitas BLU3

(2)

 NFS SSI (3) 

Navitas 2022 BLU3

(4)

 Total 
 Payment Amortization 
2022 (6 months remaining)  12,305 
2023  - 
2023 (9 months) $8,376  $10,550  $16,994  $14,261  $50,182 
2024  -   11,168   16,629   26,279   21,228   75,304 
2025  -   8,687   18,024   12,328   23,611   62,649 
2025 and thereafter  - 
2026  -   -   6,007   -   -   6,007 
Total Loan Payments $12,305  $28,231  $51,210  $55,601  $59,100  $194,142 
Current portion of Loan payable  (12,305)
Current Portion of Loan Payable $(11,169) $(14,270) $(23,154) $(19,361) $(67,954)
Non-Current Portion of Loan Payable $-  $17,062  $36,940  $32,447  $39,739  $126,188 

 

(1)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 is for $55,841 with a zero interest rate payable over 60 months with a monthly payment of $931 and is personally guaranteed by Mr. Carmichael. The loan balance as of March 31, 2023 was $28,231 and $31,023 as of December 31, 2022.

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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 as of June 30, 2022 is $37,538.

Schedule of Future Amortization of Loans Payable

     
  Payment Amortization 
2022 (6 months remaining) $6,825 
2023 $11,168 
2024 $11,168 
2025 and thereafter $8,684 
Total note payments $37,538 
Current portion of note payable $(11,168)
Non-Current Portion of notes payable $26,370 

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 “Navitas Note”). The equipment finance agreement contains customary events of default. The agreement was fully funded as of September 30, 2021.

Schedule of Future Amortization of Loans Payable

     
  Payment Amortization 
2022 (6 months remaining)  6,139 
2023  15,342 
2024  16,629 
2025  18,204 
2026  6,007 
Total Note Payments $62,141 
Current portion of Note payable  (14,736)
Non-Current Portion of Note Payable $47,405 

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 has determined that they are unable to supply the equipment, and the purchase order for this equipment was cancelled in May 2022. The lessor initially funded fifty percent 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 six months ending June 30, 2022, the Company wrote off approximately $6,300 related to fees for cancellation of this financing.

(2)On May 19, 2021, subsidiary BLU3, executed an equipment finance agreement to finance the purchase of certain plastic molding equipment through Navitas Credit Corp. (“Navitas”). The amount financed is $75,764 payable over 60 equal monthly installments of $1,611 (the “Navitas 1”). The equipment finance agreement contains customary events of default. The loan balance as of March 31, 2023 was $51,210 and $54,930 as of December 31, 2022.
(3)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. The loan balance as of March 31, 2023 and December 31, 2022 was $55,601 and $60,804, respectively.
(4)On December 12, 2022, BLU3 executed an equipment finance agreement to finance the purchase of certain plastic molding equipment through Navitas Credit Corp. (“Navitas”). The amount financed is $63,689 payable over 36 equal monthly installments of $2,083 (“Navitas 2”). The equipment finance agreement contains customary events of default. The loan balance as of March 31, 2023 was $59,100 and $63,689 as of December 31, 2022.

 

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 shareholders are unable to sell or transfer shares based upon the following:

Summary of Holding Period and Shares Eligible To Sold

Holding Period
from Closing Date
Percentage of shares
eligible to be sold or transferred
6 monthsUp to 12.5%
9 monthsUp to 25.0%
24 monthsUp to 75.0%
36 monthsUp to 100.0%

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The leak-out restriction may be waived by the Company, upon written request by a Seller, if the Company’s common stock is trading on the NYSE American or Nasdaq, and has a rolling 30-day average trading volume of 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 Merger 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:

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

     
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 volume weighted average price (“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.

15

As of June 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 $150,000to the LLC Members. The purchase price was paid by (a) the issuance to the LLC Members of an aggregate of 3,084,831shares 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:

 

Summary of Holding Period and Shares Eligible Toto Sold

Holding Period
from Closing Date
Percentage of shares
eligible to be sold or transferred
6 monthsUp to 25.0%25.0%
9 monthsUp to 50.0%50.0%
12 monthsUp to 100.0%100.0%

15

 

The leak-out restriction may be waived by the Company, upon written request by a Seller,LLC Member, 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 ValueWhile the agreement was structured as an asset purchase agreement, we also assumed the operations of Consideration TransferredGulf Coast Scuba resulting in the recognition of a business combination. During 2022 we recognized revenue of $212,876 and Recordingnet loss of Assets Acquired$75,579 associated with this business. The business combination was not material for purposes of disclosing pro forma financial information. In connection with this transaction, we recognized the following assets and liabilities:

 

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:

Summary of Asset Acquisition

  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.

Schedule of Business Acquisition, Pro Forma Information

  Three months ended June 30, 2021  Six months ended
June 30, 2021
 
Revenue $2,423,956  $3,730,805 
Net Loss $(340,186) $(842,500)
Basic and Diluted Loss per Share $(0.00) $(0.00)
Basic and Diluted Weighted Average Common Shares Outstanding  367,879,407   345,331,543 

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.

Schedule of Business Acquisition, Pro Forma Information

  Three months ended June 30, 2022  Six months ended
June 30, 2022
 
Revenue $2,423,956  $4,452,986 
Net Loss $(326,829) $(829,143)
Basic and Diluted Loss per Share $(0.00) $(0.00)
Basic and Diluted Weighted Average Common Shares Outstanding  409,524,075   402,146,829 

16

  Fair Value 
Rental Inventory $48,602 
Fixed Assets  50,579 
Retail Inventory  60,819 
Right of use asset  29,916 
Lease liability  (29,916)
Net Assets Acquired $160,000 

 

Note 7. Goodwill and Intangible Assets, Net

 

The following table sets for the changes in the carrying amount of the Company’ Goodwill for the quarterthree months ended June 30, 2022.March 31, 2023.

 Summary of Changes in Goodwill

     
  2022 
Balance, January 1 $249,986 
Addition:  - 
Balance, June 30 $249,986 

  2023 
Balance, January 1 $249,986 
Addition:  - 
Balance, March 31 $249,986 

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 three months ended March 31, 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, 2022:March 31, 2023:

Summary of Intangible Assets

 Amortization Period (Years) Cost Accumulated Amortization Net Book Value  Amortization Period (Years) Cost Accumulated Amortization Net Book Value 
                  
Intangible Assets Subject to amortization                                
Trademarks  15  $121,000  $(6,678) $114,322   15  $121,000  $(12,728) $108,272 
Customer Relationships  10   600,000   (50,000)  550,000   10   600,000   (95,000)  505,000 
Non-Compete Agreements  5   22,000   (3,667)  18,333   5   22,000   (6,967)  15,033 
Total     $743,000  $(60,354) $682,655      $743,000  $(114,695) $628,305 

 

The aggregate amortization remaining on the intangible assets as of June 30, 2022March 31, 2023 is a follows:

Schedule of Estimated Intangible Assets Amortization ExpensesExpense

    Intangible Amortization 
 Intangible Amortization 
2022 (6 months remaining) $36,225 
2023 72,467 
2023 (9 months remaining)  54,394 
2024 72,467   72,467 
2025 72,467   72,467 
2026 71,367   71,367 
2027  68,066 
Thereafter  357,662   289,544 
Total $682,655  $628,305 

 

Note 8. Shareholders’Stockholders’ Equity

 

Common Stock

 

On January 17, 2022,18, 2023 and February 18, 2023, the Company issued a law firmto Charles Hyatt, an aggregate of 1,000,00011,428,570 sharesunits, with each unit consisting of one share of common stock withand 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 sharestwo-year common stock purchase warrant to purchase one share of common stock with a fair valueat an exercise price of $4,0000.0175 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 $250,000200,000.

 

On February 2, 2022,March 31, 2023, the Company issued Grace Hyatt, the adult child of Charles Hyatt, a director, 600,00061,204 shares fromof common stock to Robert Carmichael for payment of interest on the exerciseconvertible demand note for the three months ending March 31, 2023. The fair value of a warrant atthese shares was $0.025 per share in consideration of $15,0001,336.

 

On February 28, 2022,March 31, 2023, 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.

17

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.

As of June 30, 2022, the Company issued 449,522137,000 shares of common stock to the holders of convertible notes for payment of interest through June 30,for the three months ending December 31, 2022. The fair value of these shares werewas $23,0487,000.

 

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.

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.held. The Company’s common stock and Series A Convertible Preferred Stock vote together as on any matters submitted to our shareholders for a vote.shareholders. As of June 30, 2022,March 31, 2023, and December 31, 2021,2022, 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.

 

17

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.

Equity Compensation Plan Information as of June 30, 2022:March 31, 2023:

 Schedule of Equity Compensation Plan Information

  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  3,592,647  $.0401   21,407,353 
Equity Compensation Plans Not Approved by Security Holders         
Total  3,592,647  $.0401   21,407,353 

18

  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  3,467,647  $0.0400   21,532,353 
Equity Compensation Plans Not Approved by Security Holders  230,971,520   0.0362    
Total  234,439,167  $0.0362   21,532,353 

 

Options

 

On April 14, 2020, theThe 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”)has issued options to purchase up to an aggregate ofapproximately 125,000,000234,439,167 shares of the Company’s common stock at an exerciseaverage price of $0.0450.036 per share,with a fair value of whichapproximately $69,000. For the rightthree months ended March 31, 2023, the Company issued no options to purchase 75,000,000shares. Upon exercise, shares of new common stock is subject to vesting uponare issued by 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.Company.

 

The fair valueFor the three months ended March 31, 2023 and 2022, the Company recognized an expense of approximately $11,000 and $230,000, respectively, of non-cash compensation expense (included in General and Administrative expense in the Carmichael Option on the dateaccompanying Consolidated Statement of the grant was $4,370,109 using theOperations) determined by application of a Black-Scholes option pricing model with the following assumptions: (i) risk freeinputs: exercise price, dividend yields, risk-free interest rate, and expected annual volatility. As of March 31, 2023, the Company had approximately $3,763,100 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 .26%, (ii) expected life of 1.51.2 years, (iii) dividend yield of 0%, and (iv) expected volatility of 320%.years. The Company analyzeduses straight-line amortization of compensation expense over the requisite service period for time-based options. For performance-based options the Company evaluates the likelihood that theof a 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 alsoqualification being met, and fully expensed through December 31, 2021. Forwill establish the three months ended June 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 six months ended June 30, 2022 for this option was $218,505 and $437,010, 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 sharesbased on that evaluation. The maximum contractual term of the Company’s common stock at an exercise price of $options is 0.01845 per share, of which the rightyears. The Company recognizes forfeitures and expirations as they occur. There are options to purchase approximately 10,000,000107,790,000 shares that have vested as 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:

19

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.March 31, 2023.

 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards and warrant issuances. The calculation of the fair value of the Bonus Optionsawards using the Black-Scholes option-pricing model is affected by the Company’s stock price on the date of grant as well as assumptions regarding 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 June 30, 2022, it was deemed that the Company met the qualifications for four quarters for Tranches 1 and 2 $121,668. For the three and six months ended June 30, 2022, the Company recognized $38,934 and $38,934, respectively.following:

 Schedule of Valuation Assumptions of Options

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 six months ended June 30, 2022 was $4,142 and $8,284, respectively.

  Three Months ended March 31, 
  2023  2022 
Expected volatility  172.0% - 346.4%  172.0346.4%
Expected term  1.505.0 Years   1.55.0 Years 
Risk-free interest rate  0.16% - 4.64%  0.16% - 2.10%
Forfeiture rate  0.17%  0.03%

 

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 of December 31, 2021, and did not recognize any additional expense for the three and six months ended June 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 June 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 six months ended June 30, 2022 there were no material changes to vesting qualifications and no stock option expense was recognized.

2018

 

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 six months ended June 30, 2022 was $1,494 and $2,989, 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 pursuantdetermined with reference 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) expectedhistorical volatility of 339.21%. The stock options expense recognized for the three and six months ended June 30, 2022 was $1,977 and $3,953, 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 uponstock. The Company uses historical data to estimate option exercise and employee termination within the achievementvaluation model. The expected term of certain revenue and EBITA financial metrics.options granted represents the period of time that options granted are expected to be outstanding. The fair value of the Buban Bonus Option was $374,786 using the Black-Scholes option pricing model with the following assumptions: (i) risk freerisk-free interest rate of .3150%, (ii) expectedfor periods within the contractual 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 six months ended June 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 six months ended June 30, 2022 was $3,150 and $6,300, 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 six months ended June 30, 2022 was $483 and $966, 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 Optionis based on the dateU.S. Treasury rate in effect at the time 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 six months ended June 30, 2022 was $283 and $565, respectively.

21

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 six months ended June 30, 2022 was $1,030 and $1,030, 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 recognized for the three and six months ended June 30, 2022 was $10,988 and $10,988, respectively.

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 six months ended June 30, 2022 was $9,720 and $9,720, respectively.grant.

 

A summary of the status of the Company’s outstanding stock options as of March 31, 2023 and December 31, 2021,2022 and changes during the three months ended June 30, 2022periods ending on such dates is presented below:as follows:

 Schedule of Outstanding Stock Option Activity

        Weighted    
     Weighted  Average    
     Average  Remaining  Aggregate 
  

Number of

Options

  

Exercise

Price

  

Contractual

Life in Years

  

Intrinsic

Value

 
Outstanding at December 31, 2021  233,128,266  $0.0362   2.23     
Granted  5,710,901   0.0281         
Forfeited  (400,000)  0.0354         
Exercised  -   -         
Cancelled  -   -         
Outstanding – December 31, 2022  238,439,167  $0.0360   1.43     
Exercisable – December 31, 2022  111,558,754  $0.0321   1.33  $68,994 
                 
Granted  -   -         
Forfeited  (4,000,000)  0.0229         
Exercised  -   -         
Cancelled  -   -         
Outstanding – March 31, 2023  234,439,167  $0.0362   1.21     
Exercisable – March 31, 2023  107,790,004  $0.0325   1.14  $265,633 

  Number of
Options
  Weighted
Average
Exercise Price
  Weighted
Average
Remaining
Contractual
Life in Years
  Aggregate
Intrinsic
Value
 
Outstanding – December 31, 2021  233,128,266  $0.0362   2.23  $795,201 
Granted  1,592,647   0.0353         
Forfeited  (125,000)            
Exercised  -   -         
Outstanding – June 30, 2022 (unaudited)  234,595,913  $0.0362   1.75     
Exercisable – June 30, 2022 (unaudited)  105,200,664  $0.0322   1.60  $1,022,422 

The following table summarizes information about employee stock options outstanding at March 31, 2023.

Summary of Exercise Price of Employee Stock Options Outstanding

Range of Exercise Price Number outstanding at December 31, 2022  Weighted average remaining life  Weighted average exercise price  Number exercisable at December 31, 2022  Weighted average exercise price  Weighted average remaining life 
$0.018 - $0.0225  70,730,020   2.00  $0.0182   45,730,020  $0.0181   1.62 
$0.0229 - $0.0325  5,093,254   4.27  $0.0268   5,024,504  $0.0267   4.29 
$0.0360 - $0.0425  25,530,893   3.32  $0.0398   6,166,730  $0.0396   3.26 
$0.0440 - $0.0531  133,085,000   0.28  $0.0455   50,868,750  $0.0450   0.12 
 Outstanding options  234,439,167   1.21   0.0362   107,790,004   0.0325   1.14 

At March 31, 2023, there was approximately $3,689,800 of unrecognized stock option expense which may be recognized only if the full vesting requirements for these options are met.

At March 31, 2023, there was approximately $64.200 of total unrecognized stock option expense which is expected to be recognized on a straight-line basis over a weighted-average period of 1.15 years.

19

 

Warrants

 

On September 1, 2021,January 18, 2023 and February 18, 2023, the Company issued to Charles F. Hyatt, a director,an aggregate of 10,000,00011,428,570 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 $0.0250.0175 per share in consideration of $250,000200,000.

On September 1, 2021, the Company issued Ms. Grace Hyatt, the adult child of Charles Hyatt, 600,000 units, each unit consisting 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, a director, 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, a director, 600,000 shares of common stock upon the exercise of a warrant at $0.025 per share in consideration of $15,000.

22

 

A summary of the Company’s warrants as of December 31, 20212022 and changes during the sixthree months ended June 30, 2022March 31, 2023 is presented below:

 Schedule of WarrantsWarrant Activity

 Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value  Number of
Warrants
 Weighted
Average Exercise
Price
 Weighted
Average
Remaining
Contractual
Life in Years
 Aggregate
Intrinsic
Value
 
Outstanding – December 31, 2021  14,600,000  $0.025   1.67  $153,300 
Outstanding – December 31, 2022  18,255,951  $0.0245   1.55  $12,000 
Granted                  11,428,570  $0.0175         
Exercised  (10,600,000) $0.025           -   -         
Forfeited or Expired  -               -             
Outstanding – June 30, 2022  4,000,000  $0.025   1.19     
Exercisable – June 30, 2022  4,000,000  $0.025   1.19  $56,000 
Outstanding – March 31, 2023  29,684,521  $0.0247   1.52     
Exercisable – March 31, 2023  29,684,521  $0.0247   1.52  $109,714 

 

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, extendingwhich extended the term of the lease for an additional eighty-four months expiring until September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term.escalation.

 

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 amendmentAmendment 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,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 $50,70834,823 and $41,25143,608 for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, and $94,316 and $54,955 for the six months ended months ended June 30, 2022 and 2021, respectively.

 

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.

2320

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 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 and on November 5, 2022, Mr. Constable was issued an option to purchase 3,968,254 shares of the Company’s common stock at an exercise price of $0.0252 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 toof $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.agreement, and (iii) upon execution of the Carmichael 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 agreementagreement..

In addition, Blake Carmichael shall be entitled to receive a fivefive-year-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 A measurement was made for the first $2,000,000 paidthree months ended March 31, 2023 resulting 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.no additional vesting.

 

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 fivefive-year-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,Agreement.

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 $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.

24

 

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 thea three year lease for the property located at 259 Commercial Blvd,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 aFlorida for $2,816 per month base rent. The lease provides anexpired on March 31, 2023 and LBI is currently renting on a month to month basis. LBI has the option to renew the lease for an additionala two year term of two years with an increase of base rent byof 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 with 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.

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 $160,500 for such costs. During the three months ended March 31, 2023 the Company repaired and returned 520 units to customers resulting in a reduction of the reserve of $74,187.

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. AsThe settlement was fully paid during the second quarter of June 30, 2022 this settlement has been fully paid.2022.

 

Note 10. Segment Reporting

 

The Company has 5five 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 PortableUltra-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.

22

 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 retealretail store for the diving community.

25

 

Three Months Ended

June 30March 31

(unaudited)

Schedule of Segment Reporting Information

  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 $797,022  $976,973  $270,193  $207,565  $884,271  $528,380  $399,479  $-  $50,274  $-  $2,401,238  $1,712,918 
Cost of Revenue $(558,426)  (668,246)  (140,248)  (113,499)  (570,027)  (333,864)  (255,568)  -   (14,136)  -   (1,538,404)  (1,115,609)
Gross Profit  238,596   308,727   129,945   94,066   314,244   194,516   143,911   -   36,138   -   862,834   597,309 
Depreciation  4,369   4,748   -   -   4,478   2,419   24,096  -   -   -   32,943   7,167 
Income from Operations $(334,967) $(314,279) $41,705  $40,224  $17,461  $(41,248) $(46,576) $-  $3,237  $-   (319,140)  (315,303)

Six Months Ended

June 30

(unaudited)

 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 
 Legacy SSA Products High Pressure Gas Systems Ultra Portable Tankless Dive Systems Redundant Air Tank Systems Guided Tour Retail Total Company  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  2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 
Net Revenues $1,378,131  $1,443,016  $547,010  $357,693  $1,678,858  $862,978  $721,935  $-  $50,274  $-  $4,376,208  $2,663,687  $455,380  $581,109  $234,880  $276,817  $476,915  $794,587  $392,976  $322,456  $78,902  $-  $1,639,053  $1,974,969 
Cost of Revenue  (1,020,384)  (1,038,072)  (301,039)  (194,677)  (986,985)  (522,657)  (515,070)  -   (14,136)  -   (2,837,613)  (1,755,406)  (417,814)  (461,958)  (124,186)  (160,791)  (344,516)  (416,958)  (287,740)  (259,502)  (50,771)  -   (1,225,028)  (1,299,209)
Gross Profit  357,747   404,944   245,971   163,016   691,873   340,321   206,865   -   36,138   -   1,538,595   908,281   37,566   119,151   110,694   116,026   132,398   377,629   105,236   62,954   28,131   -   414,025   675,760 
Depreciation  8,739   8,560   -   -   8,956   4,836   49,107   -   -   -   66,802   13,396 
Depreciation/Amortization  3,913   4,370   -   -   5,043   4,478   29,166   25,011   1,607   -   39,730   33,859 
Income (loss) from operations $(704,557) $(758,430) $82,164  $49,590  $34,223  $14,060  $(168,105) $-  $3,237  $-   (753,038) $(694,780) $(114,275) $(369,590) $29,322  $40,459  $(103,210) $16,672  $(104,260) $(121,530) $(20,302) $-   (312,724) $(433,899)
                                          -                                               -     
Total Assets $1,535,945  $1,529,702  $540,583  $302,088  $1,236,449  $673,255  $1,825,787  $-  $260,247  $-  $5,399,011  $2,505,045  $1,312,440  $1,503,762  $400,082  $460,496  $878,287  $1,037,192  $2,506,422  $1,995,439  $222,497  $-  $5,319,729  $4,996,889 

Note 11. Subsequent Events

 

Alliance LeaseNone

 

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 and $63,375 was financed by NFS Leasing on August 15, 2022. The lease has a 33 month term beginning in August 2022 with a monthly lease 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.

