UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended September 30, 2021 |
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 25th Avenue, Suite 1 | ||
| Pompano Beach, Florida | 33069 | |
| Address of principal executive offices | Zip code |
(954) 462-5570
Registrant’s telephone number, including area code
Not applicable
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| none | n/a | n/a |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There were 392,498,486 shares of common stock outstanding at November 21, 2021.
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. | 26 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | 35 |
| ITEM 4. | CONTROLS AND PROCEDURES. | 35 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | LEGAL PROCEEDINGS. | 36 |
| ITEM 1A. | RISK FACTORS. | 36 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | 36 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. | 36 |
| ITEM 4. | MINE SAFETY DISCLOSURES. | 36 |
| ITEM 5. | OTHER INFORMATION. | 36 |
| ITEM 6. | EXHIBITS. | 36 |
| 2 |
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Various statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived from utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. Most of these factors are difficult to predict accurately and are generally beyond our control. 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. Forward-looking statements include, but are not limited to, statements about risks associated with:
| ● | Financial risks, including: | |
| ● | our history of losses; | |
| ● | our ability to continue as a going concern; | |
| ● | our dependence on revenues from related parties; and | |
| ● | material risks in our disclosure controls and internal control over financial reporting. | |
| ● | Business and operational risks, including: | |
| ● | our dependence on key members of our management; | |
| ● | our need to hire additional employees; | |
| ● | our ability to protect our intellectual property rights; | |
| ● | reliance on third party vendors and manufacturers; | |
| ● | dependence on consumer discretionary spending; | |
| ● | the impact of government regulations; | |
| ● | any failure to protect personal information; | |
| ● | the impact of bad weather; | |
| ● | the exposure to potential product liability claims; and | |
| ● | The continuing impact of COVID-19 on our company. | |
| ● | Shareholder risks, including: | |
| ● | dilution to our common shareholders upon the possible conversion of outstanding convertible debt and/or the exercise of outstanding options; | |
| ● | the limited market for our common stock and the impact of penny stock rules; and | |
| ● | we are a voluntary filer with the Securities and Exchange Commission. | |
You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the Securities and Exchange Commission on March 31, 2021 (the “2020 10-K”) and our other filings with the Securities and Exchange Commission in their entirety. 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. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report the terms “BWMG,” the “Company,” “we,” “our,” “us,” and similar terms refers to Brownie’s Marine Group, Inc., a Florida corporation, and our wholly owned subsidiaries, Trebor Industries, Inc., a Florida corporation (“Trebor”), Brownie’s High Pressure Compressor Services, Inc. (“BHP”), a Florida corporation, BLU3, Inc., a Florida corporation (“BLU3”) and Submersible Systems, Inc., a Florida corporation (“SSI”). In addition, “ Third Quarter 2021” refers to the three month period ended September 30, 2021 and Third Quarter 2020 refers to September 30, 2020, “Second Quarter 2021” refers to the three month period ended June 30, 2021 and Second Quarter 2020 refers to June 30, 2020. “First Quarter 2021” refers to the three month period ended March 31, 2021 and “First Quarter 2020” refers to the three months ended March 31, 2020. “2020” refers to the year ended December 31, 2020 and “2021” refers to the year ending December 31, 2021.
We maintain a corporate website at www.browniesmarinegroup.com. Unless specifically set forth to the contrary, the information which appears on our websites or our social media platforms is not part of this report.
| 3 |
PART I
Item 1. Financial Statements
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
| September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | (Unaudited) | |||||||
| Current Assets | ||||||||
| Cash | $ | 738,763 | $ | 345,187 | ||||
| Restricted Cash | 121,953 | - | ||||||
| Accounts receivable - net | 249,770 | 81,251 | ||||||
| Accounts receivable - related parties | 91,161 | 67,644 | ||||||
| Inventory, net | 1,717,140 | 863,791 | ||||||
| Prepaid expenses and other current assets | 380,513 | 111,164 | ||||||
| Total current assets | 3,299,300 | 1,469,037 | ||||||
| Property, equipment and leasehold improvements, net | 279,364 | 143,413 | ||||||
| Operating Lease Assets | 518,076 | 446,981 | ||||||
| Intangible Assets, Net | 808,361 | - | ||||||
| Goodwill | 185,264 | - | ||||||
| Other assets | 17,565 | 13,649 | ||||||
| Total assets | $ | 5,107,930 | $ | 2,073,080 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 616,849 | $ | 386,977 | ||||
| Accounts payable - related parties | 84,935 | 102,360 | ||||||
| Customer deposits and unearned revenue | 388,966 | 20,353 | ||||||
| Other liabilities | 177,344 | 100,817 | ||||||
| Operating lease liabilities | 227,868 | 107,691 | ||||||
| Current maturities long term debt | 59,509 | 151,006 | ||||||
| Notes payable | - | 50,000 | ||||||
| Convertible debentures, net | - | 110,000 | ||||||
| Total current liabilities | 1,555,471 | 1,029,204 | ||||||
| Long term debt | 212,257 | 120,782 | ||||||
| Long term convertible debentures, net | 337,827 | - | ||||||
| Operating lease liabilities | 290,385 | 339,290 | ||||||
| Total liabilities | 2,395,940 | 1,489,276 | ||||||
| Commitments and contingent liabilities (see note 8) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding as of September 30, 2021 and December 31, 2020. | 425 | 425 | ||||||
| Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 391,299,010 shares issued and 392,489,486 shares outstanding at September 30, 2021 and 306,185,206 shares issued and outstanding at December 31, 2020, respectively. | 39,251 | 30,620 | ||||||
| Common stock payable 138,941 shares and 138,941 shares, respectively as of September 30, 2021 and December 31, 2020. | 14 | 14 | ||||||
| Additional paid-in capital | 16,699,902 | 13,508,882 | ||||||
| Accumulated deficit | (14,027,602 | ) | (12,956,137 | ) | ||||
| Total stockholders’ equity | $ | 2,711,990 | $ | 583,804 | ||||
| Total liabilities and stockholders’ equity | $ | 5,107,930 | $ | 2,073,080 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 4 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
|
Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net revenues | ||||||||||||||||
| Net revenues | $ | 1,288,792 | $ | 1,388,630 | $ | 3,394,890 | $ | 2,990,215 | ||||||||
| Net revenues - related parties | 269,922 | 282,029 | 827,511 | 635,761 | ||||||||||||
| Total net revenues | 1,558,714 | 1,670,659 | 4,222,401 | 3,625,976 | ||||||||||||
| Cost of net revenues | ||||||||||||||||
| Cost of net revenues | 1,008,527 | 816,570 | 2,394,242 | 1,934,332 | ||||||||||||
| Cost of net revenues - related parties | 130,821 | 129,115 | 405,951 | 316,294 | ||||||||||||
| Royalties expense - related parties | 19,484 | 31,804 | 59,090 | 54,569 | ||||||||||||
| Royalties expense | 24,854 | 13,379 | 79,809 | 41,306 | ||||||||||||
| Total cost of revenues | 1,183,686 | 990,868 | 2,939,092 | 2,346,501 | ||||||||||||
| Gross profit | 375,028 | 679,791 | 1,283,309 | 1,279,475 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | 882,937 | 591,998 | 2,443,579 | 1,834,039 | ||||||||||||
| Research and development costs | 26,655 | 28,802 | 69,074 | 84,890 | ||||||||||||
| Total operating expenses | 909,592 | 620,800 | 2,152,653 | 1,918,929 | ||||||||||||
| Income (Loss) from operations | (534,564 | ) | 58,991 | (1,229,344 | ) | (639,454 | ) | |||||||||
| Other income (expense), net | ||||||||||||||||
| Gain on settlement of debt | - | - | 10,000 | - | ||||||||||||
| Gain on the forgiveness of PPP loan | - | - | 159,600 | - | ||||||||||||
| Interest expense | (6,115 | ) | (2,456 | ) | (11,721 | ) | (14,746 | ) | ||||||||
| Income (Loss) income before provision for income taxes | (540,679 | ) | 56,535 | (1,071,465 | ) | (654,200 | ) | |||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net Income (Loss) | (540,679 | ) | 56,535 | (1,071,465 | ) | (654,200 | ) | |||||||||
| Basic income (loss) per common share | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | |||||
| Basic weighted average common shares outstanding | 342,827,940 | 301,107,923 | 328,103,475 | 283,471,765 | ||||||||||||
| Diluted income (loss) per common share | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | |||||
| Diluted weighted average common shares outstanding | 342,827,940 | 320,969,382 | 328,103,475 | 283,471,765 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 5 |
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(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, 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 | |||||||||||||||||||||||||||||
| Shares issued for acquisition | ||||||||||||||||||||||||||||||||||||
| Shares issued for acquisition, shares | ||||||||||||||||||||||||||||||||||||
| Beneficial Conversion feature | ||||||||||||||||||||||||||||||||||||
| Discount on Equity issued in Acquisition | ||||||||||||||||||||||||||||||||||||
| Common stock issued for cash | ||||||||||||||||||||||||||||||||||||
| Common stock issued for cash, shares | ||||||||||||||||||||||||||||||||||||
| Common stock issued for warrants | ||||||||||||||||||||||||||||||||||||
| Common stock issued for warrants, shares | ||||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||
| Common stock issued for services, shares | ||||||||||||||||||||||||||||||||||||
| Share issued for exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Share issued for exercise of warrants, shares | ||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | 3,116,279 | 312 | 124,688 | - | 125,000 | |||||||||||||||||||||||||||||
| Incentive Shares issued to Employees | - | - | - | - | ||||||||||||||||||||||||||||||||
| Incentive Shares issued to Employees, shares | ||||||||||||||||||||||||||||||||||||
| Stock Option Expense | - | - | 218,505 | - | 218,505 | |||||||||||||||||||||||||||||||
|
Common stock issued to for conversion of convertible debentures and accrued interest |
- | - | 422,209 | 42 | 14,735 | 14,777 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (440,981 | ) | (440,981 | ) | |||||||||||||||||||||||||
| Balance, March 31, 2021(unaudited) | 425,000 | $ | 425 | 337,223,694 | $ | 33,724 | 138,941 | $ | 14 | $ | 14,139,060 | $ | (13,397,118 | ) | $ | 776,105 | ||||||||||||||||||||
| Stock Option Expense | - | - | 257,370 | - | 257,370 | |||||||||||||||||||||||||||||||
| Common stock issued to for conversion of convertible debentures and accrued interest | - | - | 6,055,358 | 606 | 59,948 | 60,554 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (89,805 | ) | (89,805 | ) | |||||||||||||||||||||||||
| Balance, June 30, 2021 (unaudited) | 425,000 | $ | 425 | 343,279,052 | $ | 34,330 | 138,941 | $ | 14 | $ | 14,456,378 | $ | (13,486,923 | ) | $ | 1,004,224 | ||||||||||||||||||||
| Common stock issued for cash | - | - | 14,600,000 | 1,460 | 363,540 | - | 365,000 | |||||||||||||||||||||||||||||
| Common stock issued for acquisition | 27,305,442 | 2,731 | 1,447,188 | - | 1,449,919 | |||||||||||||||||||||||||||||||
| Beneficial conversion features | - | - | 12,480 | - | 12,480 | |||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | 1,190,476 | 119 | 55,833 | - | 55,952 | |||||||||||||||||||||||||||||
| Stock Option Expense | - | - | 303,949 | - | 303,949 | |||||||||||||||||||||||||||||||
| Common stock issued to for conversion of convertible debentures and accrued interest | - | - | 6,114,516 | 611 | 60,534 | - | 61,145 | |||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (540,679 | ) | (540,679 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2021(unaudited) | 425,000 | $ | 425 | 392,489,486 | $ | 39,251 | 138,941 | $ | 14 | $ | 16,699,902 | $ | (14,027,602 | ) | $ | 2,711,990 | ||||||||||||||||||||
| Balance | 425,000 | 425 | 392,489,486 | $ | 39,251 | 138,941 | $ | 14 | $ | 16,699,902 | $ | (14,027,602 | ) | 2,711,990 | ||||||||||||||||||||||
| Preferred Stock | Common Stock | Common Stock Payable | Additional | Total Stockholder’s | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Paid-in Capital | Accumulated Deficit |
Equity
(Deficit) |
||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 425,000 | $ | 425 | 225,540,501 | $ | 22,554 | 138,941 | $ | 14 | $ | 11,338,104 | $ | (11,604,518 | ) | $ | (243,421 | ) | |||||||||||||||||||
| Common stock issued for cash | - | - | 2,647,065 | 265 | - | - | 44,735 | - | 45,000 | |||||||||||||||||||||||||||
