What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-05-09 compared with 2023-03-30 · 66 added, 195 removed, 142 unchanged (65% of the section changed)

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statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

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.

for Nomad Recall

December 22, 2022, the CPSC issued a recall notice for the Nomad tankless dive system, which is distributed by BLU3, Inc.

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.

of COVID-19 Pandemic

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.

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.

However, in 2023 the Company

adjusted the allowance down to $86,300 to reflect the actual impact on the Company’s financial condition.

of Operations

Ended December 31, 2023 and 2022

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

We reported a gross profit margin of 32.6% in 2022 as compared to 30.3% in 2021.

our net revenues decreased 11.6% in 2023 from 2022, which included a decrease of 17.8% in sales to related parties.

Our cost of revenues

in 2023 was 71.9% of our total net revenues as compared to 67.4% in 2022.

Included in our cost of revenues are royalty expenses we pay

to Robert Carmichael which decreased 6.5% in 2023 from 2022.

We reported a gross profit margin of 28.1% in 2023 as compared to 32.6%

following tables provide net revenues, costs of revenues, and gross profit margins for our segments for 2023 and 2022.

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Guided Tour Retail

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

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.

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.

Cost of Sales as a % of Net Revenue

Margin as a % of Net Revenue

Direct to Consumer (website included)

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.

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.

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

This can be attributed to the change is sales mix with increasing direct to consumer sales which tend to carry higher margins.

Cost of Goods Sold as a % of Net Revenue

Gross Margin as a % of Revenue

Direct to Consumers

Original Equipment Manufacturers

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.

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.

Cost of Sales as a % of Net Revenue

Margin as a % of Net Revenue

Direct to Consumer

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.

Cost of Sales as a % of Net Revenue

Margin as a % of Net Revenue

Direct to Consumers (Website)

Tours and Retail

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.

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.

Cost of Sales as a % of Net Revenue

Margin as a % of Net Revenue

Tours and Lessons

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

Aggregate operating expenses decreased 31.0% for the year ended December

31, 2023 as compared to the year ended December 31, 2022.

General & Administrative Expenses (SG&A Expenses)

increased by 26.2% for the years ended December 31, 2022 as compared to the year ended December 31, 2021.

decreased by 31.0% for the years ended December 31, 2023 as compared to the year ended December 31, 2022.

SG&A during those years

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Professional Fees

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.

decreases for the year ended December 31, 2023 can be attributed to a decrease in the BTL and BLU3 payroll which contributed the majority

of the 8.1% decrease.

BLU3 decreased its engineering staff in 2023 by one engineer.

Additionally, the CEO resigned in Q2 of 2023 and

the annual salary was not incurred.

Stock compensation expenses decreased 91.8% for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

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were met in 2022.

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.

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.

fees, representing legal, accounting and other professional fees, which we paid in a combination of cash, common stock, or stock options,

decreased 20.8% for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Accounting fees decreased, 30.3%

in 2023, due to the change in audit firms for the year ended December 31, 2022.

Additionally, legal fees decreased by 48.9% due to fewer

stock awards for legal fees in 2023.

expense decreased 26.8% for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The decrease is attributed

to less spending on direct and internet advertising by BTL, BLU3 and SSI in 2023.

expenses decreased 9.9% for the year ended December 31, 2023 as compared the year ended December 31, 2022.

The primary driver of the

decrease to other expenses is the reserve for expenses related to the 2022 recall of the Nomad dive system.

This reserve was decreased

to reflect the actual expense of the recall in 2023.

& Development Expenses (R&D Expenses)

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The decrease can be primarily

attributed to the completion of the R&D for BLU3’s NOMAD in late 2021.

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.

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.

attributed to the completion of the R&D for BLU3’s NOMAD in early 2022.

the year ended December 31, 2023 interest expenses totaled approximately $78,700 as compared to approximately $42,500 in interest expense

for the year ended December 31, 2022.

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.

and Capital Resources

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Working Capital

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.

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.

Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash provided by financing activities

decrease in our current assets on December 31, 2023 from December 31, 2022 primarily reflects decreases in cash and inventory of approximately

The decrease in inventory was due to inventory in BLU3 that was used for

the sale of the Nomad dive system through the end of 2023.

increase in our total current liabilities for the year ended December 31, 2023 as compared to the year ended December 31, 2022 reflects

an increase in customer deposits of approximately $88,206, an increase of approximately $79,011 in other liabilities, primarily attributed

to the reserve for Nomad recall expenses of $160,500, and a decrease of 9,892 in operating lease liabilities with the

signing of the SSI lease renewal, and an increase of $225,000 in related party demand note, due to the issuances of new notes.

Years Ended December 31,

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.

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

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.

Net cash provided by financing activities

cash used in operating activities for 2023 was primarily the result of a net loss of $1,248,115, as well as the change in long term lease

liability of $258,034 for the year ended December 31, 2023 as compared to December 31, 2022.

The cash used related to net loss was offset

by $462,297 in depreciation and amortization expenses and $81,424 non-cash stock based compensation expenses during the year ended December

cash used in investing activities for the year ended December 31, 2023 of $29,955 reflects primarily the cash used to purchase fixed assets.

This compares to cash used to acquire assets of Gold Coast Scuba of $30,000, as well as the cash used to purchase fixed assets, net of

debt totaling approximately $21,124, and fixed asset purchases of $11,040 for the year ended December 31, 2022.

cash provided by financing activities for the year ended December 31, 2023 reflects $200,000 in proceeds related to the sale of the Company’s

common stock and units comprised of stock and $225,000 in proceeds from the issuance of demand notes.

The increase in net cash was offset

by repayments of notes payable and other debt of $73,533.

This is compared to cash provided from the sale of common stock and units

of $305,000, proceeds from the exercise of warrants of $265,000, and the repayment of debt and notes payable totaling $54,988 for the

year ended December 31, 2022.

audited consolidated financial statements included in this Annual Report were prepared assuming we will continue as a going concern,

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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.

or unfavorable effect on required allowance balances.

Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value.

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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.

could have a favorable or unfavorable effect on required allowance balances.

Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis