Brownie's Marine Group, Inc 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Annual Report. Actual future results may be materially different from what we expect. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by federal securities and any other applicable law. The management’s discussion and analysis of our financial condition and results of operations are based upon our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Recent Developments 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”), 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 SSI (the “Submersible Shares”), 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. The Merger became effective upon the filing of Articles of Merger with the Secretary of State of the State of Florida. 16 Pursuant to the terms and conditions of the Merger Agreement, the Company acquired all of the Submersible Shares from the Sellers for an aggregate purchase price of $1,799,919 (the “Merger Consideration”), which was paid to the Sellers at closing by issuance to the Sellers of three-year 8% convertible promissory notes in the aggregate principal amount of $350,000 and an aggregate of 27,305,442 shares (the “ Merger Shares”) of the Company’s common stock. The Merger Shares are subject to a leak-out restriction commencing on the date of issuance, as follows: (i) up to 12.5% may be sold after 6 months; (ii) up to 25% may be sold after 9 months; (iii) up to 75% may be sold after 24 months; and (iv) up to 100% may be sold after 36 months. Notwithstanding the foregoing, the leak-out restriction may be waived by the Company under certain conditions. The Sellers were granted “piggyback” registration rights with respect to the Merger Shares and the shares of common stock that may be received upon their conversion of the 8% convertible notes. Interest under the notes is payable at the end of each 3-month period commencing on September 30, 2021, in shares of common stock of the Company. The Company may prepay the notes in whole or in part at any time without penalty or premium. Within 30 days after the end of each quarter, commencing on the first full quarter after the closing, the Company is obligated to pay, as a reduction of the principal amount of the notes, in cash, payments equal to 50% of SSI’s operating net income before interest, taxes, depreciation and amortization (but expressly excluding any overhead cost allocation applied to SSI by the Company). The final payment will be a balloon payment of the balance due upon the end of the term of the notes. The holders of notes may convert the notes, in whole or in part, at any time, into shares of common stock. In connection with the Merger, Rick Kearney, Submersible’s founder, entered into a five-year confidentiality, non-competition and non-solicitation agreement with the Company. On September 17, 2021 the Company completed a private placement of an aggregate of 14,600,000 Units to five purchasers at a purchase price of $0.025 per Unit for gross proceeds of $365,000, with each Unit consisting of one restricted share of the Company’s common stock and one two year common stock purchase warrant to purchase one restricted share of common stock at an exercise price of $0.025 per share. The Units were offered and sold pursuant to the terms of a subscription agreement (the “Subscription Agreement”) to accredited or otherwise qualified investors and included Charles Hyatt, a director and an affiliate of Mr. Hyatt, who purchased an aggregate of 10,600,000 Units. The Company did not pay any commissions or finder’s fees and is using the proceeds for working capital. Impact of COVID-19 Pandemic The Company has previously been affected by temporary manufacturing closures, and employment and compensation adjustments. The market continues to suffer from the impacts of the pandemic via supply chain shortages and freight delays. The continued freight delays have and will likely continue to result in additional expenses to expedite delivery of critical parts. Additionally, increased demand for personal electronics has created a shortfall of microchip supply which are used in our battery powered products, and it is yet unknown how we may be impacted. We continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly. Results of Operations Years Ended December 31, 2021 and 2020 Overall, our net revenues increased 36.7% in 2021 from 2020, which included an increase of 37.5% in net revenue from sales to third parties and an increase of 33.2% in sales to related parties. Our cost of revenues in 2021 was 69.7% of our total net revenues as compared to 67.9% in 2020. Included in our cost of revenues are royalty expenses we pay to Robert Carmichael which increased 10.8% in 2021 from 2020. We reported a gross profit margin of 31.2% in 2021 as compared to 32.1% in 2020. 