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 December 22, 2022, the CPSC issued a recall notice for the Nomad tankless dive system, which is distributed by BLU3, Inc. As part of the recall procedure, the CPSC has approved the Company’s proposed remedy for the recall and BLU3 will begin to receive units back from consumers to repair affected Nomad units. Additionally, BLU3 will re-start its manufacturing process for the Nomad tankless dive system utilizing the material and design changes approved during the recall process, and immediately re-establish the product in all of its sales channels. The Company has set an allowance for expenses related to this recall of $160,500. 18 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, 2022 and 2021 Overall, our net revenues increased 37.7% in 2022 from 2021, which included an increase of 48.6% in net revenue from sales to third parties and a decrease of 12.0% in sales to related parties. Our cost of revenues in 2022 was 67.4% of our total net revenues as compared to 69.7% in 2021. Included in our cost of revenues are royalty expenses we pay to Robert Carmichael which decreased 18.4% in 2022 from 2021. We reported a gross profit margin of 32.6% in 2022 as compared to 30.3% in 2021. Net Revenues The following tables provide net revenues, costs of revenues, and gross profit margins for our segments for 2022 and 2021. Year Ended December 31, 2022 2021 % change Legacy SSA Products $ 2,601,622 $ 2,897,210 (10.2 )% High Pressure Gas Systems 1,118,081 616,039 81.5 % Ultra-Portable Tankless Dive Systems 3,052,192 2,241,359 36.2 % Redundant Air Tank Systems 1,592,601 472,771 236.9 % Guided Tour Retail 212,876 - 100.0 % Total revenue $ 8,577,372 $ 6,227,379 37.7 % Cost of revenues as a percentage of net revenues Year Ended December 31, 2022 2021 Legacy SSA Products 74.6 % 74.6 % High Pressure Gas Systems 61.8 % 62.7 % Ultra-Portable Tankless Dive Systems 61.2 % 64.1 % Redundant Air Tank Systems 69.7 % 74.5 % Guided Tour Retail 82.2 % - 19 Gross profit margins Year Ended December 31, 2022 2021 Legacy SSA Products 25.4 % 25.4 % High Pressure Gas Systems 38.3 % 37.3 % Ultra-Portable Tankless Dive Systems 38.8 % 35.9 % Redundant Air Tank Systems 30.3 % 25.4 % Guided Tour Retail 17.8 % - SSA Products segment The decrease in net revenues of 10.2% from this segment for the year ended December 31, 2022 as compared to the year ended December 31, 2021 can be attributed to decrease in revenue to the dealer base in 2022. Related party dealer revenue decreased by 13.9% for the year ended December 31, 2022 which is demand that shifted from BTL to BLU3 according to the customer. Other parts of the dealer base chose to remain conservative on their inventory balances through the end of the third quarter of 2022 and all of fourth quarter of 2022 due to economic uncertainties. BTL also saw a decrease in affiliate sales as these customers were not as active in the marketplace in 2022 as they were in prior years. These decreases were offset by an increase of 4.0% in direct-to-consumer sales from our website and factory store, as compared to 2021. Other Customers increased 201.4% for 2022, from the year ended December 31, 2021, as sales through Amazon are included in Other Customers, and BTL experienced increased activity from Amazon with the Bright Weights line of products now available on that website. Our aggregate costs of revenues as a percentage of net revenues in this segment remained stable at 74.6% for year ended December 31, 2022 and the year ended December 31, 2021. The Company was able to offset cost increases from 2021 to 2022 for the components in their finished goods with price increases at all levels. Additionally, the change is the customer mix also allowed the Company to retain more margin at a time of rising costs. 