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. As of December 31, 2024 the company deemed that all units effected by the recall have been serviced or are no longer in service and has reduced the recall allowance to $0. 18 Results of Operations Years Ended December 31, 2024 and 2023 Overall, our net revenues increased 7.88% in 2024 from 2023, which included a decrease of 29.8% in sales to related parties. Our cost of revenues in 2024 was 58.4% of our total net revenues as compared to 72.2% in 2023. Included in our cost of revenues are royalty expenses we pay to Robert Carmichael which decreased 10.6% in 2024 from 2023. We reported a gross profit margin of 41.6% in 2024 as compared to 27.8% in 2023. Net Revenues The following tables provide net revenues, costs of revenues, and gross profit margins for our segments for 2024 and 2023. Year Ended December 31, 2024 2023 % change Legacy SSA Products $ 1,897,358 $ 2,312,122 (17.9 )% High Pressure Gas Systems 723,935 996,040 (27.3 )% Ultra-Portable Tankless Dive Systems 2,466,550 1,904,687 29.5 % Redundant Air Tank Systems 2,948,262 2,065,224 42.8 % Guided Tour Retail 141,942 302,724 (53.1 ))% Total revenue $ 8,178,047 $ 7,580,798 7.88 % Cost of revenues as a percentage of net revenues Year Ended December 31, 2024 2023 Legacy SSA Products 84.4 % 85.6 % High Pressure Gas Systems 63.3 % 66.5 % Ultra-Portable Tankless Dive Systems 67.8 % 72.6 % Redundant Air Tank Systems 68.9 % 59.9 % Guided Tour Retail 64.4 % 62.7 % 19 Gross profit margins Year Ended December 31, 2024 2023 Legacy SSA Products 15.6 % 14.4 % High Pressure Gas Systems 36.7 % 33.5 % Ultra-Portable Tankless Dive Systems 32.2 % 27.4 % Redundant Air Tank Systems 31.1 % 40.1 % Guided Tour Retail 35.6 % 37.3 % 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 9.0% for the year ended December 31, 2024 as compared to the year ended December 31, 2023. Selling, General & Administrative Expenses (SG&A) SG&A increased 9.2% for the year ended December 31, 2024 as compared to the year ended December 31, 2023. SG&A during those years were as follows: Expense Item 2024 2023 % Change Payroll $ 1,887,910 $ 1,788,890 5.5 % Non-Cash Stock based compensation – options 151,492 81,424 86.1 % Professional Fees 204,829 269,621 (24.0 )% Advertising 427,037 365,604 16.8 % All Others 902,105 757,899 19.0 % Total SG&A $ 3,573,373 $ 3,263,439 9.7 % 20 Payroll increased by 8.9% for the year ended December 31, 2024 as compared to the year ended December 31, 2023 The increase can be attributed to a cost of living increase and year end bonuses. . Non-Cash Stock based compensation expenses increased 12.4% for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The increase can be attributed to the vesting of incentive based options for the President of SSI. Professional fees, representing legal, accounting and other professional fees, which we paid in a combination of cash, common stock, or stock options, decreased 24.0% for the year ended December 31, 2024 as compared to the year ended December 31, 2023. Accounting fees increased 31.83% in 2024, due to a substantial increase in audit fees during the first three quarters of 2024, and legal fees decreased by 23.0% due to fewer stock awards for legal fees in 2024. Advertising expense increased 16.8% for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The increase is attributed to increased expenses associated with trade shows , and increased direct and internet advertising by BTL, BLU3 and SSI in 2024. Other expenses increased 19.0% for the year ended December 31, 2024 as compared the year ended December 31, 2023. primarily as a result of increase in repair and maintenance cost at the SSI facility in California. Research & Development Expenses (R&D Expenses) R&D expenses for the year ended December 31, 2024 decreased 28.0% as compared to the year ended December 31, 2023. The decrease can be primarily attributed to the focus on products that are not proprietary. Other Expense For the year ended December 31, 2024 interest expenses totaled approximately $79,600 as compared to approximately $78,700 in interest expense for the year ended December 31, 2023. This small increase can be attributed to a slight increase in interest bearing debt. Liquidity and Capital Resources We had cash of $417,678 on December 31, 2024.The following table summarizes total current assets, total current liabilities and working capital at December 31, 2024 as compared to December 31, 2023. December 31, 2024 December 31, 2023 % of Change Total Current Assets $ 3,030,924 $ 2,736,601 12.2 % Total Current Liabilities $ 2,860,749 $ 2,502,787 18.5 % Working Capital $ 170,175 $ 233,814 (55.0 )% 21 The increase in our current assets on December 31, 2024 from December 31, 2023 primarily reflects increases in accounts receivable, prepaid expenses and inventory of approximately $336,000. The increase in our total current liabilities for the year ended December 31, 2024 as compared to the year ended December 31, 2023 reflects an increase in customer deposits of approximately $212,699, an increase of approximately $307,915 related party demand debt with the increase in loans from the Company’s chief executive officer, an increase in the operating lease liabilities in connection with the lease for the Davie, Florids facility. These increases are offset by decreases in accounts payable of $102,491, current maturities of long term debt of $64,136, accounts payable related parties of $33,103 and other liabilities of 31,184, and the release of the reserve for Nomad recall expenses of approximately $86,000. Summary Cash Flows Years Ended December 31, 2024 2023 Net cash used in operating activities $ (299,093 ) $ (374,827 ) Net cash used in investing activities $ (21,1400 ) $ (29,955 ) Net cash provided by financing activities $ 307,305 $ 351,467 Net cash used in operating activities for 2024 was primarily the result of a net loss of $254,066, as well as the decrease in long term lease liability of $290,363, the reduction of accounts payable of $157,533, the increase of accounts receivable of $135, 455, and the increase in prepaid expenses of $137,770. The cash used related to net loss was offset by $124,930 in depreciation and amortization, and $151,492 in stock related compensation expense during the year ended December 31, 2024. Net cash used in investing activities for the year ended December 31, 2024 of $21,140 was for the leasehold improvements for the Company’s new Davie, Florida facility. Net cash provided by financing activities for the year ended December 31, 2024 reflects $307,915 in proceeds from related party demand notes. 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, 2024 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 $17,949,435 as of December 31, 2024. Despite a working capital surplus of $105,210 at December 31, 2024, 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 on page F-1 of the Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.