2623

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. Actual future results may be materially different from what we expect. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by applicable law.

 

The management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

Overview

 

The Company owns and operates a portfolio of companies with a concentration in the industrial and recreational diving industry. The Company, through its subsidiaries, designs, tests, manufactures, and distributes recreational hookah diving, yacht-based scuba air compressors and nitrox generation systems and scuba and water safety products in the United States and internationally.

 

The Company has five subsidiaries focused on various sub-sectors:

 

 Brownie’s Third Lung - Surface Supplied Air (“SSA”)
 BLU3, Inc. - Ultra-Portable Tankless Dive Systems
 LW Americas - High Pressure Gas Systems
 Submersible Systems, Inc. - Redundant Air Tank Systems
 Live Blue, Inc. – Guided Tours and Retail

 

Our wholly owned subsidiaries do business under their respective trade names on both a wholesale and retail basis from our headquarters and manufacturing facility in Pompano Beach, Florida, a manufacturing facility in Huntington Beach, California, and a retail facility in Lauderdale-By-The-Sea, Florida.

 

The Company, through its wholly owned subsidiaries, designs, tests, and manufactures tankless dive systems, rescue air systems and yacht-based self-contained underwater breathing apparatus (“SCUBA”) air compressor and nitrox generation fill systems and acts assystems. In addition, the Company is the exclusive distributor for North and South America for Lenhardt & Wagner GmbH (“L&W”) compressors in the high-pressure breathing air and industrial gas markets. The Company is also building a guided tour operation that also includeincludes 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 June 30, 2022March 31, 2023 Compared to Three Months Ended June 30, 2021March 31, 2022

 

Net revenues increased 37.2%decreased 17.0% for the three months ended June 30, 2022March 31, 2023 as compared to the three months ended June 30, 2021March 31, 2022 as a result of a 67.4% increasedecrease in revenues in BTL, LWA and BLU3. The revenue decrease for BLU3 Inc.was 40% and can be directly attributed to the recall of the NOMAD dive system which took place during the fourth quarter of 2022. The recall has been resolved and BLU3 is in the process of repairing units as they are received 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 30.2% ascustomers. The sales loss is a result of the expansionslow ramp of its customer baseproduction of new units after the recall. BTL’s revenue reduction of 21.6% can be attributed to consumer concerns about the economy. While the first quarter is traditionally a slow selling period for BTL, economic uncertainties compounded the seasonal change. The loss of revenue in BLU3 and BTL was somewhat offset by increased revenue in SSI. This increase can be attributed to the additionmomentum of both SSI and LBI revenue which did not exist in 2021. the Company’s newest product, HEED3.

24

For the three months ended June 30, 2022,March 31, 2023, cost of net revenues was 64.1%74.7% as compared with the cost of net revenues of 65.1%65.8% for the three months ended June 30, 2021.March 31, 2022. The cost increase as a percentage of revenue, can be directly attributed to the cost of direct labor, which accounted for a larger portion of costs and significantly impacted the profit margin. Included in cost of net revenues are royalty expenses paid to Robert Carmichael which decreased 36.4%%20.1% for the three months ended June 30, 2022March 31, 2023 as compared to the three months ended June 30, 2021. March 31, 2022.

Gross profit margin was 35.9%25.3% for the three months ended June 30, 2022March 31, 2023 as compared to gross profit margin of 34.9%34.2% for the three months ended June 30, 2021.March 31, 2022. The slight improvementreduction in gross margin, is directly attributable to BTL’s margin of 1.0% as it relates8.2% and BLU3’s margin of 27.8%. Both BTL and BLU3 offered discounted pricing in order to revenue is a result of the production of more finished products, reducing direct labor cost per unit, primarily in LWA and the addition of LBI with margins of 71.9% formove inventory during the three months ended June 30, 2022.

27

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Net revenues increased 64.3% for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. This increase is a result of a 94.5% 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 52.9% as a result of the expansion of its customer base and the addition of SSI and LBI revenue which did not exist in 2021. These revenue increases were countered by a decrease of 4.5% in revenue for BTL. For the six months ended June 30, 2022, cost of net revenues was 64.8% as compared with the cost of revenues of 65.9% for the six months ended June 30, 2021. Included in cost of net revenues are royalty expenses paid to a third party which increased 71.6% for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. Gross profit margin was 35.2% for the six months ended June 30, 2022 as compared to gross profit margin of 34.1% for the six months ended June 30, 2021. The slight improvement in gross margin, of 1.1% revenue is a result of a 1.8% margin increase in the BLU3 product line and the addition of LBI with margins of 71.9% for the six months ended June 30, 2022.March 31, 2023.

 

The following tables providesprovide net revenues, total costs of net revenues and gross profit margins for ourthe Company’s segments for the periods presented.

 

Net Revenues

 

 Three Months Ended
June 30,
  % of  Six Months Ended
June 30,
  % of   Three Months Ended
March 31,
  % of 
 2022  2021  Change  2022  2021  Change  2023  2022  Change 
 (unaudited)     (unaudited)     (unaudited)    
Legacy SSA Products $797,022  $976,973   (18.4)% $1,378,131  $1,443,016   (4.5)% $455,380  $581,109   (21.6)%
High Pressure Gas Systems  270,193   207,565   30.2%  547,010   357,693   52.9%  234,880   276,817   (15.1)%
Ultra-Portable Tankless Dive Systems  884,271   528,380   67.4%  1,678,858   862,978   94.5%  476,915   794,587   (40.0)%
Redundant Air Tank Systems  399,479   -   100.0%  721,935   -   100.0%  392,976   322,456   21.9%
Guided Tour Retail  50,274   -   100.0%  50,274   -   100.0%  78,902   -   100.0%
Total net revenues $2,401,238  $1,712,918   37.2% $4,376,207  $1,955,317   64.3% $1,639,053  $1,974,969   (17.0)%

 

Cost of revenues as a percentage of net revenues

 

 Three Months Ended
June 30,
  Six Months Ended
June 30,
  Three Months
Ended March 31,
 
 2022  2021  2022  2021  2023  2022 
 (unaudited) (unaudited)  (unaudited) 
Legacy SSA Products  70.1%  68.4%  74.0%  71.9%  91.8%  79.5%
High Pressure Gas Systems  51.9%  54.7%  55.0%  54.4%  52.8%  58.1%
Ultra-Portable Tankless Dive Systems  64.5%  63.2%  58.8%  60.6%  72.2%  52.5%
Redundant Air Tank Systems  64.0%  -   71.4%  -   73.2%  80.5%
Guided Tour Rental  28.1%  -   28.1%  -   64.4%  - 

