Item 1A. Risk Factors
Item
1A.
Risk
Factors.
Investing
in our common stock involves risks. In addition to the other information contained in this report, you should carefully consider the
following risks before deciding to purchase our common stock. The occurrence of any of the following risks might cause you to lose all
or a part of your investment, and certain of these risks may be further exacerbated by the continuing impact of the COVID-19 pandemic
on the Company and our industry. Some statements in this report, including statements in the following risk factors, constitute forward-looking
statements. Please refer to “Cautionary Statement Regarding Forward-Looking Statements” for more information regarding forward-looking
statements.
9
FINANCIAL
RISKS
We
have a history of losses.
We
incurred net losses of $1,588,467 and $1,351,619, respectively, for the year ended December 31, 2021 and 2020. At December 31,
2021 we had an accumulated deficit of $14,544,604. While our revenues increased 36.7% for the year ended December 31, 2021 from
2020, our gross profit margin decreased from 32.1% in 2020 to 30.3% in 2021, our gross profit is not sufficient to cover
our operating expenses in the year ended December 31, 2021 and 2020 of $3,742,262 and $2,797,449, respectively, which includes
non-cash stock compensation expenses of $1,154,801 and $858,695 for the years ending December 31, 2021 and 2020,
respectively. In the year ended December 31, 2021, our selling, general and administrative expenses, increased 33.8% from 2020.
There are no assurances that we will be able to increase our revenues to a level which supports profitable operations and provides sufficient
capital to pay our operating expenses and other obligations as they become due.
Our
auditors have raised substantial doubts as to our ability to continue as a going concern .
Our
independent registered public accounting firm has included an explanatory paragraph expressing substantial doubt relating to our ability
to continue as a going concern in its report on our audited consolidated financial statements for the year ended December 31, 2021 We
have sustained recurring losses from operations and have used approximately $769,500 in net cash in our operation in the year
ended December 31, 2021 as compared to approximately $556,000 in 2020. These factors, among others, raise substantial doubt about
our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty. Our principal sources of liquidity are sales of equity and debt securities. We do not have any firm
commitments to raise additional working capital. As we are a small company who stock is quoted on the OTC Markets, we expect to encounter
difficulty in raising working capital upon terms and conditions satisfactory to us, if at all. If we are unable to obtain sufficient
funding or generate sufficient revenues, our business and results of operations will be adversely affected and we may be unable to continue
as a going concern.
We
rely on revenues from related parties.
We
generate revenues from sales to related parties, which accounted for 17.9% of our net revenues in 2021 and 18.4% of our net revenues
in 2020. The loss of revenues from these related parties would have a material adverse impact on our business, results of operations
and financial condition in future periods.
We
depend on licenses with Robert Carmichael, our Chief Executive Officer’s ownership interests in much of our intellectual property.
The
Company either owns or has licensed from entities in which Robert Carmichael, our Chairman, has an ownership interest, the following
registered and unregistered trade names, trademarks and service marks: Brownie’s Third Lung™, browniedive.com, Brownie’s,
Brownie’s Third Lung oval symbol, browniedive, YachtPro.
If
we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial
results. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business
and the trading price of our stock.
Our
management has previously determined that we did not maintain effective internal controls over financial reporting. For a detailed description
of these material weaknesses and our remediation efforts and plans, see Part II, Item 9A-Controls and Procedures of this Annual Report.
If the result of our remediation of the identified material weaknesses is not successful, or if additional material weaknesses are identified
in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our internal
control over financial reporting and/or our disclosure controls and procedures, and we could be required to further implement expensive
and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness of our financial reports
which could have an adverse effect on our stock price and potentially subject us to litigation.
10
BUSINESS
AND OPERATIONAL RISKS
We
are dependent upon certain key members of management and qualified employees and consultants.
Our
success depends to a significant degree on the abilities and efforts of our senior management. and on our ability to attract, retain
and motivate highly qualified marketing, technical, engineering and sales personnel and consultants. These people are in high demand
and often have competing employment opportunities. The labor market for skilled employees is highly competitive and we may lose key employees
or be forced to increase their compensation to retain these people. Employee turnover could significantly increase our recruitment, training
and other related employee costs. The loss of key personnel, or the failure to attract qualified personnel, could result in delays in
development or fulfillment of any current strategic and operational plans and have a material adverse effect on our business, financial
condition or results of operations.
Our
failure to obtain and enforce intellectual property protection may have a material adverse effect on our business.
Our
success depends in part on our ability, and the ability of our patent and trademark licensors, and entities owned and controlled by Robert
Carmichael to obtain and defend our intellectual property, including patent protection for our products and processes, preserve our trade
secrets, defend and enforce our rights against infringement and operate without infringing the proprietary rights of third parties, both
in the United States and in other countries. Despite our efforts to protect our intellectual proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection.
Our
industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property
rights. Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future.
We
rely on third party vendors and manufacturers.
We
deal with suppliers on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued
supply or pricing. In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production
facility capacity. Historically, we have purchased enough inventories of products or their substitutes to satisfy demand. However, unanticipated
failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us to curtail
or cease operations. Certain of our product components are manufactured in China. Due to Covid, and the logistics challenges existing
currently, we have experienced delays and may experience continued delays in our supply chain, including component products, which are
manufactured in China. Our senior management will continue to monitor our situation on a daily basis, however, we expect that these factors
and others we have yet to experience may materially adversely impact our company, its business and operations for the foreseeable future.
We
dependent on consumer discretionary spending.
The
success of our business depends largely upon a number of factors related to consumer spending, including current and future economic
conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In times of economic
uncertainty, consumers tend to defer expenditures for discretionary items, which effects demand for our products. Any significant deterioration
in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect
our financial results. The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher fuel prices; declines
in the value of investments and residential real estate; and increases in federal and state taxation can all negatively affect our results.