17 Net Revenues The following tables provides net revenues, costs of revenues, and gross profit margins for our segments for 2021 and 2020. Year Ended December 31, % 2021 2020 change Legacy SSA Products $ 2,897,210 $ 2,721,753 6.4 % High Pressure Gas Systems 616,039 489,590 25.8 % Ultra-Portable Tankless Dive Systems 2,241,359 1,344,630 66.7 % Redundant Air Tank Systems 472,771 - N/A Total revenue $ 6,227,379 $ 4,555,973 36.7 % Cost of revenues as a percentage of net revenues Year Ended December 31, 2021 2020 Legacy SSA Products 74.6 % 65.1 % High Pressure Gas Systems 62.7 % 63.4 % Ultra-Portable Tankless Dive Systems 64.1 % 74.2 % Redundant Air Tank Systems 74.6 % - Gross profit margins Year Ended December 31, 2021 2020 Legacy SSA Products 25.4 % 34.5 % High Pressure Gas Systems 37.3 % 36.6 % Ultra-Portable Tankless Dive Systems 35.9 % 25.8 % Redundant Air Tank Systems 25.4 % - SSA Products segment The increase in net revenues of 6.4% from this segment for the year ended December 31, 2021 as compared to the year ended December 31, 2020 can be attributed to increased demand at the dealer level with a 20.2% increase. This increase was offset by decreases in direct to consumer revenues of 11.4%, and revenues to affiliates of 1.1%. The decrease in consumer demand is attributed to a shift to purchases at retail from our dealer base, as the economy has allowed the retail shops to re-open after the pandemic, and consumers switched their buying habits away from our website. Management believes that total sales were stifled by supply chain issues with the critical parts delays not allowing shipment for nearly the entire month of August 2021. Additionally, the Company has been unable to supply its popular Pioneer model of the Third Lung line since the middle of 2021 due to the lack of availability in North America of the engine that is the core selling feature of that unit. Our costs of revenues as a percentage of net revenues in this segment increased from 65.5% in the year ended December 31, 2020 to 74.6% in the year ended December 31, 2021. The increase in cost of sales, and in turn decrease product margin, can be attributed primarily to an increase in suppliers cost of products during the latter half of 2021, and the cost of having to air freight a larger amount of products in order to keep the production lines occupied, and customer demand met. Additionally, The Company reserved an additional $58,829 for slow moving inventory. Lastly, the Company made a decision to not increase prices to dealers and consumers in the second half of 2021 and accept a smaller margin to ensure the continued movement by supporting our dealer base during the second quarter of 2021 in an effort to ensure continued product movement during the fourth quarter of 2021. 18 Revenue channels for this segment are set forth below. Direct to Consumer represents items sold via our website, trade shows and walk-ins to our factory store. Dealer revenue represents sales to customers that have dealer agreements that typically operate with the lowers margin. Affiliates are resellers of our products that do not have formal dealer agreements. Other represents all other sales that do not fit in any of the categories. Revenue % Cost of Sales Margin 2021 2020 Change 2021 2020 2021 2020 Direct to Consumer (website included) $ 895,348 $ 1,010,527 (11.4 )% 62.5 % 51.9 % 37.5 % 48.1 % Dealers 1,888,233 1,570,683 20.2 % 79.9 % 74.2 % 20.1 % 25.8 % Affiliates 97,222 98,324 (1.1 )% 61.6 % 68.6 % 38.4 % 31.4 % Other 16,407 42,219 (61.1 )% 201.4 % 61.9 % (101.4 )% 38.1 % Total $ 2,897,210 $ 2,721,753 6.4 % 74.6 % 65.1 % 25.4 % 34.5 % High Pressure Gas Systems segment Sales of high-pressure breathing air compressors had a 25.8% increase for the year ended December 31, 2021 as compared to the year ended December 31, 2020 as the marketplace showed an economic recovery during 2021. All segments have opened up, and demand is continuing to increase, with travel returning, and diving operations throughout the US and Caribbean re-opened and receiving tourists. The majority of our dive resort and dive operator customers’ businesses were back-up and running during the year ended December 31, 2021, and the recovery of this customer segment is reflected in the increases in revenue of 59.8% in the reseller segment. The Original Equipment Manufacturer segment showed the largest growth with an increase of 151.1% for the year ended December 31, 2021 as compared to 2020. The