Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

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 Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly 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 Quarterly 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 applicable law.

The management's discussion and analysis of our financial condition and results of operations are based upon our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Overview

The Company owns and operates a portfolio of companies with a concentration in the industrial and recreational diving industry. The Company, through its subsidiaries, designs, tests, manufactures, and distributes recreational hookah diving, yacht-based scuba air compressors and nitrox generation systems and scuba and water safety products in the United States and internationally.

The Company has five subsidiaries focused on various sub-sectors:

Our wholly owned subsidiaries do business under their respective trade names on both a wholesale and retail basis from our headquarters and manufacturing facility in Pompano Beach, Florida, a manufacturing facility in Huntington Beach, California, and a retail facility in Fort Lauderdale, Florida.

The Company, through its wholly owned subsidiaries, designs, tests, and manufactures tankless dive systems, rescue air systems and yacht-based self- contained underwater breathing apparatus ("SCUBA") air compressor and nitrox generation fill systems. In addition, the Company is the exclusive distributor for North and South America for Lenhardt & Wagner GmbH ("L&W") compressors in the high-pressure breathing air and industrial gas markets. The Company is also building a guided tour operation that includes dive retail. Lastly, The Company is the exclusive United States and Caribbean distributor for Chrysalis Trading CC, a South African manufacturer of fitness and dive equipment, doing business as Bright Weights ("Bright Weights"), of a dive ballast system produced in South Africa.

Results of Operations

Net Revenues, Costs of Net Revenues and Gross Profit

Three Months Ended September 30, 2026 Compared to Three Months Ended September 30, 2025

Net revenues increased 27.6% for the three months ended September 30, 2026 compared with the three months ended September 30, 2025. The increase in net revenues was broad-based, with higher revenues at BTL, BLU3, SSI and LWA, and reflects higher advertising and marketing expenditures, particularly online and social media advertising, which supported increased sales activity during the three months ended September 30, 2026. LBI also contributed revenue during the three months ended September 30, 2026 following the acquisition of Sunrise Paddleboards LLC ("Sunrise Paddleboards") on July 1, 2026.

For the three months ended September 30, 2026, cost of net revenues was 48.4% of revenues compared with 53.6% for the three months ended September 30, 2025. The decrease in cost of net revenues as a percentage of revenues reflects revenue growth that outpaced the increase in production costs during the period. Related-party royalty expense increased 32.0% for the three months ended September 30, 2026 compared with the corresponding period in 2025. The increase in related-party royalty expense was primarily attributable to higher sales subject to the Company's existing royalty arrangements.

Gross profit margin was 51.6% for the three months ended September 30, 2026 compared with 46.4% for the three months ended September 30, 2025. The increase in gross profit margin was primarily attributable to revenue growth outpacing the increase in cost of net revenues, resulting in cost of net revenues decreasing to 48.4% of revenues from 53.6% in the corresponding period in 2025.

Nine Months Ended September 30, 2026 Compared to Nine Months Ended September 30, 2025

Net revenues increased 16.6% for the nine months ended September 30, 2026 compared with the nine months ended September 30, 2025. The increase in net revenues was primarily attributable to higher revenues at BTL, BLU3 and SSI, with LWA's revenues also modestly higher for nine months ended September 30, 2026. The increase at BTL reflects improved dealer terms and product modifications, the increase at BLU3 reflects an improved product mix and increased online and social media marketing, and the increase at SSI reflects sales to a broader customer base and continued demand for its product lines. LBI also contributed revenue during the third quarter of 2026 following the acquisition of Sunrise Paddleboards.

For the nine months ended September 30, 2026, cost of net revenues was 50.0% of revenues compared with 61.6% for the nine months ended September 30, 2025. Related-party royalty expense increased 47.3% for the nine months ended September 30, 2026 compared with the nine months ended September 30, 2025. The decrease in cost of net revenues as a percentage of revenues was primarily attributable to increased sales combined with lower material costs relative to revenues and improved purchasing practices. The increase in related-party royalty expense was primarily attributable to higher sales subject to the Company's existing royalty arrangements.

Gross profit margin was 50.0% for the nine months ended September 30, 2026 compared with 38.4% for the nine months ended September 30, 2025. The increase in gross profit margin was primarily attributable to increased revenues and a reduction in cost of net revenues as a percentage of revenues, including lower material costs relative to sales and improved purchasing practices.

Operating Expenses

Operating expenses consist of selling, general and administrative ("SG&A") expenses and research and development costs and are reported on a consolidated basis for our operating segments. Total operating expenses increased 27.0% and 53.6% for the three and nine months ended September 30, 2026, respectively, compared with the corresponding periods in 2025. R&D expenses increased 5,198.4% and 719.1% for the three and nine months ended September 30, 2026, respectively, compared with the corresponding periods in 2025.

Selling, General & Administrative Expenses

SG&A increased 25.1% and 52.7% for the three and nine months ended September 30, 2026, respectively, compared with the corresponding periods in 2025. The increase in SG&A expense was primarily attributable to higher payroll, professional fees and advertising expense. For the nine-month period, the increase also reflects higher rent and occupancy costs and other operating expenses. SG&A expenses were comprised of the following:

Payroll, selling and administrative expense increased 22.4% and 10.7% for the three and nine months ended September 30, 2026, respectively, compared with the corresponding periods in 2025. The increase in payroll expense reflects additional personnel hired during 2026 and higher staffing costs associated with increased operating activity.

