10-K 1 form10-k.htm

 

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

(MARK ONE)

 

  [X] Annual Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2018

 

  [  ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _______ to _______.

 

Commission File No. 333-99393

 

BROWNIE’S MARINE GROUP, INC.

(Name of Small Business Issuer in Its Charter)

 

Florida   90-0226181
(State or Other Jurisdiction of  
Incorporation or Organization)
  (I.R.S. Employer  
Identification No.)

 

3001 NW 25th Avenue, Suite 1, Pompano Beach,
Florida
  33069
(Address of Principal Executive Offices)   (Zip Code)

 

(954) 462-5570

(Issuer’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of each exchange on which registered
N/A   NA    

 

Securities registered pursuant to Section 12(g) of the Act:

N/A

 

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ]   Accelerated file   [  ]
  Non-accelerated filer [X]   Smaller reporting company   [X]
        Emerging growth company   [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)

Yes [  ] No [X]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 29, 2018 ($0.02), was $1,650,323.

 

There were 218,119,561 of common stock outstanding as of June 6, 2019.

 

 

 

 
 

 

PART I

 

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

 

Information included or incorporated by reference in this filing may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

 

This filing contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our Company’s growth strategies, (c) our Company’s future financing plans and (d) our Company’s anticipated needs for working capital. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this annual report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

 

Item 1. Business.

 

Overview

 

Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company,” “we,” “us,” “our,” or “BWMG”) designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. and manufactures and sells high pressure air and industrial gas compressor packages through its wholly owned subsidiary Brownie’s High Pressure Compressor Services, Inc. (“BHP”). The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. and Brownie’s High Pressure Compressor Services, Inc. The Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”.

 

On August 7, 2017, Brownie’s Marine Group, Inc. entered into an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”), a German-based company engaged in the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean (the “Territory”). Pursuant to an intercompany assignment, BHP is party to the agreement. Through BHP we conduct business under the brand name “L&W Americas/LWA” and are establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, compressed natural gas (“CNG”), military, scientific, recreational and aerospace industries. Our goal will be to build a network of jobbers, dealers, installers and high-pressure compressor distributors throughout the Territory by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product OEM integration relationships.

 

In December 2017, the Company formed a wholly-owned subsidiary BLU3, Inc. The Company was formed to develop and market its NEMO, NOMAD and NEPTUNE dive systems, an innovation electric shallow dive system that is completely portable to the user. As of December 31, 2018 the company had no sales and limited operations.

 

In November 2018, the Company announced its crowdfunding “Kick Starter program for the NEMO and NOMAD systems was successfully concluded, preselling approximately 350 units. The Company expects to commence its first production run of the NEMO system in the second quarter 2019.

 

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Executive Summary and Business Strategy

 

The Company began in business making hookah diving systems in the late 1960s, and has grown into a niche manufacturing and distribution company with dive-oriented products loosely classified into three categories: Brownie’s Third Lung (low pressure hookah systems), Brownie’s Tankfill (high pressure and mixed gas systems), and Brownie’s Public Safety (first-responder/emergency personnel systems). The Company serves middle income boat owners, higher income yacht owners, and recreational, military and public safety divers.

 

The Company strives for meticulous attention to detail and high quality product innovation. We believe that within the boating/diving industry Brownie’s Marine Group is known as the industry standard for surface supplied “family” dive systems and Scuba Tankfill Systems for yacht diving. Brownie’s products and support services range from shallow-water dive systems and extend into deep-water with mixed gas support systems for exploration divers and submersibles/submarines.

 

The Company holds numerous patents and is dedicated to designing and building innovative products. While Brownie’s Third Lung hookah diving units were the very first product sold by the Company, the Company recognized early on that there was a need for tank filling systems and unique diving applications. This realization was the catalyst for the addition of the two product categories: Brownie’s Tankfill and Brownie’s Public Safety. Brownie’s Tankfill designs, builds, and sells diving solutions from marine-ready tank filling compressors, Nitrox Makers™, complete dive lockers, and full submarine support systems. Brownie’s Public Safety features highly specialized diving gear for rescue and safety professionals and a unique automatic floatation device for body-armor that can also be integrated into foul weather jackets, traditional load bearing harnesses and other garments, such as the Garment Integrated Personal Flotation Device (GI-PFD) for use with body armor. The following paragraphs further describe the business and sales models for each of the categories of products sold.