direct to consumer segment, which includes yacht owners and direct to dive stores declined for the year ended December 31, 2021 as compared to the same period in the prior year as product was allocated from this customer base to increase the reseller and OEM categories. Our costs of revenues as a percentage of net revenues in this segment remained consistent at 63.4% in the years ended December 31, 2021 and 2020. Revenue % Cost of Sales Margin 2021 2020 Change 2021 2020 2021 2020 Resellers $ 347,034 $ 217,150 59.8 % 63.6 % 73.6 % 36.4 % 26.4 % Direct to Consumers 96,380 203,702 (52.7 )% 68.9 % 54.4 % 31.1 % 45.6 % Original Equipment Manufacturers 172,625 68,738 151.1 % 57.3 % 57.9 % 42.7 % 42.1 % Total $ 616,039 $ 489,590 25.8 % 62.7 % 63.4 % 37.3 % 36.6 % Ultra Portable Tankless Dive Systems Net revenues in this segment increased 66.7% for the year ended December 31, 2021 as compared to the year ended December 31, 2020 inclusive of the one-time revenue from the BLU-Vent project booked in the year ended December 31, 2020. During the second quarter of 2020, BLU3 received a purchase order from a third-party to adapt the design of the NEMO into a functional ventilator prototype, to potentially help with the ventilator shortage that the country was facing due to the COVID–19 pandemic. BLU3 Vent emerged as the first in the Hack-a-Vent challenge to pass through preliminary testing at Uniformed Services University to confirm feasibility to treat an ARDS inflicted patient. BLU3 Vent has submitted initial documents for a review with the FDA at the direction and with the support of the Wright Brothers Institute. This project is currently suspended as urgent demand for emergency use ventilators has declined. Revenue from this agreement totaled $570,060 for the year ended December 31, 2020. Net of the one-time BLU-Vent project, revenue increased 189.4% during the year ended December 31, 2021. The increase in revenue for 2021 can be attributed to a 73.5% increase in NEMO sales over the prior year, and the introduction of the NOMAD to the market in the late third quarter of 2021 at a price point is nearly double that of NEMO. The largest contributors to the revenue increases for year ended December 31, 2021 as compared to the prior year, are the growth in dealer sales and sales via the Amazon channel. Through December 31, 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 225.6% revenue growth for the year ended December 31, 2021 as compared to the same period in 2020. The Company’s continued focus on direct to consumer via its website accounted for an 84.1% increase for the year ended December 31, 2021 as compared to the prior year. 19 Our aggregate cost of revenue from this segment as a percentage of net revenues for the year ended December 31, 2021 decreased to 64.1% as compared to 74.2% for the year ended December 31 2020. The decrease can be attributed to efficiencies found in both the product cost and labor cost in building the NOMAD. Revenue % Cost of Sales Margin 2021 2020 Change 2021 2020 2021 2020 Direct to Consumer $ 944,493 $ 512,892 84.1 % 54.3 % 43.5 % 45.7 % 56.5 % Dealers 780,388 239,682 225.6 % 64.5 % 49.8 % 35.5 % 50.2 % Amazon 516,478 21,996 2,248.1 % 81.4 % 46.2 % 18.6 % 53.8 % Ventilator - 570,060 (100.0 )% - 127.7 % - (27.7 )% Total $ 2,241,359 $ 1,344,630 66.7 % 64.1 % 74.2 % 35.9 % 25.8 % Redundant Air Tank Systems Revenue for the year ended December 31, 2021 in the Redundant Air Tank Systems System segment represents revenue from September 3, 2021, the closing date of the acquisition of SSI. These margins were affected by direct labor costs, as supply issues during September caused delays in shipments to SSI’s worldwide customer base, which 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 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 Revenue Cost of Sales Margin 2021 2020 % change 2021 2020 2021 2020 Commercial $ 88,876 - 100 % 55.5 % - 44.5 % - Dealers 287,877 - 100 % 89.0 % - 11.0 % - Government 42,875 - 100 % 25.6 % - 74.4 % - Direct to Consumers (Website) 53,143 - 100 % 68.2 % - 31.8 % - Total $ 472,771 - 100 % 74.6 % - 25.4 % - Operating Expenses Operating expenses, consisting of selling, general and administrative (“SG&A”) expenses and research and development costs, are reported on a consolidated basis for our operating segments. Aggregate operating expenses increased 33.8% for the year ended December 31, 2021 as compared to the year ended December 31, 2020. Selling, General & Administrative Expenses (SG&A Expenses) SG&A increased by 36.7% for the years ended December 31, 2021 as compared to the year ended December 31, 2020. SG&A during those years are as follows: Expense Item 2021 2020 % Change Payroll $ 1,144,020 $ 630,149 81.5 % Non-Cash Stock based compensation - options 1,150,801 858,695 34.0 % Professional Fees 469,206 467,271 0.4 % Advertising 343,232 154,642 121.9 % All Others 559,569 571,536 (2.8 ) % Total SG&A $ 3,666,823 $ 2,682,293 36.7 % Payroll increases for the year ended December 31, 2021 are primarily due to the addition of SSI payroll which accounted for 34.3% of the increase. The balance of the increase can be attributed to the hiring of a chief executive officer, a social media/marketing manager, and several other operating and administrative personnel to support the growth in each of our divisions. 