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, inclusive of Amazon sales, which do not fit in any of the categories. Net Revenue % Cost of Sales as a % of Net Revenue Margin as a % of Net Revenue 2022 2021 Change 2022 2021 2022 2021 Direct to Consumer (website included) $ 931,505 $ 895,348 4.0 % 71.9 % 62.5 % 28.1 % 37.5 % Dealers 1,538,460 1,888,233 (18.5 )% 77.3 % 79.9 % 22.7 % 20.1 % Affiliates 63,467 97,222 (34.7 )% 35.1 % 61.6 % 64.9 % 38.4 % Other 68,190 16,407 315.6 % 89.0 % 201.4 % 11.0 % (101.4 )% Total $ 2,601,622 $ 2,897,210 (10.2 )% 74.6 % 74.6 % 25.4 % 25.4 % High Pressure Gas Systems segment Sales of high-pressure breathing air compressors had an 81.5% increase for the year ended December 31, 2022 as compared to the year ended December 31, 2021. All sectors showed improvement over the previous year. As a percentage of revenue, the direct-to-consumer sector, which included yacht owners and direct to dive stores, had the most significant increase year over year of 154.3%. The demand from dive stores in the Caribbean increased as the region has recovered from COVID and began to re-invest into new equipment for their facilities. The reseller sector improved 90.2% year over year from 2021 to 2022. This can be directly attributed to the addition of a new distribution customer in Mexico. The OEM sector also showed an increase of 23.3% for the year ended December 31, 2022, as compared to the year ended December 31, 2021, as the LWA continued to supply boat and yacht builders with their equipment. 20 Our costs of revenues as a percentage of net revenues in this segment improved from 62.7% to 61.7% for the years ended December 31, 2022 and 2021. This can be attributed to the change is sales mix with increasing direct to consumer sales which tend to carry higher margins. Net Revenue Cost of Goods Sold as a % of Net Revenue Gross Margin as a % of Revenue 2022 2021 % change 2022 2021 2022 2021 Resellers $ 660,178 $ 347,034 90.2 % 67.3 % 63.6 % 32.7 % 36.4 % Direct to Consumers 245,097 96,380 154.3 % 53.1 % 68.9 % 46.9 % 31.1 % Original Equipment Manufacturers 212,806 172,625 23.3 % 54.4 % 57.3 % 45.6 % 42.7 % Total $ 1,118,081 $ 616,039 81.5 % 61.7 % 62.7 % 38.3 % 37.3 % Ultra-Portable Tankless Dive Systems Net revenues in this segment increased 36.2% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. In early November 2022, BLU3 recognized a flaw in the Nomad dive system that could result in a loss of air for the diver and filed with the CSPC for a voluntary recall and stopped selling the Nomad dive system until a fix could be created. The recall application with the fix was approved by the CPSC in January 2023. Notwithstanding the foregoing recall, BLU3’s sales increased in the year ended December 31, 2022 from the year ended December 31, 2021. The increase in revenue can be attributed to the introduction of the Nomad dive system and the strong sales in all categories in 2022, as compared to 2021 The largest contribution to the revenue increases for the year ended December 31, 2022 as compared to the prior year, is the growth in direct to consumer revenues from the Company’s website and trade shows, accounting for 31.7% growth and sales via the Amazon channel accounting for 95.3% growth. Our aggregate cost of revenue from this segment as a percentage of net revenues for the year ended December 31, 2022 decreased to 61.2% as compared to 64.1% for the year ended December 31 2021. The decrease can be attributed to efficiencies in both the product cost and labor cost in building the NOMAD. Net Revenue Cost of Sales as a % of Net Revenue Margin as a % of Net Revenue 2022 2021 % change 2022 2021 2022 2021 Direct to Consumer 1,244,030 944,493 31.7 % 78.6 % 54.3 % 21.4 % 45.7 % Dealers 799,369 780,388 2.4 % 40.4 % 64.5 % 59.6 % 35.5 % Amazon 1,008,794 516,478 95.3 % 56.1 % 81.4 % 43.9 % 18.6 % Total $ 3,052,193 $ 2,241,359 36.2 % 61.2 % 64.1 % 38.8 % 35.9 % Redundant Air Tank Systems Net revenue in the Redundant Air Tank Systems System segment was $1,592,602 for the year ended December 31, 2022. Revenues for the twelve months ended December 31, 2021 includes only four months of activity as SSI was acquired in September, 2021. Dealers continue to be SSI’s largest customer sector accounting for 66% of total revenues. Except for profit margin for repairs, dealer margins continue to be the lowest margin sector as SSI sees this sector as the volume driver and sets prices to help enable dealers to generate profits. SSI has a worldwide customer base that includes (1) commercial accounts with aircraft requiring redundant air systems for their pilots and passengers, such as helicopters flying to oil rigs located in bodies of water (2) government accounts that are typically domestic and international military customers with egress systems (3) dealer accounts that are resellers including, international distributors to the military, commercial account or dive shops, and domestic and international dive shops that carry a spare air product (4) direct to consumer sales which are online sales and sales via trade shows direct to consumer and (5) Company provided repairs and warranty repairs to all sectors. 21 Net Revenue Cost of Sales as a % of Net Revenue Margin as a % of Net Revenue 2022 2021 % change 2022 2021 2022 2021 Commercial $ 215,506 88,876 142.5 % 45.8 % 55.5 % 54.2 % 44.5 % Dealers 1,051,046 287,877 265.1 % 73.2 % 89.0 % 26.8 % 11.0 % Government 130,832 42,875 205.1 % 43.1 % 25.6 % 56.9 % 74.4 % Repairs 29,493 - N/A 271.2 % 0.0 % -171.2 % - Direct to Consumers (Website) 165,725 53,143 211.8 % 63.5 % 68.2 % 36.5 % 31.8 % Total $ 1,592,602 472,771 236.9 % 69.7 % 74.6 % 30.3 % 23.2 % Guided Tours and Retail The guided tour and retail segment is a new segment as of May 2022 and is derived from retail revenues of LBI. Revenue in this segment currently primarily includes retail sales, and tours and lessons. Retail sales represent the sales of product at the retail facility, while tours and lessons represent revenue derived from diving excursions and lessons. Margins for this segment are suppressed for the year ended December 31, 2022 as cost of goods sold include the amount overpaid for the inventory at acquisition, as well as a portion of the costs of closing the transaction. Net Revenue Cost of Sales as a % of Net Revenue Margin as a % of Net Revenue 2022 2021 % change 2022 2021 2022 2021 Retail Sales $ 130,295 - N/A 70.8 % - 29.2 % - Tours and Lessons 82,581 - N/A 100.3 % - -0.3 % - Total $ 212,876 - N/A 82.2 % - 17.8 % - 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 24.1% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. Selling, General & Administrative Expenses (SG&A Expenses) SG&A increased by 26.2% for the years ended December 31, 2022 as compared to the year ended December 31, 2021. SG&A during those years are as follows: Expense Item 2022 2021 % Change Payroll $ 1,946,985 $ 1,144,020 70.2 % Non-Cash Stock based compensation – options 998,474 1,150,801 (13.2 )% Professional Fees 340,221 469,206 (27.5 )% Advertising 499,441 343,232 45.5 % All Others 841,081 559,564 50.3 % Total SG&A $ 4,626,202 $ 3,666,823 26.2 % 22 Payroll increases for the year ended December 31, 2022 can be attributed to an increase in the BLU3 payroll which contributed 29.4% of the increase. BLU3 added customer service and engineering staff as well as increased pay for key employees in 2022. The addition of a full year of SSI payroll comprised approximately 21.4% of the payroll increase. The balance of the increase can be attributed to the hiring of a social media/marketing manager, and several other operating and administrative personnel to support the growth in each of our divisions. Non-Cash Stock compensation expenses decreased 13.2% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The decrease can be attributed to fewer options being issued during the year as well as certain vesting criteria not being met in 2022 that were met in 2021. Professional fees, representing legal, accounting and other professional fees, which we paid in a combination of cash, common stock, or stock options, decreased 27.5% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. While accounting fees increased, 75.8% in 2022, the lack of acquisition in 2022 resulted in a reduction of legal fees of 43.2%. Additionally, other professional fees saw a decrease as two contract employees became salaried employees in 2022. Advertising expense increased 45.5% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. 74.8%% of the increase can be directly attributed to an increase of direct, internet and Amazon marketing by BLU3. The addition of SSI attributed 19.9% of the increase in advertising expense for the year ended December 31, 2022. 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. Other expenses increased 50.3% for the year ended December 31, 2022 as compared the year ended December 31, 2021. The primary driver to the increase in other expenses is the addition of a reserve for expenses related to the 2022 recall of the Nomad dive system. This reserve accounted for 57.0% of the overall increase in other expenses. Research & Development Expenses (R&D Expenses) R&D expenses for the year ended December 31, 2022 decreased 75.6% as compared to the year ended December 31, 2021. The decrease can be primarily attributed to the completion of the R&D for BLU3’s NOMAD in late 2021. Other Income For the year ended December 31, 2022 other income and expenses totaled approximately $42,500 in interest expense as compared to approximately $264,200 in other income for the year ended December 31, 2021. Interest expense for the year ended December 31, 2022 was approximately $42,500 as compared to approximately $21,500 for the year ended December 31, 2021. This increase can be attributed to the increase in convertible debt related to the SSI acquisition, as well as the financing of tools and dyes for both the SSI and BLU3 operations. 