 

Brownie’s Third Lung hookah systems have long been a dominant figure in gasoline powered, high-performance, and feature rich hookah systems. Taking full advantage of the proprietary compressor system, a complete series of traditional “fixed speed” electric compressors were developed for the built-in-boat market in 2005. Prior to 2010, Brownie’s did not offer for sale a floating battery powered hookah due to the inadequate performance/runtime afforded by previous technology. After years of inventing, testing and development, Brownie’s introduced multiple battery powered models in 2010 that we believe provide performance and runtimes as great as 300% better than the best devices previously on the market by utilizing a variable speed technology that controls battery consumption based on diver demand. Our variable-speed battery powered hookah system provides divers with gasoline-free all day shallow diving experiences.

 

Brownie’s Tankfill designs, manufactures, sells and installs Scuba tank fill systems for on-board yacht use under the brand “Yacht-Pro™”. Brownie’s Tankfill provides complete diving packages and dive training solutions for yachts. Brownie’s Tank Fill installs Nitrox systems which allow yacht owners to fill tanks with oxygen enriched air on board. The Yacht-Pro™ compressor systems offer a completely marine-prepared, VFD (variable frequency drive)-driven, automated alternative to other compressors on the market. Brownie’s Tankfill also designs complete dive lockers, mixed gas production and distribution systems, and the unique Nitrox Maker™. Nitrox is oxygen-enriched air, which reduces the effects of nitrogen on divers; it is the industry standard for dive professionals. The Nitrox Maker™ continuously generates the oxygen rich breathing gas directly from low-pressure air; no stored oxygen or other gases are required onboard. We believe a parallel product analogy to this device is the fresh water-maker that swept through the yachting industry over the last two-decades. While less yacht owners may opt for diving systems than fresh water-makers, there is a broad market potential for yacht owners that will want to have an uninterrupted supply of the premium breathing gas. Recently, an increase in commercial NitroxMaker™ system sales has been seen as more diving operations and operators are responding to the demand from their customers to provide nitrox at diving destinations. In addition to the traditional yacht-based NitroxMaker™ systems the Company has now established a full line of commercial products to meet this need, the NMCS series.

 

Brownie’s Public Safety designs, manufactures, distributes, and sells the RES (Rapid Entry System)/ HELO™ system, a complete mini SCUBA system designed for quick water rescues. The HELO™ system can be donned in less than 60 seconds and stored in a briefcase-size padded bag. Brownie’s Public Safety includes the GI-PFD™ (Garment Integrated Personal Flotation Device™) System for body armor flotation. This system can reliably support the distressed or unconscious wearer in a true life-saving position. This patented device addresses a need as law-enforcement, coast guard and military personnel are beginning to wear heavy (life-threatening in the water) body armor during waterborne patrol, inspection, and surveillance missions. The system helps the personnel float in heavy armor, hopefully saving their lives. The Company introduced the RES device at the FDIC trade show/conference in Indianapolis held in April of 2018. As of December 31, 2018, no sales of the RES system have been made.

 

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Some of the Company’s Products in Depth

 

Surface Supplied Air Systems: The Company produces a line of Surface Supplied Diving products, commonly called hookah systems. These systems allow one to four divers to enjoy the marine environment up to a depth of 90 feet/27 meters without the bulk and weight of conventional SCUBA gear. We believe that hookah diving holds greater appeal to families with children of diving age than does conventional SCUBA. The reduction of weight by eliminating the tank allows smaller divers, especially children, to participate more actively and enjoyably. The design of our product also reduces the effort required for both its transport and use. We believe the PELETON™ Hose System revolutionizes hose management for recreational surface supplied diving. It reduces the work required of any single diver by dispersing the load over the entire group. We use a single, larger diameter hose as a main downline with up to four individual hoses attached to it. This configuration not only reduces the weight and bulk of the hose required, but also reduces drag and entanglement. An entire line of deck-mounted systems is available for commercial applications that demand extremely high performance. In addition to the gasoline-powered units and the Variable Speed battery powered units mentioned above, a series of electric powered systems is also available for light to commercial duty. Powered by battery for portability or household current for virtually unlimited dive duration, these units are used primarily by businesses that work in a marine environment.

 

E-Reel and Built-in Battery Systems: The Company developed two surface supplied air products that it believes makes boat diving even easier. The Built-in Battery System builds a battery powered electric unit into the boat, eliminating the need to transport the compressor/motor assembly. The need for a flotation tube is also removed, as the boat itself serves in that capacity. The E-Reel advances this idea by adding a reel system to provide compact storage of up to 150 feet/46 meters of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. The hose is manually pulled from the reel supporting up to two divers to a depth of 50 feet/15 meters. When the dive is complete, the hose is automatically recoiled and stowed by the simple activation of a switch.