| Common stock issued for exercise of warrants | - | - | 12,500,000 | 1,250 | - | - | 123,750 | - | 125,000 | |||||||||||||||||||||||||||
| Stock option expense | - | - | - | - | - | - | 96,290 | - | 96,290 | |||||||||||||||||||||||||||
| Incentive bonus shares to CEO | - | - | 20,000,000 | 2,000 | - | - | (720 | ) | - | 1,280 | ||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | - | (296,693 | ) | (296,693 | ) | |||||||||||||||||||||||||
| Balance, March 31, 2020 (unaudited) | 425,000 | $ | 425 | 260,687,566 | $ | 26,069 | 138,941 | $ | 14 |
$ |
11,602,159 | $ | (11,901,211 | ) | $ | (272,544 | ) | |||||||||||||||||||
| Common stock issued for cash | - | - | 20,000,000 | 2,000 | - | - | 498,000 | - | 500,000 | |||||||||||||||||||||||||||
| Common stock issued for warrants | - | - | 10,000,000 | 1,000 | - | - | 99,000 | - | 100,000 | |||||||||||||||||||||||||||
| Common stock issued for services | - | - | 5,000,000 | 500 | - | - | 222,000 | - | 222,500 | |||||||||||||||||||||||||||
| Incentive shares issued to employees | - | - | 5,322,602 | 532 | - | - | 233,968 | - | 234,500 | |||||||||||||||||||||||||||
| Stock option expense | - | - | - | - | - | - | 218,505 | - | 218,505 | |||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | - | (414,042 | ) | (414,042 | ) | |||||||||||||||||||||||||
| Balance, June 30, 2020 (unaudited) | 425,000 | $ | 425 | 301,010,168 | $ | 30,101 | 138,941 | $ | 14 | $ | 12,873,632 | $ | (12,315,253 | ) | $ | 588,919 | ||||||||||||||||||||
| Balance | 425,000 | $ | 425 | 301,010,168 | $ | 30,101 | 138,941 | $ | 14 | $ | 12,873,632 | $ | (12,315,253 | ) | $ | 588,919 | ||||||||||||||||||||
| Common stock issued for services | - | - | 1,745,000 | 175 | - | - | 28,046 | - | 28,221 | |||||||||||||||||||||||||||
| Incentive shares issued to employees | - | - | 280,038 | 28 | - | - | 5,862 | - | 5,890 | |||||||||||||||||||||||||||
| Stock option expense | - | - | - | - | - | - | 218,505 | - | 218,505 | |||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | - | 56,535 | 56,535 | |||||||||||||||||||||||||||
| Balance, September 30, 2020 (unaudited) | 425,000 | $ | 425 | 303,035,206 | $ | 30,304 | 138,941 | $ | 14 | $ | 13,126,045 | $ | (12,258,718 | ) | $ | 898,070 | ||||||||||||||||||||
| Balance | 425,000 | $ | 425 | 303,035,206 | $ | 30,304 | 138,941 | $ | 14 | $ | 13,126,045 | $ | (12,258,718 | ) | $ | 898,070 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 6 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(unaudited)
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,071,465 | ) | $ | (654,200 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | 29,717 | 14,777 | ||||||
| Amortization of debt discount | 307 | - | ||||||
| Amortization of right-of-use asset | 89,087 | 72,663 | ||||||
| Loss on debt extinguishment | - | (2,098 | ) | |||||
| Common Stock issued for services | 180,952 | 250,721 | ||||||
| Incentive bonus shares issued to CEO and employees | - | 241,670 | ||||||
| Reserve (recovery) for bad debt | 32,079 | - | ||||||
| Stock Based Compensation - Options | 779,824 | 533,300 | ||||||
| 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 | (172,246 | ) | 24,234 | |||||
| Change in accounts receivable - related parties | (23,517 | ) | (6,062 | ) | ||||
| Change in inventory | (416,993 | ) | (114,482 | ) | ||||
| Change in prepaid expenses and other current assets | (262,666 | ) | (60,791 | ) | ||||
| Change in other assets | 18,089 | 5,000 | ||||||
| Change in accounts payable and accrued liabilities | 89,818 | (138,784 | ) | |||||
| Change in customer deposits and unearned revenue | 368,613 | (81,845 | ) | |||||
| Change in long term lease liability | (88,911 | ) | (72,663 | ) | ||||
| Change in other liabilities | 65,195 | (42,442 | ) | |||||
| Change in accounts payable - related parties | (17,425 | ) | (127,145 | ) | ||||
| Net cash used in operating activities | (569,142 | ) | (158,147 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash acquired from acquisition | 541,378 | - | ||||||
| Purchase of fixed assets | (23,677 | ) | (5,500 | ) | ||||
| Net cash provided by (used in) investing activities | 517,701 | (5,500 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock | 275,000 | - | ||||||
| Proceeds from issuance of units | 365,000 | 545,000 | ||||||
| Proceeds from exercise of Warrants | - | 225,000 | ||||||
| Proceeds of debt | - | 159,600 | ||||||
| Repayment on notes payable | (40,000 | ) | (45,000 | ) | ||||
| Repayment of debt | (33,030 | ) | (21,982 | ) | ||||
| Net cash provided by (used in) financing activities | 566,970 | 862,618 | ||||||
| Net change in cash | 515,529 | 698,971 | ||||||
| Cash, beginning of period | 345,187 | 70,620 | ||||||
| Cash and restricted cash, end of period | $ | 860,716 | $ | 769,591 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash Paid for Interest | $ |
12,678 |
$ |
8,157 |
||||
| Cash Paid for Income Taxes | $ |
- |
$ | - | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Loan payable for purchase of vehicle | $ | - |
$ |
55,841 |
||||
| Common Stock issued for acquisition | $ |
1,449,919 |
$ | - | ||||
| Convertible note issued for acquisition | $ |
350,000 |
$ | - | ||||
| Beneficial conversion feature on the convertible notes issued for acquisition | $ |
12,480 |
$ | - | ||||
| Operating lease asset obtained for operating lease liability | $ |
160,182 |
$ | - | ||||
| Equipment obtained through financing | $ |
76,448 |
$ | - | ||||
| Common stock issued for the conversion of convertible debentures and accrued interest | $ |
136,476 |
$ | - | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 7 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Company Overview
Brownie’s Marine Group, Inc., a Florida corporation (hereinafter referred to as” the “Company,” or “BWMG”), (1) designs, tests, manufactures and distributes recreational hookah diving, scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc., a Florida corporation organized in 1981 (“Trebor”), (2) manufactures and sells high pressure air and industrial compressor packages, yacht based scuba air compressor and nitrox generation systems through its wholly owned subsidiary Brownie’s High Pressure Compressor Services, Inc., a Florida corporation organized in 2017 (“BHP”), doing business as LW Americas (“LWA”). And (3) develops and markets portable battery powered surface supplied air dive systems through its wholly owned subsidiary BLU3, Inc., a Florida corporation (“BLU3”). On September 3, 2021, the Company, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Submersible Acquisition, Inc., a Florida corporation and wholly owned subsidiary of the Company (“Acquisition Sub”), Submersible Systems, Inc., a Florida corporation (“Submersible” or SSI), and Summit Holdings V, LLC, a Florida limited liability company (“Summit”) and Tierra Vista Group, LLC, a Florida limited liability company (“Tierra Vista” and, together with Summit, the “Sellers”), the owners of all of the capital stock of Submersible organized in 2017, 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. SSI manufactures tanks and it redundant/rescue air systems in its facility in Huntington Beach, California and sells its products to governments, militaries, private companies and the dive industry throughout the world.
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, 2020 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our 2020 10-K for a broader discussion of our business and the risks inherent in such business.
Principles of Consolidation
The consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor, BHP, BLU3 and SSI. All significant intercompany transactions and balances have been eliminated in consolidation.
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.
Accounts receivable
Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for doubtful accounts is estimated based on historical customer experience and industry knowledge. The allowances for doubtful accounts totaled $46,554 and $16,872 at September 30, 2021 and December 31, 2020, respectively.
| 8 |
Inventory
Inventory consists of the raw material, parts that make up the items that we manufacture, and finished goods. For the year ended December 31, 2020, the Company recorded reserves for obsolete or slow-moving inventory of approximately $227,657. No additional reserve for obsolete or slow-moving inventory during the nine months ended September 30, 2021.
Schedule of Inventory
|
September
30, 2021
(unaudited) |
December
31,
2020 |
|||||||
| Raw materials | $ | 976,507 | $ | 408,841 | ||||
| Work In Process | 100,285 | - | ||||||
| Finished goods | 640,648 | 454,950 | ||||||
| Inventory, net | $ | 1,717,140 | $ | 863,791 | ||||
Revenue Recognition
We account for revenues in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive.
We recognize the sale of products under single performance obligations upon shipment of the units as that is when ownership is transferred and our performance is completed. Revenues from repair and maintenance activities is recognized when the repairs are completed and the units have been shipped.
Lease Accounting
We account for leases in accordance with ASC 842, “Leases”. The lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations.
We categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that would allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in property and equipment, net. All other leases are categorized as operating leases. We did not have any finance leases as of September 30, 2021. Our leases generally have terms that range from three years for equipment and five to twenty years for property. We elected the accounting policy to include both the lease and non-lease components of our agreements as a single component and account for them as a lease.
Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.
| 9 |
For the three and nine months ended September 30, 2021 the lease expenses were approximately $39,000 and $108,000, respectively, and approximately $33,000 and $98,000 for the three and nine months ended September 30, 2020, respectively. Cash paid for operating liabilities for the nine months ended September 30, 2021 was approximately $98,000 and $95,000 for the nine months ended September 30, 2020.
During the three months ended September 30, 2021, the Company recorded the operating lease asset and liability directly related to its acquisition of SSI. The increase to the operating asset and the operating liability from the acquisition of SSI was $160,182.
Supplemental balance sheet information related to leases was as follows:
Schedule of Supplemental Balance Sheet Information
| Operating Leases | September 30, 2021 | |||
| Right-of-use assets | $ | 518,076 | ||
| Current lease liabilities | $ | 227,868 | ||
| Non-current lease liabilities | 290,385 | |||
| Total lease liabilities | $ | 518,253 | ||
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee and non-employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee and non-employee are required to provide service in exchange for the award, usually the vesting period.
Loss per common share
Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. At September 30, 2021 and September 30, 2020, 245,297,740 and 175,134,884, respectively, of potentially dilutive shares were not recognized as their inclusion would be anti-dilutive. These shares reflect shares potentially issuable under convertible notes, outstanding warrants, outstanding stock options and the conversion of preferred stock.
Recent accounting pronouncements
The recent accounting standards that have been issued or proposed by the Financial Accounting Standards Board (FASB) or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
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 nine months ended September 30, 2021, the Company incurred a net loss of $1,071,465 of which $960,776 is non-cash stock related compensation. At September 30, 2021, the Company has an accumulated deficit of $14,027,602. Despite a working capital surplus of approximately $1,743,829 at September 30, 2021, 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.
| 10 |
Note 4. Related Party Transactions
The Company sells products to three entities, Brownies Southport Divers, Brownies Yacht Toys and Brownies Palm Beach Divers, owned by the brother of Mr. Robert M. 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 17.3% and 16.9% of the net revenues for the three months ended September 30 2021 and 2020, respectively, and 19.6% and 17.5% for the nine months ended September 30, 2021 and 2020 respectively. Accounts receivable from these entities totaled $67,596 and $44,323, respectively, at September 30, 2021 and December 31, 2020.
The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”) and 940 Associates, Inc. (“940 A”), entities wholly-owned by Mr. Carmichael. Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended to Brownie’s strategic partners. Accounts receivable from the combined entities and Mr. Carmichael totaled $23,565 and $23,321 at September 30, 2021 and December 31, 2020, respectively.
The Company had accounts payable to related parties of $84,935 and $102,360 at September 30, 2021 and December 31, 2020, respectively. The balance payable at September 30, 2021 is comprised of $5,000 due to Robert Carmichael, and $79,935 to BGL. At December 31, 2020 this account was comprised of $5,000 due to Robert Carmichael, and $97,360 due to BGL.
The Company has Exclusive License Agreements with 940 A to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. This Exclusive License Agreement provides that the Company will pay 940 A 2.5% of gross revenues per quarter as a royalty. Total royalty expense for the three months ended September 30, 2021 and 2020 were $19,484 and $31,804, respectively and $59,090 and $54,569 for the nine months ended September 30, 2021 and 2020, respectively. The accrued royalty for September 30, 2021 is $4,722 and it is included in other liabilities.
On March 25, 2021, the Company issued 27,500,000 shares of common stock to Mr. Charles F. Hyatt, a member of our Board of Directors in consideration of $275,000.
As of September 30, 2021, options to purchase 25,000,000 shares of common stock held by Mr. Carmichael vested in accordance with Carmichael Option agreement as further discussed in Note 7 of these financial statements.
On August 1, 2021 as part of the Blake Carmichael Agreement the company is obligated to enter into a Non-Qualified Stock Option agreement with Blake Carmichael as part of his employment agreement. Under the terms of the Blake Carmichael agreement, the Company will enter into an option contract that will grant Blake Carmichael a 5 year option to purchase 3,759,400 shares of the Company’s common stock at an exercise price of $.0399, (the “BC Compensation Options”). The BC Compensation Options vest 33.3% upon the execution of the agreement, 33% at the first anniversary date and 33% upon the second anniversary date. As part of the Blake Carmichael Agreement the company is also obligated to enter into a Non-Qualified Stock option agreement (the “BC Bonus Options”) that will grant Blake Carmichael a 5-year option to purchase up to 18,000,000 shares to be vested annually on a contract year basis, based upon the achievement of certain financial metrics tied to Revenue and EBITDA.
On September 1, 2021, the Company issued Mr. Charles F. Hyatt, a member of our Board of Directors, 10,000,000 units of the securities of the Company, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025 per share in consideration of $250,000.
On September 1, 2021, the Company issued Ms. Grace Hyatt, the adult child of a member of our Board of Directors, 600,000 units of the securities of the Company, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025 per share in consideration of $15,000.
| 11 |
Note 5. Convertible Debentures and Notes Payable
Convertible Debentures
Convertible debentures consisted of the following at September 30, 2021:
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. | |||||||||||||||||||||||||
| 8/31/11 | 8/31/13 | 5 | % | 10,000 | (4,286 | ) | - | - | - | - | (1 | ) | ||||||||||||||||||||||
| 12/01/17 | 12/31/21 | 6 | % | 50,000 | (12,500 | ) | - | - | - | - | (2 | ) | ||||||||||||||||||||||
| 12/05/17 | 12/31/21 | 6 | % | 50,000 | (12,500 | ) | - | (3 | ) | |||||||||||||||||||||||||
| 9/03/21 | 9/03/24 | 8 | % | 346,500 | (12,355 | ) | 346,500 | (12,051 | ) | 334,449 | 2,310 | (4 | ) | |||||||||||||||||||||
| 9/03/21 | 9/03/24 | 8 | % | 3,500 | (125 | ) | 3,500 | (122 | ) | 3,378 | 23 | (5 | ) | |||||||||||||||||||||
| $ | 350,000 | $ | (12,173 | ) | $ | 337,827 | $ | 2,333 | ||||||||||||||||||||||||||
| (1) | The Company borrowed $10,000 in exchange for a convertible debenture (the “Hoboken Convertible Note”). The holder at its option may convert all or part of the note plus accrued interest into common stock at a price of 30% discount as determined from the average four highest closing bid prices over the preceding five trading days. The Company valued the beneficial conversion feature of the convertible debenture at $4,286, which was accreted to interest expense over the period of the note. On February 22, 2021, this note and accrued interest of $4,777 were converted by the holder for 422,209 shares of common stock in accordance with the terms of the note. |
| (2) | On December 1, 2017, the Company entered into a $50,000 principal amount 6% secured convertible promissory note, initially due December 1, 2018, subject to extension. The note is secured with such assets of the Company equal to the principal and accrued interest, is guaranteed by the Company’s wholly-owned subsidiaries, Trebor and BHP and the personal guarantee of Mr. 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 maturity date of the note was extended for one additional 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, this note and accrued interest of $10,554 were converted by the holder for 6,055,358 shares of common stock in accordance with the terms of the note. |
| (3) | On December 5, 2017, the Company entered into a $50,000 principal amount 6% secured convertible promissory note, 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, is guaranteed by the Company’s wholly-owned subsidiaries, Trebor and BHP and the personal guarantee of Mr. 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 additional 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. The maturity date was further extended to December 31, 2021. On August 18, 2021, this note and accrued interest of $11,145 were converted by the holder for 6,114,516 shares of common stock in accordance with the terms of the note. | |
| (4) | On September 3, 2021, the Company entered into a $346,500 note payable to Summit Holding V, LLC as part of the acquisition of SSI. The note carries 8% unsecured convertible promissory note, due September 3, 2024. Payments on the note are to be equivalent to 50% of the adjusted net profit of Submersible Systems, Inc. payable calendar quarterly. Interest is payable in company stock at the conversion price of $.051272 and shall be paid quarterly. The note holder may convert any outstanding principal and unpaid interest at a conversion rate of $.051272 at any time up to the maturity date of the note. The Company recorded $12,355 for the beneficial conversion feature. |
| (5) | On September 3, 2021, the Company entered into a $3,500 note payable to Tierra Vista Partners, LLC as part of of the acquisition of SSI. The note carries 8% unsecured convertible promissory note, due September 3, 2024. Payments on the note are to be equivalent to 50% of the adjusted net profit of Submersible Systems, Inc. payable calendar quarterly. Interest is payable in company stock at the conversion price of $.051272 and shall be paid quarterly. The note holder may convert any outstanding principal and unpaid interest at a conversion rate of $.051272 at any time up to the maturity date of the note. The Company recorded $125 for the beneficial conversion feature. |
| 12 |
Notes Payable
Gonzales Note
The Company issued an unsecured, non-interest-bearing note of $200,000 with Mr. Tom Gonzales on July 1, 2013. The note is payable upon demand. The Company made repayments totaling $40,000 during the nine months ended September 30, 2021, fully repaying the note. The note was paid in full as of September 30, 2021 and had a balance of $40,000 December 31, 2020.
Hoboken Note
The Company issued an unsecured, non-interest-bearing note of $10,000 with Hoboken Street Association on October 15, 2016. The note was forgiven as part of the conversion of the Hoboken Convertible Note on February 22, 2021 as described above. The company recorded a gain on settlement of debt of $10,000. The note balance as of September, 2021 and December 31, 2020 was $0 and $10,000, respectively.
Loan Payable
Marlin Note
On September 30, 2019 the Company, via 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 over 36 equal monthly installments of $3,144 (the “Marlin Note”). The equipment finance agreement contains customary events of default. The loan balance was $35,665 as of September 30, 2021
Schedule of Future Amortization of Loans Payable
| Payment Amortization | ||||
| 2021 (3 months remaining) | $ | 8,570 | ||
| 2022 | 27,095 | |||
| 2023 | ||||
| 2024 | ||||
| 2025 and thereafter | ||||
| Total Loan Payments | $ | 35,665 | ||
| Current portion of Loan payable | (35,665 | ) | ||
| Non-Current Portion of Loan Payable | $ | - | ||
Mercedes Benz Note
On August 21, 2020, the Company executed an installment sales contract with Mercedes Benz Coconut Creek for the purchase of a 2019 Mercedes Benz Sprinter delivery van. The installment agreement was for $55,841 with a zero interest rate payable over 60 months with a monthly payment of $931 and is personally guaranteed by Mr. Carmichael. The first payment was due on October 5, 2020. The loan balance as of September 30, 2021 is $44,673.
Schedule of Future Amortization of Loans Payable
| Payment Amortization | ||||
| 2021 (3 months remaining) | $ | 2,793 | ||
| 2022 | $ | 11,168 | ||
| 2023 | $ | 11,168 | ||
| 2024 | $ | 11,168 | ||
| 2025 and thereafter | $ | 8,376 | ||
| Total note payments | $ | 44,673 | ||
| Current portion of note payable | $ | (11,168 | ) | |
| Non-Current Portion of notes payable | $ | 33,505 | ||
| 13 |
Navitas Note
On May 19, 2021 the Company, via its wholly owned subsidiary BLU3, executed an equipment finance agreement financed for the purchase of certain plastic molding equipment through Navitas Credit Corp. (“Navitas”). The amount financed is $79,309 payable over 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 | ||||
| 2021 (3 months remaining) | $ |
2,837 |
||
| 2022 | 12,974 | |||
| 2023 | 14,403 | |||
| 2024 | 15,991 | |||
| 2025 | 17,753 | |||
| Balance | 11,310 | |||
| Total Note Payments | $ | 75,268 | ||
| Current portion of Note payable | (12,676 | ) | ||
| Non-Current Portion of Note Payable | $ | 62,592 | ||
PPP Loan
On May 12, 2020, we received an unsecured loan from South Atlantic Bank in the principal amount of $159,600 (the “SBA Loan”), under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration. The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a focus on payroll. As a qualifying business as defined by the SBA, we used the proceeds from this loan to primarily help maintain our payroll and cover our rent and utilities as we navigated our business through the lockdowns associated with the COVID-19 pandemic until our return to normal operations earlier in 2020.
The term of the note is two years, though it may be payable sooner in connection with an event of default under the note. The SBA Loan carries a fixed interest rate of one percent per year, and a monthly payment of $8,983, with the first payment due seven months from the date of initial cash receipt. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. We used the SBA Loan for qualifying expenses and have applied for forgiveness of the SBA Loan in accordance with the terms of the CARES Act. On April 28, 2021, the Company was notified by South Atlantic Bank that the SBA Loan was forgiven in full under the terms of the CARES Act. The company recorded the forgiveness as a gain on the forgiveness of the PPP loan of $159,600 on our condensed consolidated income statement.
The note balance as of September 30, 2021 and December 31, 2020 was $0 and $159,600, respectively.
PPP Loan – Submersible Systems, Inc.
On May 12, 2020, SSI received an unsecured loan from City National Bank in the principal amount of $116,160 (the “Submersible SBA Loan”), under the CARES act.
The term of the note is two years, though it may be payable sooner in connection with an event of default under the note. The Submersible SBA Loan carries a fixed interest rate of one percent per year, and a monthly payment of $6,925, with the first payment due seven months from the date of initial cash receipt. As part of the forgiveness application and directly related to the acquisition of SSI by the Company, SSI was required to place $121,953 in an escrow account until forgiveness is determined and City National Bank has been paid in full by the SBA. On October 15, 2021, the Company was notified by City National Bank that the Submersible SBA Loan was forgiven in full under the terms of the CARES Act. The restricted cash in escrow was released in full by the bank as a result of this forgiveness on November 8, 2021.
| 14 |
The note balance as of September 30, 2021 and December 31, 2020 was $116,160 and $0 respectively.
Note 6. Business Combination
Merger with Submersible Systems, Inc.
On September 3, 2020, the Company completed its merger with Submersible Systems, Inc. Under the terms of the Merger Agreement, the Company paid $1.79 million in consideration consisting of the issuance of 27,305,442 shares of its common stock (valued at $1.4 million), the issuance of $350,000 in 8% unsecured convertible promissory notes in exchange for all of the equity of Submersible. The 27,305,442 shares of the Company’s common stock issued for the $1.44 million in consideration are subject to leak out agreements whereby the shareholders are unable to sell or transfer 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 months | Up to 12.5% | |
| 9 months | Up to 25.0% | |
| 24 months | Up to 75.0% | |
| 36 months | Up to 100.0% |
The Leak-Out Provision may be waived by the Company, upon written request by a Seller, if the Company is trading on either 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 five percent (5%) of the previous days total volume can be sold in one day by a Seller; and (ii) the Seller can only sell 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. The common stock for these transaction costs will be issued subsequent to September 30, 2021.
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 | ||
| 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 | $ | 1,094,326 | ||
| Liabilities assumed | (294,671 | ) | ||
| Net tangible assets acquired | 799,655 | |||
| Identified Intangible Assets | ||||
| Customer Relationships | $ | 672,000 | ||
| Trademarks | 121,000 | |||
| Non-compete agreements | 22,000 | |||
| Total Intangible Assets | 815,000 | |||
| Goodwill | $ | 185,264 | ||
| Total purchase price | $ | 1,799,919 |
| 15 |
In determining the number of shares of the common stock issued, the Company considered the value of the stock as defined the Merger Agreement to be the calculated based on the volume weighted average price of a share of the Company’s common stock on the OTC Markets (“VWAP”) 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. Based on this calculation, the Company utilized calculation (i) resulting in a conversion price of $.051271831. This conversion price resulted in the issuance of 27,305,442 shares of common stock with a fair value of $1,449,919 on the closing date.
Inventory was assessed at the time of closing as to its fair value, and it was determined that a step-up analysis was necessary in order to evaluate the fair value of the inventory at the time of closing. The step up represents the net profit that would be attained when the inventory is sold. The key assumptions used in this analysis is a gross margin of 38.3% and selling costs of 5.0%, The analysis resulted in a necessary step up of $31,000 at the time of closing.
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition is attributable to the value of the potential expanded market opportunity with new customers. The goodwill is not expected to be deductible for tax purposes.
As of September 30, 2021, the Company has recorded an estimated fair value of the intangible assets and goodwill of $1,198,264 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
Pro Forma Information
The following is the unaudited pro forma information assuming all business acquisitions 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
| Nine months ended September 30, 2021 | ||||
| Revenue | $ | 5,258,139 | ||
| Net Loss | $ | (1,087,932 | ) | |
| Basic and Diluted Loss per Share | $ | (0.00 | ) | |
| Basic and Diluted Weighted Average Common Shares Outstanding | 346,431,786 | |||
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.
| 16 |
Note 7. Goodwill and Intangible Assets, Net
The following table sets for the changes in the carrying amount of the Company’ Goodwill for the quarter ended September 30, 2021
Summary of Changes to Goodwill
| 2021 | ||||
| Balance, January 1 | $ | - | ||
| Acquisitions of Submersible Systems, Inc. | 185,264 | |||
| Balance, September 30 | $ | 185,264 | ||
The following table sets for the components of the Company’s intangible assets at September 30, 2021:
Summary of Intangible Assets
| Amortization Period (Years) | Cost | Accumulated Amortization | Net Book Value | |||||||||||||
| Intangible Assets Subject to amortization | ||||||||||||||||
| Trademarks | 15 | $ | 121,000 | $ | (672 | ) | $ | 120,328 | ||||||||
| Customer Relationships | 10 | 672,000 | (5,600 | ) | 666,400 | |||||||||||
| Non-Compete Agreements | 5 | 22,000 | (367 | ) | 21,633 | |||||||||||
| Total | $ | 815,000 | $ | (6,639 | ) | $ | 808,361 | |||||||||
The aggregate amortization remaining on the intangible assets as of September 30, 2021 is a follows:
Schedule of Estimated Intangible Assets Amortization Expenses
| Intangible Amortization | ||||
| 2021 (3 Months) | $ | 19,917 | ||
| 2021 | 79,667 | |||
| 2022 | 79,667 | |||
| 2023 | 79,667 | |||
| 2024 | 79,667 | |||
| Thereafter | 469,776 | |||
| Total | $ |
808,361 |
||
Note 8. Shareholders’ Equity
Common Stock
On February 22, 2021, the Company issued 422,209 shares of common stock related to the conversion of a convertible debenture and accrued interest of $14,777.
On March 1, 2021, the Company issued a consultant 3,000,000 shares of its common stock related to investor relation services at a fair value of $120,000.
On March 25, 2021, the Company issued 27,500,000 shares of common stock to Mr. Charles F. Hyatt, a member of our Board of Directors, in consideration of $275,000.
On February 25, 2021, the Company issued 116,279 shares of common stock to a consultant with a fair value of $5,000 for professional business services.
On June 10 2021, the Company issued 6,055,358 shares of common stock related to the conversion of a convertible debenture and accrued interest of $60,554.
On September 1, 2021, the Company issued Mr. Charles F. Hyatt, a member of our Board of Directors, 10,000,000 units of the securities of the Company, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025 per share in consideration of $250,000. The Company did not pay any fees or commissions in connection with the sale of the unit.
| 17 |
On August 18, 2021, the Company issued 6,114,516 shares of common stock related to the conversion of a convertible debenture and accrued interest of $61,145.
On September 1, 2021, the Company issued Ms. Grace Hyatt, the adult child of a member of our Board of Directors, 600,000 units of the securities of the Company, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025 per share in consideration of $15,000. The Company did not pay any fees or commissions in connection with the sale of the unit.
On September, 2021, the Company issued 4,000,000 units of the securities of the Company to three accredited investors, with the unit consisting of 1 share of common stock and 1 24 month common stock purchase warrants exercisable at $0.025 per share in consideration of $100,000. The Company did not pay any fees or commissions in connection with the sale of the unit.
On September 3, 2021, the Company issued 273,054 shares of common stock to Tierra Vesta Group as part of the purchase agreement of Submersible Systems, Inc. with a fair value of $14,499.
On September 3, 2021, the Company issued 27,032,388 shares of common stock to Summit Holdings V, LLC. as part of the purchase agreement of Submersible Systems, Inc. with a fair value of $1,435,420.
On September 22, 2021, the Company issued a law firm 1,190,476 shares of common stock with a fair value of $55,952 as partial consideration for its legal services related to acquisition of SSI.
Preferred Stock
During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of blank check preferred stock. The blank check preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business Corporation Act. In April 2011 the Board of Directors designated 425,000 shares of the blank check preferred stock as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into a share of the Company’s common stock at any time at the option of the holder at a conversion price of $18.23 per share. Holders of shares of Series A Convertible Preferred Stock are entitled to 250 votes for each share held. The Company’s common stock and Series A Convertible Preferred Stock vote together as on any matters submitted to our shareholders for a vote. As of September 30, 2021, and December 31, 2020, the 425,000 shares of Series A Convertible Preferred Stock are owned by Mr. 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-statutory 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. The maximum number of shares that may be issued under the Plan shall be 25,000,000 shares. Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company. The term of the Plan shall be ten years.
Equity Compensation Plan Information as of September 30, 2021:
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 | 2,075,000 | $ | .0434 | 22,925,000 | ||||||||
| Equity Compensation Plans Not Approved by Security Holders | — | — | — | |||||||||
| Total | 2,075,000 | $ | .0434 | 22,925,000 | ||||||||
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Options
Effective July 29, 2019 the Company issued options to purchase up to an aggregate of 10,380,952 shares of common stock to Mr. Blake Carmichael. The options were issued pursuant to a stock option grant agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $43,575 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 172%. These stock options were fully expensed as of December 31, 2020.
Effective July 29, 2019, the Company issued Mr. Carmichael options to purchase up to 20,761,904 shares of common stock. The options were issued pursuant to a Grant Agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $87,147 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.01%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 172%. These stock options were fully expensed during the year ending December 31, 2020.
Effective January 6, 2020, the Company issued options to purchase up to 2,000,000 shares of common stock to Mr. Jeffrey Guzy, then a member of the Board of Directors of the Company. The options were issued pursuant to a stock option grant agreement and is exercisable at $0.0229 per share for a period of three years from the date of issuance. The options were immediately vested. The fair value of the options on the date of the grant was $40,107 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 1.55%, ii) expected life of 1.5 years, iii) dividend yield of 0%, iv) expected volatility of 250%. These stock options were fully expensed during the year ending December 31, 2020.
Effective January 11, 2020, the Company issued options to purchase up to 2,000,000 shares of common stock to BizLaunch Advisors, LLC. The options were issued pursuant to a professional services agreement and are exercisable at $0.0229 per share for a period of three years from the date of issuance. The options were immediately vested. The fair value of the options on the date of the grant was $40,097 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 1.54%, ii) expected life of 1.5 years, iii) dividend yield of 0%, iv) expected volatility of 250%. These stock options were fully expensed during the year ending December 31, 2020.
On April 14, 2020, the Company entered into a Non-Qualified Stock Option Agreement with Mr. Carmichael (the “Carmichael Option Agreement”). Under the terms of the Carmichael Option Agreement, as additional compensation the Company granted Mr. Carmichael an option (the “Carmichael Option”) to purchase up to an aggregate of 125,000,000 shares of the Company’s common stock at an exercise price of $.045 per share, of which the right to purchase 75,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase 50,000,000 shares of common stock is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
| ● | the right to purchase 25,000,000 shares of the Company’s common stock shall vest at such time as the Company reports cumulative consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any subsequent acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively, “Net Revenues”), in excess of $3,500,000 in the aggregate over four consecutive fiscal quarters commencing May 1, 2020 and ending on April 30, 2023 (the “Net Revenue Period”); |
| ● | the right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $7,000,000 in the aggregate over four consecutive fiscal quarters during the Net Revenue Period; and |
| ● | the right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues in excess of $10,500,000 in the aggregate over four consecutive quarters during the Net Revenue Period. |
| 19 |
The Carmichael Option Agreement provides that the Carmichael Option is exercisable by Mr. Carmichael on a cashless basis. The Carmichael Option is not transferrable by Mr. Carmichael, and he must remain an employee of the Company as an additional term of vesting. Once a portion of the Carmichael Option vests, it is exercisable by Mr. Carmichael for 90 days. Any portion of the Carmichael Option which does not vest during the Net Revenue Period lapses and Mr. Carmichael has no further rights thereto.
The fair value of the Carmichael Option on the date of the grant was $4,370,109 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of .26%, ii) expected life of 1.5 years, iii) dividend yield of 0%, iv) expected volatility of 320%. The Company analyzed the likelihood that the vesting qualifications would be met. As of June 30, 2021, 25,000,000 of options were vested as the targeted net revenues were reached and fully expensed. The second net revenue target was 50% reached. Therefore, stock option expense recognized during the nine months ended September 30, 2021 for this option was $655,517.
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. Under the terms of the option agreement, the Company granted Mr. Constable a 5 year option to purchase 5,434,783 shares of the Company’s common stock at an exercise price of $.0184, (the “Compensation Options”). The Compensation Options were immediately vested. The fair value of the options on the date of the grant was $106,199 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of .16%, ii) expected life of 2.5 years, iii) dividend yield of 0%, iv) expected volatility of 341%. These stock options were fully expensed as of December 31, 2020.
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 $.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. |
| 20 |
The Constable Option Agreement provides that the Compensation Options and Bonus Options are exercisable by Mr. Constable on a cashless basis. The Constable Option is not transferrable by Mr. Constable, and he must remain an employee of the Company as an additional term of vesting. Once a portion of the Constable Option vests, it is exercisable by Mr. Constable for four years.
The fair value of the Bonus Options on the date of the grant was $578,082 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of .14%, ii) expected life of 2.0 years, iii) dividend yield of 0%, iv) expected volatility of 312.2%. The Company analyzed the likelihood that the vesting qualifications would be met, and as of September 30, 2021, deemed that the Company met the qualifications for 2 quarters for tranche one of the options. Therefore, stock option expense recognized during the nine months ended September 30, 2021 for this option was $58,400.
Effective 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 a 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 nine months ended September 30, 2021 was $9,594.
On August 1, 2021 as part of the Blake Carmichael Employment Agreement (as defined below), the Company is obligated to enter into a Non-Qualified Stock Option agreement with Blake Carmichael. Under the terms of the Blake Carmichael Employment agreement, the Company will enter into an option contract that will grant Blake Carmichael a 5 year option to purchase 3,759,400 shares of the Company’s common stock at an exercise price of $.0399, (the “BC Compensation Options”). The BC Compensation Options vest 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%, iv) expected volatility of 346.36%. The Company expensed $49,692 as of September 30, 2021.