There can be no assurance that in this type of environment consumer spending will not decline, thereby adversely affecting our growth,
net sales and profitability or that our business will not be adversely affected by continuing or future downturns in the economy, boating
industry, or dive industry. If declines in consumer spending on recreational marine accessories and dive gear are other than temporary,
we could be forced to curtail or cease operations.
11
Government
regulations may impact us.
The
SCUBA industry is self-regulating, therefore, from an industry perspective the Company is not subject to government industry specific
regulation. However, our tank manufacturing operation is required to comply with DOT, as well as being approved to sell in various countries
outside of the United States. The Company strives to be a leader in promoting safe diving practices within the industry and is at the
forefront of self-regulation through responsible diving practices. The Company is subject to all regulations applicable to “for
profit” companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses,
and bonds to operate its facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive
regulations in the future, which could force us to curtail or cease operations.
Our
failure to adequately protect personal information that is collected on our website and our third-party payment platforms could have
a material adverse effect on our business.
A
wide variety of local, state, national, and international laws, directives and regulations apply to the collection, use, retention, protection,
disclosure, transfer, and other processing of personal data (including with respect to the European Union’s General Data Protection
Regulation and U.S. state laws such as the California Consumer Privacy Act). These data protection and privacy-related laws and regulations
continue to evolve and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions
and increased costs of compliance. Our failure to comply with applicable laws and regulations, or to protect such data, could result
in enforcement actions against us, including fines, imprisonment of company officials and public censure, claims for damages by end-customers
and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing end-customers and prospective
end-customers), any of which could have a material adverse effect on our operations, financial performance, and business. Changing definitions
of personal data and personal information, within the European Union, the United States, and elsewhere may limit or inhibit our ability
to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. The evolving data
protection regulatory environment may require significant management attention and financial resources to analyze and modify our information
technology infrastructure to meet these changing requirements all of which could reduce our operating margins and impact our operating
results and financial condition.
Bad
weather could have an adverse effect on operating results.
Our
business is significantly impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably
rough surf, may decrease boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may
not be indicative of results of any future period.
The
manufacture and distribution of recreational diving equipment could result in product liability claims.
We,
like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent
risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among
other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use
and/or side effects, if any. We do not obtain indemnification from parties supplying raw materials , manufacturing our products
or marketing our products. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating
to defective products could have a material adverse effect on our operations and financial conditions, which could force us to curtail
or cease our business operations.
The
worldwide impact from the COVID-19 pandemic may negatively impact our business.
While
we have been relatively successful in navigating such impact to date, we have previously been affected by temporary manufacturing closures,
and employment and compensation adjustments. There are also ongoing related risks to our business depending on the progression of the
pandemic, and recent trends in certain regions have indicated potential returns to limited or closed government functions, business activities
and person-to-person interactions. Global trade conditions and consumer trends may further adversely impact us and our industries. For
example, pandemic-related issues have exacerbated port congestion and intermittent supplier shutdowns and delays, resulting in additional
expenses to expedite delivery of critical parts. Similarly, increased demand for personal electronics has created a shortfall of microchip
supply, and it is yet unknown how we may be impacted. We cannot predict the duration or direction of current global trends from this
pandemic, the sustained impact of which is largely unknown, is rapidly evolving and has varied across geographic regions. Ultimately,
we continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will
have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly.
12
SHAREHOLDER
RISKS
The
issuance of shares of our common stock upon exercise of our outstanding options, warrants, convertible debt and Series A Convertible
Preferred Stock may cause immediate and substantial dilution to our existing shareholders.
We
presently have vested and unvested options, warrants, convertible debt and Series A Convertible Preferred Stock that if exercised would
result in the issuance of an additional 254,577,924 shares of our common stock. The issuance of shares upon exercise of options
will result in dilution to the interests of other shareholders.
Our
common stock may be affected by limited trading volume and may fluctuate significantly.
Our
common stock is quoted on the OTCQB tier of the OTC Markets. There is a limited public market for our common stock and there can be no
assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’
ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common
stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price
and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance.
In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the
condition of the financial markets could cause the price of our common stock to fluctuate substantially.
Our
company is a voluntary filer with the SEC and in the event that we cease reporting under the Exchange Act, investors would have limited
information available to them about the company.
While
we are voluntarily file reports with the SEC under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), we do not have a class of securities registered under Section 12(g) of the Exchange Act. To the extent that our duty to
file Exchange Act reports has automatically suspended under Section 15(d) of the Exchange Act, as a voluntary filer, we may elect to
cease reporting under the Exchange Act at such time which would limit the information available to investors and shareholders about the
company.
Our
common stock is deemed to be “penny stock,” which may make it more difficult for investors to sell their shares due to suitability
requirements.
Our
common stock is deemed to be “penny stock” as that term is defined under the Exchange Act. Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges. Our common stock
is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other
than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals
with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.
Broker/dealers
dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers
are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements
may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for
investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
Our
officers and directors are able to control the Company.
Our
officers and directors and their affiliates own or have the right to vote a majority of the common stock of our company. As a result,
they have significant influence over the management and affairs of the Company and control over matters requiring stockholder approval,
including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets.
Their interests may differ from the interests of other shareholders and thus result in corporate decisions that are disadvantageous to
other shareholders. This concentration of ownership and influence in management and board decision-making could also harm the price of
our capital stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our capital stock (whether
by making a tender offer or otherwise) or otherwise attempting to obtain control of our company.
13
Item
1B.
Unresolved
Staff Comments
Not
applicable to smaller reporting companies.