 

Brownie’s Integrated Air Systems (BIAS™): Compressed air can have many uses on a boat. The E-Reel and Built in Battery Systems discussed above are just a few examples of BIAS. In addition to supplying air to divers, integrated air systems provide for the inflating fenders, opening of doors, blowing of air horns, flushing toilets and more.

 

Kayak Diving Hose Kits: This product allows the use of a conventional SCUBA cylinder, but does not require the diver to wear it. The cylinder remains above the surface, in a kayak or boat, and a hose ranging from 20 feet/6 meters to 150 feet/46 meters allow the diver to explore the surrounding area.

 

Drop Weight Cummerbelt: The patented Drop Weight Cummerbelt is available with all our diving systems, and brings a new dimension to weighting systems. The belt will accommodate waist sizes from 24 to 54 inches and is depth compensating. It features two pockets, each capable of holding up to 10 pounds of block or shot weight. Each pocket can be instantly released by either hand, allowing the diver to achieve positive buoyancy in an emergency while retaining the belt itself. Additionally, the design of this belt provides for expanded capability. By adding an optional sleeve that zips onto the back of the belt, an egress, or bailout system, can be added. The Egressor Add-on Kit contains the sleeve, a 6 or 13 cubic foot SCUBA cylinder, and a SCUBA regulator. In addition to the added safety inherent in this design, many other uses for this present themselves, including, but not limited to, propeller clearing, overboard item retrieval and pool maintenance.

 

Tankfill Compressors: Many yacht owners enjoy the convenience and freedom of filling their own diving tanks with air, NITROX or custom mixed gases while out on cruise, freeing them from carrying extra cylinders or the need to locate a reputable source in various ports-of-call. Brownie’s Tankfill specializes in the design and installation of high-end custom systems to do just that. From surveying the vessel for installation requirements to custom fabrication of the necessary components, Tankfill provides all the services necessary to satisfy this market. We believe that every large vessel currently in service, being re-fitted, or being built is a potential customer. Through OEM relationships we have expanded our market to reach these customers. Our light duty compressor, the Yacht Pro™25 is specifically designed and built to withstand the marine environment with all components and hardware impervious to spray from the elements. The Yacht Pro™ series contains models for both medium-duty applications, such as recreational divers and small groups, and heavy-duty use as found on research vessels, commercial operations and live-aboard dive boats. All Yacht Pro™ models come with the Digital Frequency Drive, which is a Brownie’s Tankfill innovation. The Digital Frequency Drive eliminates the spike previously experienced in starting the compressor, eliminating the need to ration the boat’s electrical usage by shutting down components when the compressor is needed. Custom design work is done in-house for major product installations and in conjunction with other entities.

 

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NitroxMaker™: We believe Nitrox has become the gas of choice for informed recreational divers the world over. What was once only available from land-based gas mixing facilities is now easily accessible to the yacht diver. With a Brownie’s NitroxMaker™, the user dials-in a desired oxygen level from 21% to 40%, eliminating the need to transport and handle pure oxygen. The resulting diving gas mix is monitored with digital oxygen analyzers, removing the calculations required to blend or mix the gas.

 

Rapid Entry System (RES) and HELO System and Abdominal Aortic Tourniquet (AAT): The Brownie’s Public Safety product line exists to address the needs of the public safety dive market. The inherent speed and ease of donning our patented Drop Weight Cummerbelt with Egressor Add-on Kit identified RES as a great choice for rapid response for water-related emergencies. A first-responder or officer on-scene can initiate the location and extraction of victims while the dive team is enroute, saving valuable time and increasing the chances for survival of victims. The RES is a small SCUBA system that can be quickly donned over clothes, usually in less than sixty seconds. Its small size allows it to be stored in areas that do not accommodate a full set of SCUBA gear. The 13 cubic foot aluminum tank can provide up to 5-15 minutes in shallow water depths. The air cell remains stowed under the protective cover and can be partially inflated to achieve positive flotation. The cover is a specially designed break-away zipper which bursts open to provide instant inflation yet “heals” and can be repacked and fastened quickly in the field. The HELO offers all the same features, but has been specially designed and modified for rescue divers working from helicopters. By placing the cylinder in the front and adding leg straps, the HELO allows divers to use the standard seating configurations and deploy from a helicopter. The advantages of this system over full sized SCUBA rigs are increased mobility for the diver and diminished space requirements for the gear. Since the bottle is mounted at the diver’s waist, the diver can more easily control his gear during deployment, further adding to the comfort and rescue performance capabilities.

 

First responders and medics in the field know that every second counts with junctional injuries and pelvic area bleeding. Each passing second can determine the difference between life and death. We have designed the Abdominal Aortic Tourniquet (AAT) which is designed for application in under one minute, and without specialized training.