20 Non-Cash Stock compensation expenses increased 34.0% for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase can be attributed to stock options issued to employees as part of the Company’s 2021 Equity Plan, stock options issued to Blake Carmichael and Christeen Buban, President of SSI, pursuant to their employment agreements during the year ended December 31, 2021. Additionally, the increase can be attributed to compensation and bonus stock options issued to our Chief Executive Officer, pursuant to his employment agreement and expenses related to options issued to our Chairman. Professional fees, representing legal and other professional fees, which we paid in a combination of cash, common stock, or stock options, had an increase of .4% for the year ended December 31, 2021 as compared to the year ended December 31, 2020. This despite an increase in professional fees related to the acquisition of SSI. Advertising expense increased 121.9% for the year ended December 31, 2021 as compared to the year ended December 31, 2020. 108.0% of the increase can be directly attributed to an increase of direct, internet and Amazon marketing by BLU3. The addition of SSI attributed 15.4% of the increase in advertising expenses for the year ended December 31, 2021. These increases are offset by decreases in Trebor advertising expenses associated with the agreement with the Company’s provider of marketing and advertising, which was entered into in the third quarter of 2020, and was not renewed as of July 31, 2021. Research & Development Expenses (R&D Expenses) R&D expenses for the year ended December 31, 2021 decreased 34.5% as compared to the year ended December 31, 2020. The decrease can be primarily attributed to the lack of R&D expenses related to the BLU-Vent project in 2021 as well as the completion of the R&D for BLU3’s NOMAD in 2021. Other Income For the year ended December 31, 2021 other income and expenses, totaled approximately $264,000 in income as compared to approximately $18,600 in expenses for the year ended December 31, 2020. Interest expense for the year ended December 31, 2021 was approximately $21,500 as compared to approximately $18,600 for the year ended December 31, 2020. This increase can be attributed to the increase in convertible debt related to the SSI acquisition. Other income for the year ended December 31, 2021 included a gain on the forgiveness of Trebor and SSI PPP loans totaling approximately $275,800 and the forgiveness of a loan payable of $10,000. Liquidity and Capital Resources We had cash of $643,143 at December 31, 2021.The following table summarizes total current assets, total current liabilities and working capital at December 31, 2021 as compared to December 31, 2020. December 31, December 31, % of 2021 2020 change Total current assets $ 2,966,432 $ 1,469,037 101.9 % Total current liabilities $ 1,396,197 $ 1,029,204 35.6 % Working capital $ 1,570,235 $ 439,833 257.0 % The increase in our current assets at December 31, 2021 from December 31, 2020 principally reflects increases in cash of approximately $298,000, accounts receivable of approximately $42,000, inventory of approximately $1,031,500 and prepaid assets of approximately $116,300 for the year ended December 31, 2021. The increase in inventory was due to the addition of SSI inventory and increased purchasing to try to counteract the concerns over supply chain disruptions due to the lingering effects of the COVID19 pandemic. The increase in accounts receivable is attributable to the increase in the aggregate sales for the year ended December 31, 2021 as compared to the year ended December 31, 2020 as well as the inclusion of the accounts receivable related to SSI in the year ended December 31, 2021. 