 

Gross profit (loss) margins

 

  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
  2022  2021  2022  2021 
  (unaudited)  (unaudited) 
Legacy SSA Products  31.6%  31.6%  26.0%  28.1%
High Pressure Gas Systems  45.3%  45.3%  45.0%  45.6%
Ultra-Portable Tankless Dive Systems  36.8%  36.8%  41.2%  39.4%
Redundant Air Tank Systems  36.0%  -   28.7%  - 
Guided Tour Rental  71.9%  -   71.9%  - 

28

  Three Months
Ended March 31,
 
  2023  2022 
  (unaudited) 
Legacy SSA Products  8.2%  20.5%
High Pressure Gas Systems  47.2%  41.9%
Ultra-Portable Tankless Dive Systems  27.8%  47.5%
Redundant Air Tank Systems  26.8%  19.5%
Guided Tour Rental  35.7%  - 

 

SSA Products segment

 

Net revenue in this segmentRevenues decreased 4.1%21.6% for the sixthree months ended June 30, 2022March 31, 2023 as compared to the sixthree months ended June 30, 2021.March 31, 2022. The decrease can be primarily attributed to a 5.4%largest decrease in revenue came from the dealer segmentDirect to Consumer revenue channel of 31.7%. This decrease is likely attributable to economic concerns that were lingering from late 2022. Dealer revenue dropped 25.8% for the sixthree months ended June 30, 2022March 31, 2023 as compared to the same period in 2021. The decrease2022. Our dealers have indicated that they were taking a conservative approach in dealer orders can be attributedthe offseason to conserve cash for the 23.2% dropseason. BTL was able to stimulate some demand during the three months ended March 31, 2023 with a discounting program. Affiliate sales, while the smallest segment of revenue increased 149.8% for the three months ended June 30, 2022 as compared the same period in 2021. Many dealers increased purchases to prepare for the summer season during the first quarter of 2022, and held back with restocking orders as we believe there may be some trepidation regarding the economy. Affiliate sales, while down for the three months ending June 30, 2022March 31, 2023 as compared to the three months ended June 30, 2021 remain 32.2% over the six month results at June 30,March 31, 2022. Direct to consumer sales have also decreased for the six months ending June 30, 2022 as compared to the same period in 2021 we believe due to concerns over the economy.

 

25

Our

The costs of revenues as a percentage of net revenues in this segment increased from 71.9%79.5% to 74.0%91.8% for the sixthree months ended June 30, 2022March 31, 2023 compared to the sixthree months ended June 30, 2021March 31, 2022 due to a decrease in margins in the negative margin forDirect to Consumer and Dealer revenue channels, as a result of the affiliate sales channel.discounting to stimulate revenue.

 

A breakdown of the revenue channels for this segment are below. Direct to Consumer representrepresents items sold via our website, trade shows and walk-ins to our factory store. Dealer revenue represents sales to customers that we haveunder dealer agreements thatwhich typically operate with the lowers margin.have lower margins. Affiliates are resellers of our products that arewith which we do not in ahave formal dealer arrangement.arrangements.

 

  Net Revenue  

Cost of Sales as a % of

Net Revenue

  Margin 
  Three Months Ended
June 30,
2022
  Three Months Ended
June 30,
2021
  % change  Three Months Ended
June 30,
2022
  Three Months Ended
June 30,
2021
  Three Months Ended
June 30,
2022
  Three Months Ended
June 30,
2021
 
Dealers $510,902  $664,928   (23.2)%  73.4%  77.7%  26.6%  22.3%
Direct to Consumer (website included)  258,899   273,430   (5.3)%  57.7%  45.1%  42.3%  54.9%
Affiliates  27,221   38,615   (29.5)%  156.9%  74.3%  (56.9)%  25.7%
Total $797,022  $976,973   (18.4)%  71.1%  68.4%  28.9%  31.6%

  Net Revenue  

Cost of Sales as a % of

Net Revenue

  Margin 
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  % change  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
 
Dealers $868,755  $918,467   (5.4)%  78.2%  78.7%  21.8%  21.3%
Direct to Consumer (website included)  461,534   484,102   (4.7)%  63.3%  58.9%  36.7%  41.1%
Affiliates  47,842   40,447   18.3%  120.8%  74.5%  (20.8)%  25.5%
Total $1,378,131  $1,443,016   (4.5)%  74.0%  71.9%  26.0%  28.1%

29

  Revenue  Cost of Revenue as a % of Revenue  Margin 
  Three months ended March 31,
2023
  Three months ended March 31,
2022
  % change  Three months ended March 31,
2023
  Three months ended March 31,
2022
  Three months ended March 31,
2023
  Three months ended March 31,
2022
 
Dealers $265,372  $357,853   (25.8)%  99.4%  85.2%  0.6%  14.8%
Direct to Consumer (website Included)  138,487   202,635   (31.7)%  85.4%  70.5%  14.6%  29.5%
Affiliates  51,521   20,621   149.8%  69.6%  73.3%  30.4%  26.7%
Total $455,380  $581,109   (21.6)%  91.8%  79.5%  8.2%  20.5%

 

High Pressure Gas Systems segment

 

Sales of high-pressure breathing air compressors increased 52.9% in the six months ended June 30, 2022 compared with the six months ended June 30, 2021 as LWA was able to continue to supply its customers with their needs despite industry supply chain issues. The reseller segment while decreasing 9.4%decreased 15.1% for the three months ended June 30, 2022March 31, 2023 compared with the three months ended March 31, 2022. The drop in revenues can be directly attributed to a 74.7% decrease in Original Equipment Manufacturers, as this channel has proven to be inconsistent over the long term. The reseller channel remained consistent with prior periods with a .3% increase for the three months ended March 31, 2023 as compared to the same period in the prior year, showed an overall increase of 25.9% for the six months ended June 30, 2022 with2022. The Direct to Consumer channel increased orders through distribution customers in the US, South America, and the Caribbean. The Original Equipment Manufacturer segment continued to show growth with an increase of 205% for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 due to several orders shipped internationally to boat manufacturers. The direct to consumer segment, which includes yacht owners and direct to dive stores, increased 199.0%30.1% for the three months ended June 30, 2022March 31, 2023 as compared to the three months ended June 30, 2021 and increased 49.2% for the six months ended June 30,March 31, 2022, as comparedLWA is seeing an increase in sales to June 30, 2021.dive stores that have begun to reinvest in their operations after recouping from the challenges of COVID in 2020.

 

Costs of revenues as a percentage of net revenues in this segment showed a slight increasedecreased to 55.0%52.9% for the sixthree months ended June 30, 2022March 31, 2023 as compared to 54.4%58.1% for the sixthree months ended June 30, 2021.March 31, 2022. This increase can beis attributed to increased cost of transportation from suppliers andrevenue in the Direct to customersConsumer channel during the sixthree months ended June 30, 2022.March 31, 2023, which generally has a higher margin.