As part of the Blake Carmichael Agreement the company is also obligated to enter into a Non-Qualified Stock option agreement (the “BC Bonus Options”) that will grant Blake Carmichael a 5-year option to purchase up to 18,000,000 shares to be vested annually on a contract year basis, based upon the achievement of certain financial metrics tied to Revenue and EBITA. 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 .25%, ii) expected life of 2.5 years, iii) dividend yield of 0%, iv) expected volatility of 346.36%, v) exercise price of .0399 per share. The measurement period for these options began in August, 2021 The Company deemed that there was no option expense to be recognized for the nine months ended September 30, 2021.
During the Third Quarter, 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 of 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%, iv) expected volatility of 249.38% to 287.12%. The stock options expense recognized for the nine months ended September 30, 2021 was $1,494.
Effective September 3, 2021 the Company issued options to purchase up to an aggregate of 300,000 shares of common stock to Christeen Buban, President of SSI under the Plan. The options were issued pursuant to the Buban Agreement and a stock option grant agreement and is 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 .315%, ii) expected life of 2.5 years, iii) dividend yield of 0%, iv) expected volatility of 339.21%. The stock options expense recognized for the nine months ended September 30, 2021 was $1,977.
As part of the Buban Agreement the company is also obligated to enter into a Non-Qualified Stock option agreement (the “Buban Bonus Options”) that will grant Mrs. Buban a 5-year option to purchase up to 7,110,000 shares to be vested annually on a contract year basis, based upon the achievement of certain financial metrics tied to Revenue and EBITA. The fair value of the Buban Bonus Options was $374,786 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of .3150%, ii) expected life of 2.5 years, iii) dividend yield of 0%, iv) expected volatility of 339.21%, v) exercise price of .0531 per share. The measurement period for these options began on September 3, 2021. The company deemed that there was no option expense to be recognized for the nine months ended September 30, 2021.
Effective 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 .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 nine months ended September 30, 2021 was $3,150.
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A summary of the Company’s outstanding stock options as of December 31, 2020, and changes during the nine months ended September 30, 2021 is presented below:
Schedule of Option Activity
|
Number
of
Options |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life in Years |
Aggregate
Intrinsic Value |
|||||||||||||
| Outstanding - December 31, 2020 | 199,730,020 | $ | 0.0185 | 2.84 | $ | 168,892 | ||||||||||
| Granted | 30,969,400 | 0.0432 | ||||||||||||||
| Forfeited | (25,000 | ) | 0.036 | |||||||||||||
| Exercised | - | - | ||||||||||||||
| Outstanding – September 30, 2021 (unaudited) | 230,674,420 | $ | 0.0281 | 2.45 | ||||||||||||
| Exercisable – September 30, 2021 (unaudited) | 71,295,653 | $ | 0.0185 | 2.41 | $ | 1,175,136 | ||||||||||
Warrants
On September 1, 2021, the Company issued Mr. Charles F. Hyatt, a member of our Board of Directors, 10,000,000 units of the securities of the Company, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025 per share in consideration of $250,000. The Company did not pay any fees or commissions in connection with the sale of the unit.
On September 1, 2021, the Company issued Ms. Grace Hyatt, the adult child of a member of our Board of Directors, 600,000 units of the securities of the Company, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025 per share in consideration of $15,000. The Company did not pay any fees or commissions in connection with the sale of the unit.
In September, 2021, the Company issued 4,000,000 units of the securities of the Company to three accredited investors, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025 per share in consideration of $100,000. The Company did not pay any fees or commissions in connection with the sale of the unit.
A summary of the Company’s warrants as of December 31, 2020 and changes during the nine-month period then ended September 30, 2021 is presented below:
Schedule of Warrants
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding - December 31, 2020 | - | $ | 0.01 | 1.85 | ||||||||||||
| Granted | 14,600,000 | $ | 0.025 | |||||||||||||
| Exercised | - | |||||||||||||||
| Forfeited or Expired | - | |||||||||||||||
| Outstanding - September 30, 2020 | 14,600,000 | $ | 0.025 | 1.92 | ||||||||||||
| Exercisable - September 30, 2020 | 14,600,000 | $ | 0.025 | 1.92 | $ | 292,000 | ||||||||||
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Note 9. Commitments and contingencies
On August 14, 2014, the Company entered into a thirty-seven-month term lease for its facilities in Pompano Beach, Florida, commencing on September 1, 2014. Terms included payment of $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 (i.e. common areas maintenance), which was approximately $2,000 per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term.
On January 4, 2018, the Company entered into a sixty-one month lease renewal for its facility in Huntington Beach, CA, commencing on February 1, 2018. Terms included base rent of approximately $9,300 Gross per month for the first 12 months and increasing 2.5% annual escalation throughout the amended term. The Company paid a security deposit of $8,450 with the initial lease that ended with the renewal.
On November 11, 2018, the Company entered a new lease agreement for approximately 8,025 square feet adjoining its existing facility in Pompano Beach, Florida. Terms of the new lease include a sixty-nine month term commencing on January 1, 2019, or the date the Company took possession of the premises, if earlier; 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 payment of 10.11% of the buildings annual operating expenses (i.e. common area maintenance) which is approximately $1,679 per month subject to adjustment as provided in the lease.
On June 30, 2020, the Company entered into Amendment No. 2 to the Patent License Agreement with Setaysha Technical Solutions, LLC (“STS”). The amendment set certain limits and expectations of the assistance from STS related to designing and commercializing certain diving products, and revised the royalty payments due to STS as consideration for uncompensated services. The Company is obligated to pay STS a minimum yearly royalty of $60,000, or $15,000 per fiscal quarter, beginning in December 2019 and increasing by 2.15% per year. The minimum royalty was temporarily increased to $60,000 for fiscal years 2022, 2023 and 2024, with a fourth quarter true up against earned royalties. In addition, if the Company should terminate the agreements with STS prior to December 31, 2023, then the Company is obligated to pay STS $180,000, less cumulative royalties paid in excess of $200,174 for the years 2019 through 2024. Royalty recorded in relation to this agreement totaled $24,854 and $13,379 for the three months ended September 30, 2021 and 2020, respectively and $79,809 and $41,306 for the nine months ended September ended September 30, 2021 and 2020, respectively.
On June 9, 2020, the Company entered into an advertising and marketing agreement with Figment Design. The term of the agreement is for one year, and thereafter renew or cancel the agreement in writing 60 days before the final date. The Company will continue to be billed $8,840 per month through the expiration date of July 2021. The Company terminated the agreement with Figment Design effective July 31, 2021.
On August 1, 2020, BLU3 entered into a marketing agreement with This Way Media PTY, Ltd. The term of this agreement is for 11 months and can be cancelled with 30 days’ notice during the first 90 days of the agreement. After the first 90 days, the agreement can be cancelled with 60 days’ notice after the completion of the term of the agreement. BLU3 will pay This Way Media PTY, LTD $500 per month, and 5% of each affiliate sale. This agreement expired on July 1, 2021. BLU3, Inc. is currently in negotiation to renew this agreement.
On November 5, 2020, the Company and Christopher H. Constable entered into a three year employment agreement (the “Constable Employment Agreement”) pursuant to which the Mr. Constable shall serve as Chief Executive Officer of the Company. Previously, Mr. Constable had provided advisory services to the Company through the 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) issuable 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 stock 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 Common Stock on the date of issuance. Therefore, the Executive shall receive an initial stock option grant to purchase 5,434,783 shares of the Corporation’s common stock at an exercise price of $0.0184 per share pursuant to an option award agreement.
In addition, Mr. Constable shall be entitled to receive four-year stock options to purchase shares of common stock at an exercise price equal to $0.0184 per share in the amounts listed below 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 on NASDAQ or New York Stock Exchange.
| 23 |
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.
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 continue to serve as Chief Executive Officer of BLU3. In consideration for his services, Blake Carmichael shall receive (i) an annual base salary of $120,000, payable in accordance with the customary payroll practices of the Company, and (ii) a cash bonus equal to 5% of the net income of BLU3 payable quarterly, beginning with the first full calendar quarter after the execution of the agreement. (iii) Issuable upon execution of the Employment Agreement, a non-qualified five-year stock option to purchase 3,759,400 shares at $.0399. 33.3% of the stock option vests immediately, 33.3% vests on the second anniversary of the contract and 33.3% on the third anniversary of the agreement.
In addition, Blake Carmichael shall be entitled to receive a five-year stock options to purchase up to 18,000,000 shares of common stock at an exercise price equal to $0.0399 per share that will vest upon defined financial metrics that are measured on a contract year basis. The metrics defined in the agreement escalate the shares available to vest 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. The merger agreement shall pay seven percent commission for the first two million dollars paid in aggregate consideration and six percent on the aggregate consideration above two million dollars. The fee shall be paid in the common stock of the Company. The equity received is subject to a holding period of six months from the closing date of the transaction.
On September 3, 2021, SSI and Christeen Buban entered into a three-year employment agreement (the “Buban Employment Agreement”) pursuant to which Mrs. Buban shall serve as the President of SSI. In consideration for his 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 totaling $10,800 per year, (iii) a five-year stock option issued under the Plan to purchase 300,000 shares at $.0531. The options vest quarterly over the next eight calendar quarters.
In addition, Mrs. Buban shall be entitled to receive a five-year stock options to purchase up to 7,110,000 shares of common stock at an exercise price equal to $0.0531 that will vest upon defined financial metrics that are measured on a contract year basis. The metrics defined in the agreement escalate the shares available to vest based upon a revenue measurement, expediency measurement and an EBITDA measurement.
Legal
The Company was a defendant in that certain lawsuit styled 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 in and for 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 pays monthly installments of $1,000 and is current in its payments.
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Note 10. Segment Reporting
The Company has four operating segments as described below:
| 1. | Legacy SSA Products, which sells recreational multi-diver surface supplied air diving systems. | |
| 2. | High Pressure Gas Systems, which sells high pressure air and industrial gas compressor packages. | |
| 3. | Ultra Portable Tankless Dive Systems, which sells next generation electric surface supply air diving systems and electric shallow dive system that are battery operated and completely portable to the user. | |
| 4. | Redundant Air Tank Systems, which manufactures and distributes a line of high pressure tanks and redundant air systems for the military and recreational diving industries |
Schedule of Segment Reporting Information
Nine months ended
September 30
| Legacy SSA Products | High Pressure Gas Systems | Ultra Portable Tankless Dive Systems | Redundant Air Tank Systems | Total Company | ||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||
| Net Revenues | $ | 2,419,920 | $ | 2,192,175 | $ | 477,085 | $ | 352,383 | $ | 1,204,265 | $ | 1,081,418 | $ | 121,131 | $ | - | $ | 4,222,401 | $ | 3,625,976 | ||||||||||||||||||||
| Cost of Revenue | (1,682,597 | ) | (1,301,939 | ) | (279,209 | ) | (230,366 | ) | (885,223 | ) | (814,196 | ) | (92,063 | ) | - | (2,939,092 | ) | (2,346,501 | ) | |||||||||||||||||||||
| Gross Profit | 737,323 | 890,236 | 197,876 | 122,017 | 319,042 | 267,222 | 29,068 | - | 1,283,309 | 1,279,475 | ||||||||||||||||||||||||||||||
| Depreciation | 13,077 | 5,105 | - | - | 10,001 | 9,672 | 6,639 | - | 29,717 | 14,777 | ||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | (1,071,220 | ) | $ | (479,387 | ) | $ | 46,435 | $ | (37,300 | ) | $ | (188,534 | ) | $ | (122,767 | ) | $ | (16,025 | ) | $ | - | (1,229,344 | ) | $ | (639,454 | ) | |||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 1,679,021 | $ | 1,646,192 | $ | 314,514 | $ | 193,019 | $ | 904,386 | $ | 654,427 | $ | 2,210,009 | $ | - | $ | 5,107,930 | $ | 2,493,638 | ||||||||||||||||||||
Three Months Ended
September 30
| Legacy SSA Products | High Pressure Gas Systems | Ultra Portable Tankless Dive Systems | Redundant Air Tank Systems | Total Company | ||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||
| Net Revenues | $ | 976,904 | $ | 1,271,668 | $ | 119,392 | $ | 78,997 | $ | 341,287 | $ | 319,994 | $ | 121,131 | $ | - | $ | 1,558,714 | $ | 1,670,659 | ||||||||||||||||||||
| Cost of Revenue | $ | (644,525 | ) | (763,157 | ) | (84,532 | ) | (45,079 | ) | (362,566 | ) | (182,632 | ) | (92,063 | ) | - | (1,183,686 | ) | (990,868 | ) | ||||||||||||||||||||
| Gross Profit | 332,379 | 508,511 | 34,860 | 33,918 | (21,279 | ) | 137,362 | 29,068 | - | 375,028 | 679,791 | |||||||||||||||||||||||||||||
| Depreciation | 4,517 | 1,950 | - | - | 5,165 | 2,419 | 6,639 | - | 16,321 | 4,369 | ||||||||||||||||||||||||||||||
| Income (loss) from Operations | $ | (312,790 | ) | $ | 135,302 | $ | (3,155 | ) | $ | (35,063 | ) | $ | (202,594 | ) | $ | (41,248 | ) | $ | (16,025 | ) | $ | - | (534,564 | ) | 58,991 | |||||||||||||||
Note 11. Subsequent Events
On October 15, 2021, City National Bank, the lender of the Submersible SBA Loan of $116,160 informed SSI Company that its loan forgiveness application had been accepted, and the Submersible SBA Loan was fully forgiven in accordance with the terms of the CARES Act.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
BWMG, through its wholly owned subsidiaries, designs, tests, and manufactures tankless dive systems, yacht-based SCUBA air compressor and nitrox generation fill systems and acts as the exclusive distributor for North and South America for Lenhardt & Wagner GmbH (“L&W”) compressors in the high-pressure breathing air and industrial gas markets. Our wholly owned subsidiaries and related product lines are as follows:
|
[
Legacy SSA Products |
This segment represents our surface supplied air (SSA) product line. Trebor began its business making surface supplied air diving systems in the late 1960s. Our Brownie’s Third Lung systems have long been a dominant figure in gasoline powered, high-performance, and now the battery powered surface supplied air diving systems. Taking full advantage of the proprietary compressor system, a complete series of traditional “fixed speed” electric compressors were developed for the built-in-boat market in 2005. After years of inventing, testing and development, in 2010 we introduced our variable-speed battery powered hookah system which provides divers with gasoline-free all day shallow diving experiences. This battery system was updated in 2019 we introduced a lithium-ion battery powered variable speed system that is capable of three dives to thirty feet for three hours on one charge. These systems provide performance and runtimes as great as 300% better than the best devices previously on the market by utilizing a variable speed technology that controls battery consumption based on diver demand.