21 The increase in our total current liabilities for the year ended December 31, 2021 as compared to the year December 31, 2020 reflects an increase in accounts payable and accrued liabilities of approximately $357,400, a decrease of approximately $65,100 in accounts payable – related parties, an increase of approximately $123,600 in customer deposits, an increase of approximately $124,600 in operating lease liabilities with the addition of the SSI lease liability, and a reduction of debt liabilities of approximately $260,600 due to the conversion of short term convertible notes and the reduction of other non- convertible debt. Summary Cash Flows Years Ended December 31, 2021 2020 Net cash used in operating activities $ (769,467 ) $ (556,108 ) Net cash provided by (used in) investing activities $ 517,701 $ (5,500 ) Net cash provided by financing activities $ 549,723 $ 836,175 Net cash used in operating activities for 2021 was primarily the result of a net loss of $1,588,467, an increase in our inventory balances of $649,414, increases in prepaid expenses and other current assets of $109,612, and total decreases in all liabilities of $193,614 for the year ended December 31, 2021 as compared to December 31, 2020. The cash used related to net loss was offset by $1,154,801 in non-cash stock related compensation expenses and $201,952 non-cash expenses for shares issued for professional fees during the year ended December 31, 2021. Net cash provided by investing activities in 2021 of $517,701 reflects primarily the cash acquired from the SSI acquisition of $541,378 offset by fixed asset purchases of $23,677. This compares to cash used for the purchase of fixed assets of $5,500 for the year ended December 31, 2020. Net cash provided by financing activities in 2021 reflect $640,000 in proceeds related to the sale of the company’s common stock and units that included both stock and warrants. The increase in cash was offset by repayments of both notes payable and other debt of $90,278. This is compared to cash provided from the sale of common stock and the exercise of warrants of $770,000 as well as net proceeds of debt of $65,575 after offsetting the repayment of debt from the proceeds of debt for the year ended December 31, 2020. Going Concern Our audited consolidated financial statements included in this Annual Report were prepared assuming we will continue as a going concern, and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. The report of our independent registered public accounting firm on our audited consolidated financial statements for the year ended December 31, 2021 includes an explanatory paragraph stating the Company has net losses and an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. If the Company is unable to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back, delay or cease operations, liquidate assets and possibly seek bankruptcy protection. We have a history of losses, and an accumulated deficit of $14,544,604 as of December 31, 2021. Despite a working capital surplus of $1,570,235 at December 31, 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 continue 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. We are continuing to engage in discussions with potential sources for additional capital, however, our ability to raise capital is somewhat limited based upon our revenue levels, net losses and limited market for our common stock. If we fail to raise additional funds when needed, or if we do not have sufficient cash flows from operations, we may be required to scale back or cease certain of our operations. Critical Accounting Estimates The Company’s management discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales and expenses, and related footnote disclosures. On an on-going basis, the Company evaluates its estimates for product returns, bad debts, inventories, income taxes, warranty obligations, litigation and other subjective matters impacting the financial statements. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 22 The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Allowance for Doubtful Accounts Allowances for doubtful accounts are estimated based on estimates of losses related to customer accounts receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances. Inventories The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances. Deferred Taxes The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Warranties The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations. Off balance Sheet Arrangements We currently have no off-balance sheet arrangements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not required for smaller reporting companies. Item 8. Financial Statements and Supplementary Data. Our consolidated financial statements appear beginning at page F-1. 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.