 

  Net Revenue  

Cost of Sales as a % of

Net Revenue

  Margin 
  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
  % change  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
 
Resellers $109,767  $121,118   (9.4)%  48.6%  53.0%  51.4%  47.0%
Direct to Consumers  130,816   43,749   199.0%  57.7%  68.2%  42.3%  31.8%
Original Equipment Manufacturers  29,610   42,698   30.7%  38.8%  45.6%  61.2%  54.4%
Total $270,193  $207,565   30.2%  51.9%  54.7%  48.1%  45.3%

  Net Revenue  

Cost of Sales as a % of

Net Revenue

  Margin 
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  % change  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
 
Resellers $239,540  $190,191   25.9%  51.7%  57.3%  48.3%  42.7%
Direct to Consumers  195,245   130,819   49.2%  58.4%  51.7%  41.6%  48.3%
Original Equipment Manufacturers  112,225   36,683   205.9%  57.1%  46.1%  42.9%  53.9%
Total $547,010  $357,693   52.9%  55.0%  54.4%  45.0%  45.6%
26

 

30

  Revenue  Cost of Revenue as a % of Revenue  Margin 
  Three months ended March 31,
2023
  Three months ended March 31,
2022
  % change  Three months ended March 31,
2023
  Three months ended March 31,
2022
  Three months ended March 31,
2023
  Three months ended March 31,
2022
 
Resellers $130,216  $129,773   0.3%  64.5%  54.4%  35.5%  45.6%
Direct to Consumers  83,790   64,429   30.1%  32.9%  55.9%  67.1%  44.1%
Original Equipment Manufacturers  20,874   82,615   (74.7)%  60.5%  65.5%  39.5%  34.5%
Total $234,880  $276,817   (15.1)%  52.9%  58.1%  47.1%  41.9%

 

Ultra Portable Tankless Dive Systems

 

Net revenueRevenue for the sixthree months ended June 30, 2022March 31, 2023 in the Ultra Portable Tankless Dive System segment showed growth of 94.5%decreased increased 40.0% as compared to the sixthree months ended June 30, 2021. The growthMarch 31, 2022 as a result of the loss of sales momentum from the recall of the NOMAD dive system in the fourth quarter of 2022. Revenue was down across all segments forchannels with the three and six months ended June 30, 2022 can be attributedlargest lost to the additionAmazon channel with a drop of the Nomad product line into those sales channels. The growth of 162.2% in the Dealer channel represents the continued expansion of the international dealer base. The growth in this segment of 156.8%47.5% for the three months ended June 30, 2022 represents salesMarch 31, 2023 as compared to new dealers and seasonal buy-in as dealers prepared for the summer season.same period in 2022.

 

Cost of revenues from this segment as a percentage of net revenues for the three and six months ended June 30, 2022 showed improvement over both the three and six months ended June 30, 2021, primarily dueMarch 31, 2023 increased to the impact of the cost and production efficiencies of the Nomad dive system and the resulting increase in margin as a percentage of revenue72.2% from 64.1% for the same periodsperiod in 20222022. The increase in cost of revenue as comparedit compares to 2021.revenue was impacted by direct labor costs, necessary in connection with the recalled products. In addition, BLU3 discounted its selling price in order to stimulate demand in all of its diving systems during the three months ended March 31, 2023.

 

  Net Revenue  

Cost of Sales as a % of

Net Revenue

  Margin 
  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
  % change  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
 
Direct to Consumer  220,950   188,466   17.2%  67.9%  53.9%  32.1%  46.1%
Amazon  274,444   188,467   45.6%  53.0%  61.90   47.0%  38.1%
Dealers  388,877   151,447   156.8%  70.6%  76.4%  29.4%  23.6%
Total $884,271  $528,380   67.4%  52.5%  63.2%  47.5%  36.8%

  Net Revenue  

Cost of Sales as a % of

Net Revenue

  Margin 
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  % change  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
 
Direct to Consumer $539,955  $340,665   58.5%  55.2%  52.2%  44.8%  47.8%
Amazon  449,120   259,265   73.2%  54.5%  61.8%  45.5%  38.2%
Dealers  689,783   263,048   162.2%  64.4%  70.1%  35.6%  29.9%
Total $1,678,858  $862,978   94.5%  58.8%  60.6%  41.2%  39.4%

31

  Net Revenue  Cost of Revenue as a % of Net Revenue  Margin as a % of Net Revenue 
  Three months ended March 31,
2023
  Three months ended March 31,
2022
  % change  Three months ended March 31,
2023
  Three months ended March 31,
2022
  Three months ended March 31,
2023
  Three months ended March 31,
2022
 
Direct to Consumer  207,781   319,005   (34.9)%  67.1%  46.3%  32.9%  53.7%
Dealers  177,484   300,906   (41.0)%  85.6%  56.4%  14.4%  43.6%
Amazon  91,650   174,676   (47.5)%  57.9%  56.9%  42.1%  43.1%
Total $476,915  $794,587   (40.0)%  72.2%  64.1%  27.8%  35.9%

 

Redundant Air Tank Systems

 

Net revenue for the six months ended June 30, 2022Revenue in the Redundant Air Tank Systems System segment was $721,935 and $399,479increased 21.9% for the three months ended June 30,March 31, 2023 as compared to the same period in 2022. This increase can be attributed to increases in both the Dealer and Government sales channels increasing 23.8% and 269.2%, respectively, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. These channels are drivers of sales volume for the new HEED3 product line and have also seen increased quantity orders from their international dealer base on their Spare Air product. These increases were offset by decreases in the commercial channel of 38.7% and website sales of 3.1% for the three months ended March 31, 2023 as compared to the same period in 2022.

27

The margins for the three months ended June 30 ,2022 showed improvement at 36.0%March 31, 2023 increased to 26.8% as compared to 28.7%19.5% for the six months ended June 30, 2022 as the margin for dealer sales improved during the three months ended June 30,March 31, 2022 as the margins across all channels improved. This improvement can be attributed to 31.2% as compared to 22% for the six months ended June 30, 2022. Outside ofincreased revenue from the margin for repairs, dealerHEED3 which offers higher margins continue to be the lowest margin segment as SSI must price goods in order for dealers to also generate profits. than SSI’s traditional product Spare Air.

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
June 30,
2022
  Three months ended
June 30,
2021
  % change  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
 
Commercial $46,550   -   N/A   43.8%  -   56.2%  - 
Dealers  250,223   -   N/A   68.8%  -   31.2%  - 
Government  38,711   -   N/A   37.5%  -   62.5%  - 
Repairs  11,047   -   N/A   221.6%  -   (121.6)%    
Direct to Consumers (Website)  52,948   -   N/A   45.8%  -   54.2%  - 
Total $399,479   -   N/A   64.0%  -   36.0%  - 

  Net Revenue  

Cost of Sales as a % of

Net Revenue

  Margin 
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  % change  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
 
Commercial $103,156   -   N/A   43.6%  -   56.4%  - 
Dealers  462,342   -   N/A   78.0%  -   22.0%  - 
Government  52,712   -   N/A   36.8%  -   63.2%  - 
Repairs  18,858   -   N/A   236.1%      -(136.1)%    
Direct to Consumers (Website)  84,867   -   N/A   53.9%  -   46.1%  - 
Total $721,935   -   N/A   71.3%  -   28.7%  - 

32

  Revenue  Cost of Revenue as a % of Revenue  Margin 
  Three months ended March 31,
2023
  Three months ended March 31,
2022
  % change  Three months ended March 31,
2023
  Three months ended March 31,
2022
  Three months ended March 31,
2023
  Three months ended March 31,
2022
 
Commercial $34,696  $56,606   (38.7)%  54.7%  43.5%  45.3%  56.5%
Dealers  262,632   212,119   23.8%  73.1%  88.8%  26.9%  11.2%
Government  51,687   14,001   269.2%  24.7%  35.0%  75.3%  65.0%
Repairs  13,031   7,811   66.8%  321.0%  256.6%  (221.0)%  (156.6)%
Direct to Consumers (Website)  30,930   31,919   (3.1)%  71.5%  67.3%  28.5%  32.7%
Total $392,976  $322,456   21.9%  73.2%  80.5%  26.8%  19.5%

 

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
June 30,
2022
  Three months ended
June 30,
2021
  % change  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
  Three months ended
June 30,
2022
  Three months ended
June 30,
2021
 
Retail Sales $34,549   -   N/A   8.9%  -   91.1%  - 
Tours and Lessons  15,725   -   N/A   70.4%  -   29.6%  - 
Total $50,274   -   N/A   28.1%  -   71.9%  - 

  Net Revenue  

Cost of Sales as a % of

Net Revenue

  Margin 
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  % change  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
  Six months ended
June 30,
2022
  Six months ended
June 30,
2021
 
Retail Sales $34,549   -   N/A   8.9%  -   91.1%  - 
Tours and Lessons  15,725   -   N/A   70.4%  -   29.6%  - 
Total $50,274   -   N/A   28.1%  -   71.9%  - 

33

  Revenue  Cost of Revenue as a % of Revenue  Margin as a % of Net Revenue 
  Three months ended March 31,
2023
  Three months ended March 31,
2022
  % change  Three months ended March 31,
2023
  Three months ended March 31,
2022
  Three months ended March 31,
2023
  Three months ended March 31,
2022
 
Retail Sales $46,433   -   N/A   44.3%  -   55.7%  - 
Tours and Lessons  32,469   -   N/A   93.0%  -   7.0%  - 
Total $78,902   -   N/A   64.3%  -   35.7%  - 

 

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 38.3%decreased 34.5% for the three months ended June 30, 2022 and 42.1% for the six months ended June 30, 2022March 31, 2023 as compared to the same periods in the prior year.three months ended March 31, 2022.

 

28

Selling, General & Administrative Expenses (SG&A Expenses)

 

SG&A increaseddecreased by 41.4%34.3% for the three months ended June 30, 2022 and 45.5% for the six months ending June 30,March 31, 2022 as compared to the same periods in the prior year.three months ended March 31, 2022. SG&A expenses were comprised of the following:

 

Expense Item Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 % Change Six Months Ended June 30, 2022 Six Months Ended June 30, 2021 % Change  Three Months Ended
March 31,
2023
 Three Months Ended
March 31,
2022
 % Change 
Payroll, Selling & Administrative $544,709  $236,062   130.7% $940,485  $461,529   103.8% $450,806  $395,776   13.9%
Non-Cash Stock Compensation Expense  290,706   266,370   9.1%  520,740   498,875   4.4%
Stock Compensation Expense  11,034   230,034   (95.2)%
Professional Fees  98,619   116,576   (15.4)%  225,031   178,015   26.4%  66,302   126,412   (47.6)%
Advertising  101,129   47,615   112.4%  257,573   113,841   126.3%  104,005   156,444   (33.5)%
All Others  142,438   156,984   (9.3)%  339,511   308,382   10.1%  94,073   197,073   (52.3)%
Total SG&A $1,177,601  $823,607   43.0% $2,283,340  $1,560,642   46.3% $726,220  $1,105,739   (34.3)%

Payroll increases for the three months ended March 31, 2022 can be attributed primarily to the addition of SSI payroll which accounted for 51% of the increase with the remaining 49% attributable to increases in personnel at BLU3 to manage increasing revenue and production, as well as slight increases in wages and staffing in the other divisions.

Non-Cash Stock compensation expenses2023 increased 4.4% for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase can be attributed to options granted to employees under the Company’s Equity Incentive Plan, and the vesting of the Company’s Chief Executive Officer’s incentive option. The increase of 9.1% for the three months ended June 30, 202213.9% as compared to the three months ended June 30, 2021 is relatedMarch 31, 2022. BTL increased its direct marketing team and production staff to account for 46% of the same option vesting.increase. BLU3 increased its customer service presence as well as converting a sales person from contractor to salaried employee and accounted for 61.8% of the increase. The addition of the LBI payroll accounted for 31.1% of the increase. These are offset by the decrease in SSI payroll with a reduction in overtime and the attrition of production personnel which accounted for a 35.8% decrease in payroll.

 

Non-Cash Stock Compensation expenses decreased by 95.2%, as vesting milestones were not met due to the reduction in revenue for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

34

 

Professional fees, including legal, accounting and other professional fees whichdecreased 47.6% for the Company has paid with a combination of cash and common stock increased 26.4% in the sixthree months ended June 30, 2022March 31, 2023 as compared to the sixthree months ended June 30, 2021.March 31, 2022. The increasedecrease can be attributed to ana decrease in legal fees of 28.5% and other professional fees of 49.1% offset by a slight increase in accounting fees relatedof 30.6%. Legal fees reduction can be attributed to the year-end audit. Forlack of billing for acquisition activity in 2023 and the three months ended June 30, 2022reduction in professional fees decreased 15.4% as comparedis attributable to the prior year, as a consultant was addedconversion of consultants to payrollemployees late in 2022.

 

The decrease in advertising expense for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was 33.5%, attributable to BLU3’s decrease in advertising as it worked through its recall process. BLU3’s decrease in advertising expense was offset slightly by an increase in advertising expense for SSI.

Other expenses decreased 52.3% for the sixthree months ended June 30, 2022March 31, 2023, as compared to the sixthree months ended June 30, 2021 is attributableMarch 31, 2022 due primarily to BLU3’s focus on social media, Amazon and trade show advertising.a reduction in the reserve for recall expenses which accounted for 78.7% of the overall decrease.

 

29

Research & Development Expenses (R&D Expenses)

 

R&D expenses for the three months ended June 30, 2022March 31, 2023 decreased 79.5% and 80.5% for the six months ended June 30, 202286.5% 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.three months ended March 31, 2022.

 

Other Income/Expense

 

For the sixthree months ended June 30, 2022,March 31, 2023, other expenses totaled approximately $19,700$15,198 of interest expense as compared to other income of approximately $164,000 for the six months ended June 30, 2021.expense. Other income for the sixthree months ended June 30, 2021March 31, 2022 consisted of a gain due to the settlement of debt of $10,000, the forgiveness of a PPP loan less interest expense of approximately $5,600.$10,193. The increase in interest expense can be attributed to the NFS loan, the Navitas 2022 loan, and the convertible demand note from Robert Carmichael that waswere funded in the second quarterthird and fourth quarters of 2021, and the interest on the debt related to the acquisition of SSI.2022.