The Legacy SSA segment has experienced a 45.8% growth in units sold in the first nine months of 2021 as compared to the first nine months of 2020, as we continue to expand our dealer network and the breadth of product that each of the dealers provide.
This segment is seeing results from its marketing efforts with both the consumer and our network of dealers. The company continues to add dealers across the country in order to diversify the seasonality as well as the geography risks. Additionally, we continue to pursue more aggressively the boat builder market to offer our Legacy SSA systems as an option on newly built boats, expanding our market beyond the traditional consumer markets for our products. Our Legacy SSA products include:
● Tankless Dive Systems: The Company produces a line of tankless dive products, commonly called hookah or recreational surface supplied air systems. These systems allow one to four divers to enjoy the marine environment up to a depth of up to 45 feet without the bulk and weight of conventional SCUBA gear. The removal of barriers to entry into the sport of diving and the reduction of complicated and bulky SCUBA gear invites a broader range of the general public to participate more actively and enjoyably at their own pace and schedule. The design of our product also reduces the effort required for both its transport and continued use while exploring, cruising or traveling. A line of land-based systems is available for light-duty commercial applications that demand portability and performance. In addition to the gasoline-powered units and the variable speed battery powered units, a series of AC electric powered systems is also available for light to commercial duty. Powered by battery for portability or household current for virtually unlimited dive duration, these units are used primarily by businesses that work in aquatic maintenance and marine environments.
● BIAS (Boat Integrated Air Systems): The Company developed several tankless products and complimentary accessories that it believes makes boat diving even easier. The BIAS battery powered tankless kit allows boat builders, dealers and end users to seamlessly install a pre-packaged kit directly into the boat. The E-Reel advances this idea by adding a level-winding battery powered hose reel system to provide compact storage of up to 150 feet of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. In addition to supplying air to divers, BIAS is useful for supporting air horns, inflating boat fenders/water toys, activating pneumatically operated doors, and more. The Company strategy is to align the easy to install, complete kit packages with boat builders, dealer and end users through a vertically targeted sales and marketing program. |
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High Pressure Gas Systems |
Through this segment, we design, manufacture, sell and install SCUBA tank fill systems for on-board yacht use under the brand “Yacht-Pro™”. Our systems provide complete diving packages and dive training solutions for yachts, includes Nitrox systems which allow yacht owners to fill tanks with oxygen enriched air on board. The Yacht-Pro™ compressor systems offer a completely marine-prepared, VFD (variable frequency drive)-driven, automated alternative to other compressors on the market. We also design complete dive lockers, mixed gas production and distribution systems, and the unique Nitrox Maker™. Nitrox is oxygen-enriched air, which reduces the effects of nitrogen on divers; it is the industry standard for dive professionals. The Nitrox Maker™ continuously generates the oxygen rich breathing gas directly from low-pressure air; no stored oxygen or other gases are required onboard.
Consistent with our goals for 2021, this segment of our business continues to work to expand its customer base beyond that of the diving community. We believe the product lines from L&W, will allow LW Americas to put a high quality, competitive products into the first responder and industrial market that utilize compressed air for many applications. Our goal will be to build a network of jobbers, dealers, installers and high-pressure compressor distributors throughout the territory by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product OEM integration relationships. |
|
|
[
Ultra Portable Tankless Dive Systems |
Through our wholly-owned subsidiary BLU3, we develop and market a next generation electric surface supplied air diving systems electric shallow dive system that is completely portable to the user. The BLU3 line currently consists of two models targeting specific performance levels and price points – NEMO and NOMAD.
The NEMO dive system continues to expand its customer base and become more accepted across the world. Currently, Nemo is sold in 9 countries through Amazon, and also through 25 dealers across the world. Nemo, the world’s smallest dive system is capable of taking one diver to 10 feet for 60 to 90 minutes on one charge of its lithium-ion battery. Nemo is portable, and approved for airline travel.
NOMAD is currently in production with the first units shipping at the beginning of August. The company is fulfilling its customer pre-orders production is in full swing and the company has begun to deliver its significant pre-orders to both end users and dealers. The NOMAD has seen wide acceptance and excitement at industry trade shows. The NOMAD will expand the customers dive capability to up to 30 feet and continue to drive the vertical integration of the diving experience. |
|
|
Redundant Air Tank Systems |
In 2021 the Company acquired SSI to further expand its product offerings and manufacturing capabilities.
SSI has been manufacturing redundant air systems for recreational divers, private companies and militaries throughout the world for more than 40 years.
Their state-of-the-art manufacturing facilities in Huntington Beach, CA is fully equipped to add to the machining and product development capabilities of the Company.
The SSI acquisition will give the Company access to a world-wide base of dealers and distributors, GSA contracting capability, as well as the direct source for the redundant air needs for all of our BTL and BLU3 divers. It also expands both entities warehousing capabilities, reducing freight costs for both sets of customers.
SSI continues to innovate their technologies to meet changing military and commercial needs and is in development of the next generation of their HEED product line, specifically designed for aircraft and military vehicle use. Additionally, SSI has found use for their products in the medical field and continues to develop customer relationships in that area to grow revenue and diversify its product and customer portfolio. |
]
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Third Quarter and Nine Months ended September 30, 2021 Highlights
Revenue for the Third Quarter 2021 declined as compared to the same period in 2020, however, revenue for the nine months ended September 30, 2021 have maintained an increased as compared to the same periods in 2020, The Company continues its mission to expand our customer base from primarily the southeast US to an international distributor and retail customer base. We believe that we are changing the way that people will approach the next atmosphere, by providing innovative, portable and easy to use surface supplied air products that will allow the users to explore what is below the surface of the water.
Highlights:
| ● | The Company closed on the acquisition of Submersible Systems, Inc., expanding the Company’s product portfolio, manufacturing capability and geographic reach. |
| ● | NOMAD has completed the design and testing phase and its manufacturing capabilities are expanding as the product was designed to reduce manufacturing time compared to NEMO. |
| ● | BLU3, Inc. reached 100% of pre-order capacity for September and October shipment of its Nomad Product line. |
| ● | The Company raised $365,000 in the Third quarter, 2021 to secure supply chain for 2022, and taking advantage of buying opportunities to secure raw materials and components whenever possible. |
| ● | The Company reorganized marketing expenses by terminating its marketing agency, and employing a social media/marketing manager to continue the Company’s commitment to growing its Social Media presence |
Results of Operations
Net Revenues, Costs of Net Revenues and Gross Profit
Net revenues decreased 6.7% for the Third Quarter, 2020, but increased 16.4% for the nine months ended September 30, 2021 from the comparable period in 2020. The Third Quarter, 2021 decreases were are result of a reduction in sales to related parties of 7.2% and sales to third parties of 4.3% due to supply chain issues discussed below. For the nine months ending September 30, 2021, sales related parties have increased 13.5% and third party sales increase 30.5% as compared to the same period in 2020 from sales to related parties for the three and nine months ended September 30, 2021, respectively, over the comparable prior period. Net revenue for the Third Quarter 2020 and nine months ended September 30, 2020 included non-recurring revenue related to the Blu-Vent project of approximately $574,901. Adjusting this non-recurring item from the 2020 revenue the core business revenue increase for the three and nine months ended September 30, 2021 would be 38.2% and 0.1%, respectively.
Our total cost of net revenues in the Third Quarter 2021 and the nine months ended September 30, 2021 were 75.9% and 69.6% of our total net revenues as compared to 59.3% and 64.7% for the same periods in 2020. Included in our total cost of net revenues are royalty expenses we pay to Mr. Carmichael which decreased 38.7% and increased 8.3% for the three and nine months ended September 30, 2021 as compared to the same periods in the prior year. The decreased royalties are the result of decreased Third Quarter revenue in the legacy SSA segment as compared to the same periods in 2020. Also included in the total cost of net revenue are royalties paid pursuant to our agreement with STS. These royalties accounted for approximately 1.6% and 1.9% of total net revenue for the three and nine months ended September 30, 2021, respectively as compared to .8% and 1.1% for the same periods in 2020.
We reported an overall gross profit margin of 24.1% and 30.4% for the three and nine months ended September 30, 2021 as compared to 40.7% and 35.3% for the three and nine months ended September 30, 2020. The Legacy SSA product lines suffered from supply chain slowness in the Third Quarter 2021 decreasing sales for the Third Quarter 2021 as compared to the same period in 2020. This led to increased direct labor costs as compared to revenue. The High Pressure Gas Systems margins have shown a decrease in margin percentage for the Third Quarter 2021 to 29.2% from 42.9% during the same quarter in 2020. However, with the increased revenue in this segment for the Third Quarter 2021, dollar margin available to cover operating expenses remained consistent with the same period in the prior year. Revenue in this segment grew 51.1% for the Third Quarter, 2021 as compared to the Third Quarter 2020. Margins related to the Ultra-Portable Tankless dive segment decreased to (6.2%) from 42.9% for the Third Quarter 2021 as compared to the Third Quarter, 2020. The margins in this segment were impacted by direct labor costs which increased 120% for the quarter over the same quarter in 2020. This increase is solely attributable to ramping up manufacturing labor for NOMAD production, which began shipping in October, 2021.
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The following tables provides net revenues, total costs of net revenues, and gross profit margins for our segments for the periods presented.