Non-cash stock compensation expense increased 83.3% and 27.8% for the three and nine months ended September 30, 2026, respectively, compared with the corresponding periods in 2025. The increase in non-cash stock compensation expense reflects additional equity compensation recognized for directors and employees during 2026.

Professional fees increased 405.5% and 71.1% for the three and nine months ended September 30, 2026 compared with the corresponding periods in 2025. The increase in professional fees was primarily attributable to higher audit, legal, consulting and other professional fees. The three-month increase was also affected by a net credit to professional fees recorded in the three months ended September 30, 2025.

Advertising expense increased 89.3% and 37.8% for the three and nine months ended September 30, 2026, respectively, compared with the corresponding periods in 2025. The increase in advertising expense was primarily attributable to increased online and social media advertising, particularly for BLU3, together with increased marketing activity across the Company.

All other SG&A expenses decreased 1.0% for the three months ended September 30, 2026 and increased 98.3% for the nine months ended September 30, 2026, compared with the corresponding periods in 2025. All other SG&A expenses were substantially unchanged for the three-month period as increases in rent and occupancy and other operating costs were offset by decreases in other miscellaneous expenses. For the nine-month period, the increase was primarily attributable to higher rent and occupancy costs, insurance, payroll-related taxes and benefits, and other operating expenses. Rent expense during the three months ended September 30, 2026 also reflects costs associated with the Company's new Davie facility beginning in August 2026.

Research & Development Expenses (R&D Expenses)

R&D expenses for the three and nine months ended September 30, 2026 increased 5,198.4% and 719.1%, respectively, compared with the corresponding periods in 2025. The increase in research and development expense was primarily attributable to a more deliberate allocation of engineering labor and other development costs to research and development activities. The increase was primarily related to engineering labor at LWA associated with the redesign of certain systems and related technical re-certification efforts, as well as other product development activities across the Company.

Other Income/Expense

For the three and nine months ended September 30, 2026, other income was $377,576 and $1,228,604, respectively, compared with $114,315 for each of the corresponding periods in 2025. Interest expense was $28,606 and $146,228 for the three and nine months ended September 30, 2026, respectively, compared with $55,587 and $53,804 for the corresponding periods in 2025. The increase in other income was primarily attributable to the Internal Revenue Service's Employee Retention Credit related income, the write-off and settlement of certain historical liabilities, prior-period accounting corrections and other adjustments identified through the Company's ongoing reconciliation and financial reporting processes, as well as other refunds and non-operating items. Other income during the third quarter also included gains associated with the disposition of certain assets and additional adjustments resulting from the reconciliation of historical account balances. Several of these items are non-recurring and we believe are not indicative of the Company's ongoing operating performance.

Liquidity and Capital Resources

We had cash of $790,026 as of September 30, 2026. The following table summarizes total current assets, total current liabilities and working capital at September 30, 2026, as compared to December 31, 2025.

Total current assets increased to $4,552,209 at September 30, 2026 from $3,040,113 at December 31, 2025, while total current liabilities increased to $2,690,775 from $2,461,040. Working capital increased to $1,861,433 from $579,073. The increase in current assets was primarily attributable to increases in cash, inventory, accounts receivable, and prepaid expenses and other current assets. The increase in current liabilities was primarily attributable to higher accounts payable and accrued liabilities and operating lease liabilities, partially offset by reductions in current debt balances. As a result, working capital increased significantly from December 31, 2025.

Summary Cash Flows

Net cash provided by operating activities for the nine months ended September 30, 2026 was $711,316. Net cash provided by operating activities primarily reflects net income for the period, adjusted for non-cash items and changes in operating assets and liabilities. Cash generated from earnings and increases in accounts payable and accrued liabilities was partially offset by increased investment in inventory, higher accounts receivable and prepaid expenses, and cash payments associated with operating leases.

Net cash used in investing activities for the nine months ended September 30, 2026 was $29,022. Net cash used in investing activities was primarily attributable to purchases of property and equipment. The acquisition of Sunrise Paddleboards was principally a non-cash transaction and therefore did not materially affect investing cash flows during the period.

Net cash used in financing activities for the nine months ended September 30, 2026 was $200,153. Net cash used in financing activities was primarily attributable to repayments of loans and notes payable, including related-party debt, partially offset by proceeds from new equipment financing during the period.

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis. Although the Company reported net income of $1,371,382 for the nine months ended September 30, 2026 and had a working capital surplus of approximately $1.9 million, the Company continues to have an accumulated deficit of approximately $16.9 million and a history of operating losses. These factors raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the consolidated financial statements are issued. Management's plans to alleviate this substantial doubt include increasing revenues, controlling operating expenses, and obtaining additional capital as needed. However, there can be no assurance that these plans will be successful. Accordingly, substantial doubt about the Company's ability to continue as a going concern remains. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, valuation of inventory, allowance for doubtful accounts, and equity-based transactions. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited consolidated financial statements contained in this Quarterly Report.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company's operations, financial position or cash flows.

These recent accounting pronouncements are described in Note 2 to our unaudited consolidated financial statements contained in this Quarterly Report.

Off Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.