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 $484,427 on December 31, 2022.The following table summarizes total current assets, total current liabilities and working capital at December 31, 2022 as compared to December 31, 2021. December 31, 2022 December 31, 2021 % of Change Total Current Assets $ 3,265,714 $ 2,966,432 10.1 % Total Current Liabilities $ 1,792,151 $ 1,396,197 28.4 % Working Capital $ 1,473,563 $ 1,570,235 (6.2 )% 23 The increase in our current assets on December 31, 20221 from December 31, 2021 primarily reflects increases in inventory of approximately $527,000. The increase in inventory is offset by decreases in cash of approximately $158,700, accounts receivable of approximately $33,300 and prepaid assets of approximately $35,300 for the year ended December 31, 2022. The increase in inventory was due to inventory in BLU3 that was procured to continue to produce the Nomad dive system through the end of 2022, and to ensure enough inventory through the holidays, as well as the addition of the inventory in connection with the Gold Coast Scuba asset acquisition by LBI. The increase in our total current liabilities for the year ended December 31, 2022 as compared to the year ended December 31, 2021 reflects an increase in accounts payable and accrued liabilities of approximately $85,100, an increase in customer deposits of approximately $23,600, an increase of approximately $185,000 in other liabilities, primarily attributed to the reserve for Nomad recall expenses of $160,500, and an increase of approximately $36,800 in operating lease liabilities with the signing of the SSI lease renewal, and an increase in related party demand note, net, related to funds lent to LBI. Summary Cash Flows Years Ended December 31, 2022 2021 Net cash used in operating activities $ (678,356 ) $ (769,467 ) Net cash provided by (used in) investing activities $ (62,164 ) $ 517,701 Net cash provided by financing activities $ 581,805 $ 549,722 Net cash used in operating activities for 2022 was primarily the result of a net loss of $1,892,891, an additional cash used to fund inventory of $443,421, as well as the change in long term lease liability of $242,690 for the year ended December 31, 2022 as compared to December 31, 2021. The cash used related to net loss was offset by $998,474 in non-cash stock related compensation expenses and $47,501 non-cash expenses for shares issued for professional fees during the year ended December 31, 2022. Net cash used in investing activities for the year ended December 31, 2022 of $67,466 reflects primarily the cash used to acquire the assets of Gold Coast Scuba of $30,000 as well as the cash used to purchase fixed assets, net of debt totaling approximately $21,125, and fixed asset purchases of $16,341. This compares to cash provided by the purchase of SSI of $541,378 and cash used for the purchase of fixed assets of $23,677 for the year ended December 31, 2021. Net cash provided by financing activities for the year ended December 31, 2022 reflects $305,000 in proceeds related to the sale of the Company’s common stock and units comprised of stock and warrants and $265,000 in proceeds from the exercise of warrants. The increase in net cash was offset by repayments of notes payable and other debt of $54,976. This is compared to cash provided from the sale of common stock and units of $640,000 and the repayment of debt and notes payable totaling $90,278 for the year ended December 31, 2021. 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, 2022 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 $16,437,495 as of December 31, 2022. Despite a working capital surplus of $1,473,563 at December 31, 2022, 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. 24 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. 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 allownace 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 allowance 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 allowances 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 allownace 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. 25 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.