 

Liquidity and Capital Resources

 

We had cash of $574,567$347,635 as of June 30, 2022.March 31, 2023. The following table summarizes total current assets, total current liabilities and working capital at June 30, 2022March 31, 2023 as compared to December 31, 2021.2022.

 

 June 30, December 31, %  March 31, December 31, % 
 2022  2021  change  2023  2022  change 
 (unaudited)       (unaudited)      
Total current assets $3,783,509  $2,966,432   11.2% $2,963,931  $3,265,714   (9.2)%
Total current liabilities $1,991,200  $1,396,197   14.2% $1,643,114  $1,792,151   (8.3)%
Working capital $1,792,309  $1,570,235   8.4% $1,320,817  $1,473,563   (10.4)%

 

The increasedecrease in our current assets at June 30, 2022March 31, 2023 from December 31, 20212022 primarily reflects an increase from the assets of SSI as well as the increases in inventory purchases reflected by an increasea decrease in inventory and prepaid assets which includes prepayments of inventory, as the Company has experiencedtapered its purchasing to convert inventory when revenue growth and ramped up purchasing and production forbegan to slow in the summer season.third quarter of 2022. The increasedecrease in total current liabilities primarily reflects the additional SSI liabilities as well as a significant increasedecrease in customer deposits, particularly customer deposits with LWA.accounts payable of 16.9%.

 

Summary Cash Flows

 

 

Six Months Ended

June 30,

  

Three Months Ended

March 31,

 
 2022  2021  2023  2022 
 (unaudited)  (unaudited) 
Net cash used by operating activities $(275,257) $(396,838)
Net cash used in operating activities $(313,881) $(290,337)
Net cash used in investing activities $(31,946) $(14,941) $(5,069) $(2,884)
Net cash provided by financing activities $238,627  $227,904  $182,158  $254,352 

 

Net cash used in operating activities for the sixthree months ended June 30, 2022March 31, 2023 was due to the net loss of approximately $772,754 which is primarily attributable to non-cash stock compensation expenses of approximately $579,300. The non-cash stock compensation expense for the six months ended June 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.$327,900. Net cash used in operating activities is also the result of increases in current assets, including, accounts receivable, inventory, net,accounts receivable, related party, and prepaid expenses offset by a decrease in inventory that generated approximately $101,300, a net decrease in liabilities which also utilized cash with decreases in accounts payable and accrued liabilities, long term lease liability and accounts payable-related party utilizing approximately $797,000,$219,094, offset by increases in current liabilities including accounts payable,customer deposits, and other liabilities and customer deposits, which totaledof approximately $501,700.$71,200.

35

 

Net cash used in investing activities for the sixthree months ended June 30, 2022March 31, 2023 of approximately $31,946$5,100 consists of $30,000 used in an asset acquisition and a small fixed asset purchase of approximately $1,900.purchases.

 

Net cash provided by financing activities for the sixthree months ended June 30, 2022March 31, 2023 reflects proceeds of $200,000 from the exercisesale of warrants of approximately $265,000 lessunits, offset by the repaymentpayment of debt of approximately $26,400.$17,800.

 

30

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, 20212022 includes an explanatory paragraph stating the Company has net losses and an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. If the Company is unable to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back, delay or cease operations, liquidate assets and possibly seek bankruptcy protection.

 

We have a history of losses, and an accumulated deficit of $15,317,359$16,765,417 as of June 30, 2022.March 31, 2023. Despite a working capital surplus of $1,792,309$1,320,817 at June 30, 2022,March 31, 2023, the continued losses and cash used in operations raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to continue to increase revenues, control expenses, raise capital, and continue to sustain adequate working capital to finance its operations. The failure to achieve the necessary levels of profitability and cash flows would be detrimental to the Company. We are continuing to engage in discussions with potential sources for additional capital, however, our ability to raise capital is somewhat limited based upon our revenue levels, net losses and limited market for our common stock. If we fail to raise additional funds when needed, or if we do not have sufficient cash flows from operations, we may be required to scale back or cease certain of our operations.

 

Critical Accounting Policies

 

The preparation of condensed 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.

36

 

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 the end of the period covered by this report,March 31, 2023, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of continuing material weaknesses in our internal control over financial reporting described below. A material weakness is a deficiency, or combination of deficiencies, that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected.

 

31

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 June 30, 2022March 31, 2023 and based upon the such evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to the material weaknesses set forth below.

 

 Insufficient number and lack of qualified accounting department and administrative personnel and support;
   
 Insufficient written policies and procedures to ensure the correct application of accounting and financial reporting with respect to GAAP and SEC disclosure requirements;

 

 Insufficient segregation of duties, oversight of work performed and lack of controls in our finance and accounting functions due to limited personnel;
   
 Company’s systems that impact financial information and disclosures have ineffective information technology controls;
   
 Inadequate controls surrounding revenue recognition, to ensure that all material transactions and developments impacting the financial statements are reflected and properly recorded; and
   
 Evaluation of disclosure controls and procedures was not sufficiently comprehensive due to limited personnel.

 

Subject to sufficient resources, management expects to remediate the material weaknesses identified above as follows:

 

 Management has leveraged and will continue to leverage experienced consultants to assist with ongoing GAAP and SEC compliance requirements. We intend to expand our finance department through the hiring of a certified public accountant to strengthen the segregation of duties, internal controls and enhance our current staff.
   
 Segregation of duties is being analyzed and adjusted Company-wide, where possible. The Company 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 hashave materially affected or isare reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEEDINGS

 

There are no pending legal proceedings to which we are a party or in which any director, officer or affiliate of ours, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.

 

ITEM 1A. RISK FACTORS

 

The Company is a smaller reporting company and is not required to provide this information.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Except as set forth below, there were no sales of equity securities during the period covered by this Quarterly Report that were not registered under the Securities ActOn January 18, 2023 and were not previously reported in a Current Report on Form 8-K filed by the Company.

On May 31, 2022,February 18, 2023, the Company issued a consultant, 302,953 sharesto Charles Hyatt, an aggregate of 11,428,570 units, with each unit consisting of one share of common stock for consulting services relatedand a two-year common stock purchase warrant to the dive industry.

As of June 30, 2022, the Company issued 449,522 sharespurchase one share of common stock to the holdersat an exercise price of convertible notes for payment$0.0175 per share in consideration of interest through June 30, 2022.$200,000.

On June 17, 2022, the Company issued 280,000 shares of common stock to an employee as a retirement gift.

The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe are exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof.

 

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
101.SCH Inline XBRL TAXONOMY EXTENSION SCHEMA
101.CAL Inline XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF Inline XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB Inline XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.PRE Inline XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
104 Cover Page Interactive Data File (embedded within the Inline XBRL 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: August 22, 2022May 15, 2023BROWNIE’S MARINE GROUP, INC.
   
 By:/s/ Christopher H. Constable
  Christopher H. Constable
  Chief Executive Officer
  (Principal Executive Officer)
   
 By:/s/ Robert M. Carmichael
  Robert M. Carmichael
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

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