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”). Reserve for Nomad Recall 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. However, in 2023 the Company adjusted the allowance down to $86,300 to reflect the actual impact on the Company’s financial condition. 18 Results of Operations Years Ended December 31, 2023 and 2022 Overall, 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% in 2022. Net Revenues The following tables provide net revenues, costs of revenues, and gross profit margins for our segments for 2023 and 2022. Year Ended December 31, 2023 2022 % change Legacy SSA Products $ 2,312,122 $ 2,601,622 (11.1 )% High Pressure Gas Systems 996,040 1,118,081 (10.9 )% Ultra-Portable Tankless Dive Systems 1,904,687 3,052,192 (37.6 )% Redundant Air Tank Systems 2,065,224 1,592,601 29.7 % Guided Tour Retail 302,724 212,876 42.2 % Total revenue $ 7,580,798 $ 8,577,372 (11.6 )% Cost of revenues as a percentage of net revenues Year Ended December 31, 2023 2022 Legacy SSA Products 85.6 % 74.6 % High Pressure Gas Systems 66.5 % 61.8 % Ultra-Portable Tankless Dive Systems 72.6 % 61.2 % Redundant Air Tank Systems 59.9 % 69.7 % Guided Tour Retail 62.7 % 82.2 % 19 Gross profit margins Year Ended December 31, 2022 2021 Legacy SSA Products 14.4 % 25.4 % High Pressure Gas Systems 33.5 % 38.33 % Ultra-Portable Tankless Dive Systems 27.4 % 38.8 % Redundant Air Tank Systems 40.1 % 30.3 % Guided Tour Retail 37.3 % 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 decreased 31.0% for the year ended December 31, 2023 as compared to the year ended December 31, 2022. Selling, General & Administrative Expenses (SG&A Expenses) SG&A 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 are as follows: Expense Item 2023 2022 % Change Payroll $ 1,788,890 $ 1,946,985 (8.1 )% Non-Cash Stock based compensation – options 81,424 998,474 (91.8 )% Professional Fees 269,621 340,221 (20.8 )% Advertising 365,604 499,441 (26.8 )% All Others 757,899 841,081 (9.9 )% Total SG&A $ 3,263,439 $ 4,626,202 (29.5 )% 20 Payroll 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. Non-Cash Stock compensation expenses decreased 91.8% for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease can be attributed to fewer options being issued during the year as well as certain vesting criteria not being met in 2023 that 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 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. Advertising 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. Other 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. Research & Development Expenses (R&D Expenses) R&D expenses for the year ended December 31, 2023 decreased 24.5% as compared to the year ended December 31, 2022. The decrease can be primarily attributed to the completion of the R&D for BLU3’s NOMAD in early 2022. Other Expense For 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. Liquidity and Capital Resources We had cash of $431,112 on December 31, 2023.The following table summarizes total current assets, total current liabilities and working capital at December 31, 2023 as compared to December 31, 2022. December 31, 2023 December 31, 2022 % of Change Total Current Assets $ 2,736,601 $ 3,265,714 (16.2 )% Total Current Liabilities $ 2,502,787 $ 1,792,151 39.7 % Working Capital $ 233,814 $ 1,473,563 (84.1 )% 21 The decrease in our current assets on December 31, 2023 from December 31, 2022 primarily reflects decreases in cash and inventory of approximately $476,000. 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. The 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. Summary Cash Flows Years Ended December 31, 2023 2022 Net cash used in operating activities $ (374,827 ) $ (678,357 ) Net cash (used in) investing activities $ (29,955 ) $ (62,164 ) Net cash provided by financing activities $ 351,467 $ 581,805 Net 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 31, 2023. Net 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. Net 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. 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, 2023 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 $17,685,610 as of December 31, 2023. Despite a working capital surplus of $233,814 at December 31, 2023, 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. 22 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 allowance 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 allowance 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. 23 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.