Net Revenues
| Three Months Ended September 30 | % of | Nine Months Ended September 30, | % of | |||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||
| Legacy SSA Products | $ | 976,904 | $ | 1,271,668 | (23.2 | %) | $ | 2,419,920 | $ | 2,192,175 | 10.4 | % | ||||||||||||
| High Pressure Gas Systems | 119,392 | 78,997 | 51.1 | % | 477,085 | 352,383 | 35.4 | % | ||||||||||||||||
| Ultra-Portable Tankless Dive Systems | 341,287 | 319,994 | 6.7 | % | 1,204,265 | 1,081,418 | 11.4 | % | ||||||||||||||||
| Redundant Air Tank Systems | 121,131 | - | 100.0 | % | 121,131 | - | 100.0 | % | ||||||||||||||||
| Total net revenues | $ | 1,558,714 | $ | 1,670,659 | (6.7 | %) | $ | 4,222,401 | $ | 3,625,976 | 16.4 | % | ||||||||||||
Cost of revenues as a percentage of net revenues
|
Three
Months Ended
September 30, |
Nine
Months Ended
September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Legacy SSA Products | 66.0 | % | 60.0 | % | 69.5 | % | 59.4 | % | ||||||||
| High Pressure Gas Systems | 70.8 | % | 57.1 | % | 58.5 | % | 65.4 | % | ||||||||
| Ultra-Portable Tankless Dive Systems | 106.2 | % | 57.1 | % | 73.5 | % | 75.3 | % | ||||||||
| Redundant Air Tank Systems | 76.0 | % | - | 76.0 | % | - | ||||||||||
Gross profit (loss) margins
|
Three
Months Ended
September 30, |
Nine
Months Ended
September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Legacy SSA Products | 34.0 | % | 40.0 | % | 30.5 | % | 40.6 | % | ||||||||
| High Pressure Gas Systems | 29.2 | % | 42.9 | % | 41.5 | % | 34.6 | % | ||||||||
| Ultra-Portable Tankless Dive Systems | (6.2 | %) | 42.9 | % | 26.5 | % | 24.7 | % | ||||||||
| Redundant Air Tank Systems | 24.0 | % | - | 24.0 | % | - | ||||||||||
Legacy SSA Products segment
Revenue in this segment for the Third Quarter 2021 declined 23.2% as compared to the same period in 2020. The decline was across all customer segments for primarily the following two reasons: 1) Schools in our primary geographic areas of revenue started fully in person during the Third Quarter 2021, cutting back activity time for families out on the water. 2) Supply chain slowness. The Company was unable to ship orders for nearly the entire month of August due to critical parts delays. Additionally, the Company was unable to further supply its popular Pioneer model of Third Lung to the market for July and August due to a lack of availability in North America of the engine that is the core selling feature of that unit. All indications are that the shortage of this specific engine is a temporary delay, and supplier estimates indicate a product availability in the first quarter of 2022. The sales staff of the Company maintained sales momentum by encouraging customers to purchase what is available. Despite the decline during the Third Quarter 2021, revenue for the nine months ending September 30, 2021 is up over the prior year in this segment by 10.4%. The largest increase year to date is in the dealer segment, increasing 15.6% year over year for the nine months ending September 30, 2021. The company has put a significant effort in increasing the Company’s dealer base during 2021 both in number and geographically.
Our costs of revenues as a percentage of net revenues in this segment increased from 59.4% to 69.5% for the nine months ended September 30, 2021 from the prior year. The increased cost of revenue, and in turn reduction in product margin, can be attributed to increase proportion of dealer sales as compared to the prior year, as well as the increased labor burden to cost of sales, in comparison to total cost due to the decrease in anticipated production and therefore sales for the Third Quarter, 2021.
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A breakdown of the revenue channels for this segment are below. Direct to Consumer represent items sold via our website, trade shows and walk-ins to our factory store. Dealer revenue represents sales to customers that we have dealer agreements that typically operate with the lowers margin. Affiliates are resellers of our products that are not in a formal dealer arrangement.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Third Quarter 2021 | Third Quarter 2020 | % change | Third Quarter 2021 | Third Quarter 2020 | Third Quarter 2021 | Third Quarter 2020 | ||||||||||||||||||||||
| Dealers | $ | 660,180 | $ | 852,185 | -22.5 | % | 70.4 | % | 70.4 | % | 29.6 | % | 29.6 | % | ||||||||||||||
| Direct to Consumer (website Included) | 311,479 | 406,562 | -23.4 | % | 54.8 | % | 37.7 | % | 45.2 | % | 62.3 | % | ||||||||||||||||
| Affiliates | 5,245 | 12,921 | -59.4 | % | 173.4 | % | 78.1 | % | (73.4 | )% | 21.9 | % | ||||||||||||||||
| Total | $ | 976,904 | $ | 1,271,668 | -23.2 | % |
66.0 |
% | 60.0 | % | 34.0 | % | 40.0 | % | ||||||||||||||
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | % change | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||||
| Dealers | $ | 1,577,607 | $ | 1,364,469 | 15.6 | % | 75.3 | % | 62.8 | % | 24.7 | % | 37.2 | % | ||||||||||||||
| Direct to Consumer (website Included) | 796,565 | 794,061 | 0.3 | % | 57.2 | % | 53.2 | % | 42.8 | % | 46.8 | % | ||||||||||||||||
| Affiliates | 45,748 | 33,645 | 36.0 | % | 85.8 | % | 67.2 | % | 14.2 | % | 32.8 | % | ||||||||||||||||
| Total | $ | 2,419,920 | $ | 2,192,175 | 10.4 | % | 69.5 | % | 59.4 | % | 30.5 | % | 40.6 | % | ||||||||||||||
High Pressure Gas Systems segment
Sales of high-pressure breathing air compressors had a 51.1% year over year increase during the Third Quarter 2021 as the marketplace continues to see an economic recovery during through the Third Quarter, 2021. All segments have opened up, and demand is continuing to increase, with travel returning, and diving operations throughout the US and Caribbean have re-opened and receiving tourists. The majority of our dive resort and dive operator customers’ businesses were up and running in the Third Quarter, 2021, and the recovery of this customer segment can be seen in the increases in revenue of 127% in the reseller segment. The Original Equipment Manufacturer segment continues to show growth with an increase of 35.4% for the nine months ended September 30, 2021 as compared to 2020. The direct to consumer segment, which includes yacht owners and direct to dive stores, showed additional improvement in the Third Quarter, 2021 increasing 47.9%, however this increase wasn’t enough to recover the year over year results for the nine months ended September 30, 2021 with a decrease in revenue in the segment of 17.3%. We continue to see acceptance of the L&W brand and we expect sales to continue to increase as we open the product up to new markets outside of the diving and yachting segments.
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Our costs of revenues as a percentage of net revenues in this segment decreased to 58.5% as compared to 65.4% for the nine months ended September 30, 2021 and 2020. This can be attributed to significant improvements of in margin to the reseller and OEM customer segments. This is attributed to improved product mix and improvements in the job-costing process.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Third Quarter 2021 | Third Quarter 2020 | % change | Third Quarter 2021 | Third Quarter 2020 | Third Quarter 2021 | Third Quarter 2020 | ||||||||||||||||||||||
| Resellers | $ | 103,667 | $ | 45,649 | 127.0 | % | 73.6 | % | 76.5 | % | 52.0 | % | 23.5 | % | ||||||||||||||
| Direct to Consumers | 12,301 | 8,319 | 47.9 | % | 53.4 | % | 298.2 | % | 46.6 | % | -198.2 | % | ||||||||||||||||
| Original Equipment Manufacturers | 3,424 | 25,029 | 86.3 | % | 48.1 | % | 106.2 | % | 51.9 | % | -6.2 | % | ||||||||||||||||
| Total | $ | 119,392 | $ | 78,997 | 51.1 | % | 70.8 | % | 57.1 | % | 29.2 | % | 42.9 | % | ||||||||||||||
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | % change | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||||
| Resellers | $ | 321,590 | $ | 187,368 | 71.6 | % | 60.7 | % | 73.0 | % | 39.3 | % | 27.0 | % | ||||||||||||||
| Direct to Consumers | 106,564 | 128,877 | -17.3 | % | 49.5 | % | 49.1 | % | 50.5 | % | 50.9 | % | ||||||||||||||||
| Original Equipment Manufacturers | 48,931 | 36,138 | 35.4 | % | 56.1 | % | 83.9 | % | 43.9 | % | 16.1 | % | ||||||||||||||||
| Total | $ | 477,085 | $ | 352,383 | 35.4 | % | 58.5 | % | 65.4 | % | 41.5 | % | 34.6 | % | ||||||||||||||
Ultra Portable Tankless Dive Systems
Revenue for the nine months ended September 30, 2021 in the Ultra Portable Tankless Dive System segment continues to show improvement with growth of 11.4% increase for the first nine months of 2021 as compared to the same period in 2020. The increase in revenue is despite the loss of the non-recurring revenue related to the BLU-Vent project that was recognized during the first nine months of 2020. All of the sales channels for this business segment continue to develop. The largest contributors to the revenue increases for both the three and nine months ended September 30, 2021 as compared to the prior year, are the growth in dealer sales and sales via the Amazon channel. Through September 30, 2021, BLU3 is selling to Amazon in nine countries as well as a significant presence in the US Amazon Channel. BLU3 continues to expand its dealer base which can be seen by the 261.0% revenue growth for first nine months of 2021 as compared to the same period in 2020. The Company’s continued focus on direct to consumer via our website accounted for a 20.1% increase for the nine months ended September 30, 2021 as compared to the prior year.
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Our aggregate cost of revenue from this segment as percentage of net revenues for the Third Quarter 2021 was significantly impacted by an increased cost of labor. For most of the Third Quarter 2021, BLU3 was hiring and training manufacturing staff to prepare for NOMAD production. Cost of direct labor increase in excess of 100% for the Third Quarter and nine months ending September 30, 2021 as compared to the same period in 2020. Moving into the last quarter of the year, we believe we will see the labor costs level out and margins return to a normal as NOMAD shipment begin in October, 2021. Despite the tremendous impact to margins for the Third Quarter 2021, margins for the nine months ended September 30, 2021 surpassed margins of the same period in 2020. Margin improvement will continue as direct labor rates are absorbed into NOMAD revenues.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Third Quarter 2021 | Third Quarter 2020 | % change | Third Quarter 2021 | Third Quarter 2020 | Third Quarter 2021 | Third Quarter 2020 | ||||||||||||||||||||||
| Ventilator | $ | - | $ | 117,098 | -100.0 | % | - | -76.2 | % | - | 176.2 | % | ||||||||||||||||
| Direct to Consumer | 146,901 | 162,952 | -9.9 | % | 82.4 | % | 155.5 | % | 17.6 | % | -55.5 | % | ||||||||||||||||
| Amazon | 94,569 | - | 100.0 | % | 106.8 | % | - | -67.8 | % | - | ||||||||||||||||||
| Dealers | 99,817 | 39,944 | 149.9 | % | 82.9 | % | 46.4 | % | -17.1 | % | 53.6 | % | ||||||||||||||||
| Total | $ | 341,287 | $ | 319,994 | 6.7 | % | 106.2 | % | 57.1 | % | -6.2 | % | 42.9 | % | ||||||||||||||
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | % change | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||||
| Ventilator | $ | - | $ | 574,901 | -100.0 | % | - | 55.4 | % | - | 44.6 | % | ||||||||||||||||
| Direct to Consumer | 487,566 | 405,994 | 20.1 | % | 61.3 | % | 105.4 | % | 38.7 | % | -5.4 | % | ||||||||||||||||
| Amazon | 353,834 | - | 100.0 | % | 90.1 | % | - | 9.9 | % | - | % | |||||||||||||||||
| Dealers | 362,865 | 100,523 | 261.0 | % | 73.6 | % | 67.5 | % | 26.4 | % | 32.5 | % | ||||||||||||||||
| Total | $ | 1,204,265 | $ | 1,081,418 | 11.4 | % | 73.5 | % | 75.3 | % | 26.5 | % | 24.7 | % | ||||||||||||||
Redundant Air Tank Systems
Revenue for the Third Quarter 2021 and nine months ended September 30, 2021 in the Redundant Air Tank Systems System segment represent just one month of revenue and costs as the acquisition closed in early September. The margins for the one month are burdened by direct labor costs, as supply issues during September caused delays in shipments to their customer base. SSI has a vast worldwide customer base that includes (1) Commercial accounts, that have aircraft that require redundant air systems for their pilots and passengers, such as the oil business with helicopters flying to oil rigs located in the middle of large bodies of water. (2) Government accounts that are typically domestic and international military customers who use their egress systems for various uses. (3) Dealers accounts that are resellers including, but not limited to international distributors to the military, commercial account or dive shops, and domestic and international dive shops that carry their Spare Air product. (4) Direct to consumer sales represent not only online sales, but sales via trade shows that go direct to consumer.
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Third Quarter 2021 | Third Quarter 2020 | % change | Third Quarter 2021 | Third Quarter 2020 | Third Quarter 2021 | Third Quarter 2020 | ||||||||||||||||||||||
| Commercial | $ | 7,020 | $ | - | 100 | % | 53.2 | % | - | 46.8 | % | - | ||||||||||||||||
| Dealers | 95,191 | - | 100 | % | 88.5 | % | - | 11.5 | % | - | ||||||||||||||||||
| Government | 14,302 | - | 100 | % | 19.7 | % | - | 80.3 | % | - | ||||||||||||||||||
| Direct to Consumers (Website) | 4,618 | - | 100 | % | 28.3 | % | - | 71.7 | % | - | ||||||||||||||||||
| Total | $ | 121,131 | $ | - | 100 | % | 76.8 | % | - | 24.0 | % | - | ||||||||||||||||
| Net Revenue | Cost of Sales as a % of Net Revenue | Margin | ||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | % change | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||||
| Commercial | $ | 7,020 | $ | - | 100 | % | 53.2 | % | - | 46.8 | % | - | ||||||||||||||||
| Dealers | 95,191 | - | 100 | % | 88.5 | % | - | 11.5 | % | - | ||||||||||||||||||
| Government | 14,302 | - | 100 | % | 19.7 | % | - | 80.3 | % | - | ||||||||||||||||||
| Direct to Consumers (Website) | 4,618 | - | 100 | % | 28.3 | % | - | 17.7 | % | - | ||||||||||||||||||
| Total | $ | 121,131 | $ | - | 100 | % | 76.8 | % | - | 24.0 | % | - | ||||||||||||||||
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Operating Expenses
Operating expenses, consisting of selling, general and administrative (“SG&A”) expenses and research and development costs, and are reported on a consolidated basis for our operating segments. Aggregate operating expenses increased 46.5% for the Third Quarter 2021 as compared to the Third Quarter 2020. For the nine months ended September 30, 2021 aggregate operating expenses increased by 30.9% from the same period in 2020.
Selling, General & Administrative Expenses (SG&A Expenses)
SG&A increased by 46.5% and 33.2% for the Third Quarter and nine months ended September 30, 2021 as compared to the same periods in 2020. The main drivers of SG&A during those periods are as follows:
| Expense Item | Third Quarter 2021 | Third Quarter 2020 | % Change | Nine Months Ended September 30, 2021 |
Nine Months Ended September 30, 2020 |
% Change | ||||||||||||||||||
| Payroll, Selling & Admin | $ | 276,262 | $ | 173,073 | 59.6 | % | 737,791 | 420,963 | 75.3 | % | ||||||||||||||
| Stock Comp Expense | 312,946 | 260,092 | 20.3 | % | 811,821 | 666,132 | 21.9 | % | ||||||||||||||||
| Professional Fees | 121,470 | 15,389 | 689.3 | % | 276,998 | 287,983 | -3.8 | % | ||||||||||||||||
| Advertising | 64,317 | 58,263 | 10.4 | % | 178,158 | 93,331 | 90.9 | % | ||||||||||||||||
| All Others | 107,942 | 88,181 | 26.7 | % | 438,811 | 365,630 | 19.0 | % | ||||||||||||||||
| Total SG&A | $ | 882,937 | $ | 591,998 | 49.1 | % | 2,443,579 | 1,834,039 | 33.2 | % | ||||||||||||||
Payroll increases for the three and nine months ended September 30, 2021 are related to the hiring of the CEO, social media/marketing manager, and several other operating and administrative personnel to support the growth in each of our divisions. Also, payroll related to SSI contributed nearly 10% of the increase.
Non-Cash Stock compensation expenses increased 20.3% and 21.9% for the three and nine months ended September 30, 2021 as compared to the same periods in the prior year. The increase can be attributed to options given to employees as part of the Plan, and options issued under both the Blake Carmichael Employment Agreement and the Buban Agreement during the three months ended September 30, 2021. The increase for the nine months ended September 30, 2021 as compared to the same period in 2020 also includes expenses related to options issued to our CFO and Chairman, that were issued during the Second Quarter 2020 and were fully expensed in the First Quarter 2021.
Professional fees, including legal and other professional fees which are typically paid via a combination of cash, common stock, or stock options increased 689% and decreased 3.8% for the Third Quarter 2021 and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. The increase in the Third Quarter is directly related to professional fees in relation to the acquisition of SSI. The decrease for the nine months ending can be attributed to the contracts of both an IR firm and a PR firm in the Second Quarter 2020, that were terminated or their compensation was restructured for 2021.
The increase in advertising expense for the three and nine months ended September 30, 2021 as compared to the same periods in 2020 is attributable to the agreement with the Company’s provider of marketing and advertising. This contract was executed in the Third Quarter 2020, and was not renewed as of July 31, 2021.
Research & Development Expenses (R&D Expenses)
R&D expenses for the Third Quarter and nine months ended September 30, 2021 decreased 7.5% and 18.6%, respectively 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, 2021.
Total Other Income
For the Third Quarter, 2021 other expenses totaled approximately $6,100 and other income totaled approximately $157,900 for the nine months ended September 30, 2021 as compared to other expense of approximately $2,500 and $14,700 during the same period in 2020. The other income for the nine months ended September 30, 2021 consists of a gain from the forgiveness of the PPP loan of $159,600 and gain on the settlement of debt of $10,000 offset by interest expense of approximately $11,700. The other expenses for the Second Quarter 2020 consist only of interest expense. The decrease in interest expense can be attributed to the decrease in interest expense on the Marlin Note, the conversion and settlement of debt and a reduction in the note balances due to repayments made.
| 33 |
Liquidity and Capital Resources
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. The following table summarized total current assets, total current liabilities and working capital at September 30, 2021 (unaudited) as compared to December 31, 2020.
| September 30, | December 31, | % of | ||||||||||
| 2021 | 2020 | change | ||||||||||
| (unaudited) | ||||||||||||
| Total current assets | $ | 3,299,300 | $ | 1,469,037 | 124.5 | % | ||||||
| Total current liabilities | $ | 1,555,471 | $ | 1,029,204 | 51.1 | % | ||||||
| Working capital | $ | 1,743,829 | $ | 439,833 | 296.5 | % | ||||||
The increase in our current assets at September 30, 2021 from December 31, 2020 principally reflects increases in cash, accounts receivable, and inventory related to the SSI acquisition. The increase in our total current liabilities principally reflect increases in total accounts payable, customer deposits, and other liabilities, inclusive of those acquired in the SSI Acquisition.
Summary Cash Flows
|
Nine Months Ended September 30, |
||||||||
| 2021 | 2020 | |||||||
| (unaudited) | ||||||||
| Net cash used by operating activities | $ | (569,142 | ) | $ | (158,147 | ) | ||
| Net cash provided by (used in) investing activities | $ | 517,701 | $ | (5,500 | ) | |||
| Net cash provided by financing activities | $ | 566,970 | $ | 862,618 | ||||
Net cash used in operating activities for the nine months ended September 30, 2021 was due to the net loss of approximately $1,071,500 which is primarily attributable to non-cash stock compensation expenses of approximately $960,800. The non-cash stock compensation expense for the nine months ended September 30, 2021 is attributable stock options issued to our executive officers and various employees as well as shares of common stock issued to consultants and professionals for services. The cash used is also the result of increases in current assets, including, accounts receivable, inventory, net, and prepaid expenses that utilized approximately $875,400 offset by increases in current liabilities including accounts payable, other liabilities, and customer deposits, which totaled to approximately $417,300.
Net cash provided by investing activities for the nine months ended September 30, 2021 relate to the cash acquired in the SSI acquisition of $541,400 offset by an increase in leasehold improvements of approximately $23,700, as the company expanded its office space for additional personnel, and lighting in the production areas.
Net cash provided by financing activities in the nine months ended September 30, 2021 reflects proceeds from the sale of units and common stock, proceeds from a new debt agreement, offset by the repayments of notes payable and debt.
Going Concern and Management’s Liquidity Plans
As set forth in Note 3 of the unaudited condensed consolidated financial statements appearing in this 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 12-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, 2020 contained a going concern qualification.
We have a history of losses, and an accumulated deficit of $14,027,602 as of September 30, 2021. Despite a working capital surplus of $1,743,829 at September 30, 2021, the continued losses and cash used in operations raise substantial doubt as to the Company’s ability to continue as a going concern. We believe with the cash balance of approximately $860,700 the Company has the ability to sustain operations for the next twelve months. 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.
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 condensed consolidated financial statements appearing earlier in this report.
| 34 |
Recent Accounting Pronouncements
The recent 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 the financial statements upon adoption. These recent accounting pronouncements are described in Note 2 to our notes to unaudited condensed consolidated financial statements appearing earlier in this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. The Company’s management, under the supervision and with the participation our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2021. Based upon that evaluation our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report as a result of the continuing material weakness in the Company’s internal control over financial reporting as described in Item 9A. of our 2020 10-K. We do not, however, expect that the weaknesses in our disclosure controls will be remediated until such time as we remediate the material weaknesses in our internal control over financial reporting.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15 under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 35 |
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
We incorporate by reference the risk factors disclosed in Part I, Item 1A of our 2020 10-K.
Item 2. Unregistered sales of equity securities and use of proceeds
In addition to unregistered sales of securities disclosed under prior reports during the period covered by this report, we sold the securities disclosed below that were not registered under the Securities Act of 1933, as amended (the “Act”). The recipient of our securities below are accredited investors.
On September 22, 2021, the Company issued a law firm 1,190,476 shares of restricted common stock as partial consideration for its legal services related to acquisition of SSI. The shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Act.
On August 18, 2021 the Company issued 6,114,516 shares of common stock to a note holder pursuant to the conversion of a $50,000 principal amount 6% secured promissory note dated December 5, 2017, in full satisfaction of such note. The shares were issued pursuant to the exemption from registration provided by Section 3(a)(9) of the Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. MINE SAFETY DISCLOSURE
None.
Item 5. Other Information
Item 6. Exhibits
| Incorporated by Reference | Filed | |||||||||
| Exhibit | or Furnished | |||||||||
| No. | Exhibit Description | Form | Date Filed | Number | Herewith | |||||
| 3.1 | Articles of Conversion (Nevada) | 8-K | 10/28/15 | 3.1 | ||||||
| 3.2 | Certificate of Conversion (Florida) | 8-K | 10/28/15 | 3.2 | ||||||
| 3.3 | Articles of Incorporation (Florida) | 8-K | 10/28/15 | 3.3 | ||||||
| 3.4 | Articles of Amendment | 8-K | 12/16/15 | 3.5 | ||||||
| 3.5 | Bylaws | 8-K | 10/28/15 | 3.4 | ||||||
| 4.1 | 8-K | 9/9/21 | ||||||||
| 10.1 | 8-K | 9/9/21 | ||||||||
| 10.2 | Confidentiality, Non-Competition and Non-Solicitation Agreement | 8-K | 9/9/21 | |||||||
| 10.21 | M&A Services Agreement | Filed | ||||||||
| 10.22 | Employment Agreement – Blake Carmichael | Filed | ||||||||
| 10.23 | Employment Agreement – Christeen Buban | Filed | ||||||||
| 31.1 | Certification Pursuant to Rule 13a-14(a)/15d-14(a) | Filed | ||||||||
| 31.2 | Certification Pursuant to Rule 13a-14(a)/15d-14(a) | Filed | ||||||||
| 32.1 | Certification Pursuant to Section 1350 | Filed | ||||||||
| 101.INS | Inline XBRL Instance Document | |||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||||
| 36 |
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 22, 2021 | Brownie’s marine group, Inc. | |
| By: | /s/ Christopher H. Constable | |
| Christopher H. Constable | ||
| Chief Executive Officer, | ||
| principal executive officer | ||
| By: | /s/ Robert M. Carmichael | |
| Robert M. Carmichael | ||
| Chief Financial Officer, | ||
| principal financial and accounting officer | ||
| 37 |