 

In 2010, our design team became aware of potential traditional tourniquet deficiencies and potentially avoidable fatalities in the most demanding situations. Field medic professionals approached our team for a potential solution. After working on the problem, we created an alternative tourniquet resulting in US patents 9,782,182 and 9,351,737.

 

We believe our ATT will address the issue of how to treat an incompressible hemorrhage that cannot be tended to by use of a traditional tourniquet in the leg, groin or pelvic area. Our tourniquet is designed for quick and efficient application, restricting blood loss and possibly preventing death from wounds that were previously untreatable.

 

Brownie’s High Pressure Compressor Services (LW Americas): Through BHP we began operations to conduct business and build the brand name “LW Americas”, establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. Since 1980, L&W has been supplying high-pressure compressors and the associated modules for the processing, storage and filling of air, inert gases, natural gas, biogas and hydrogen.

 

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BLU3: BLU3 designs next generation electric surface supplied air diving systems. The BLU3 line currently consists of three development stage models targeting specific performance levels and price points – NEMO, NOMAD and NEPTUNE. Currently, NEMO and NOMAD are functional design prototypes. Nemo is entering the initial production phase with first delivery of products anticipated in mid to late June, 2019

 

In November 2018, the Company announced its crowdfunding “Kick Starter program for the NEMO invention was successfully concluded, preselling approximately 350 units. The Company expects to commence its first production run of the NEMO system in the second quarter 2019 and we believe we have the funding to successfully bring our NEMO product to market.

 

Diving and Boating Markets

 

The diving and boating markets are key to the expansion of the Brownie’s brand. Each of these industries has experienced growth over the past several decades, but we believe each industry also has significant weaknesses. The dive industry has focused on the initial certification of divers for revenue. According to industry data, follow up has been poor; causing many divers to quit diving after their first experience. When the Company’s working capital reaches a sufficient level, BWMG intends to implement a follow-up program, facilitate proper selection of equipment for divers, and institute mentoring programs.

 

We continue to work with boaters to enhance their on-water experience by exploiting the diving activities that they can easily add as an accessory to their investment in boating. Brownie’s OEM BIAS program will improve the overall value at the manufacturing level and consumer experience by elimination of waste during the design/build phase. They can blow their horns, open air-powered doors and dive directly from a BIAS package.

 

Trade names

 

The Company either owns or has licensed from an entity, which the Chief Executive Officer has an ownership interest, the use of the following registered and unregistered trade names, trademarks and service marks for the terms of their indefinite lives: Brownie’s Third Lung™, browniedive.com, Brownie’s, Brownie’s Third Lung oval symbol, browniedive, NitroxMaker™, HELO, RES, fast float rescue harness, tankfill.com, browniestankfill, browniestankfill.com, browniespublicsafety.com, browniespublicsafety, Peleton Hose System, Twin-Trim, Kayak Diving Hose Kit, Bell Bottom Flag Bag, Brownie’s Dogsnare, SHERPA, BC keel, Garment integrated personal flotation device (GI-PFD). In 2017, the Company formed two wholly-owned subsidiaries; Brownie’s High Pressure and has commenced operations under the name L&W Americas/LWA and BLU3. Use of these trade names, trademarks, and service marks is exclusive to the Company and the Company’s related parties.

 

Patents

 

The Company owns multiple patents issued and in process related to the following:

 

  Water safety and survival
     
  Garment integrated flotation devices or life jacket
     
  Collar for improved life jacket performance
     
  Combined signaling and ballast for personal flotation device
     
  Inflatable dive marker and collection bag.
     
  Three dimensional dive flag
     
  Novel dive raft and float system for divers
     
  Drop weight Cummerbelt

 

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  Buoyancy compensator
     
  Utility backpack
     
  Transport harness or like garment with adjustable one size component for use by a wide range of individuals
     
  Active control releasable ballast

 

Marketing

 

Print Literature, Public Relations, and Advertising

 

We have in-house graphic design capability to create and maintain product support literature, catalogs, mailings, web-based advertising, newsletters, editorials, advertorials, and press releases. We also, from time-to-time, target specific markets by selectively advertising in journals and magazines that we believe reach our potential customers. In addition, we strive to issue press releases, newsletters, and social media postings periodically to keep the public informed of our latest products and related endeavors.

 

Tradeshows

 

In 2018 and 2017, the Company was represented either through their own presence or by a dealer at the following annual trade shows: The Miami Yacht and Brokerage Show, The Fort Lauderdale International Boat Show, the Palm Beach Boat Show, and the Seattle Boat Show.

 

Websites

 

The Company’s main website is www.browniesmarinegroup.com. Additionally, many of our products are marketed on some of our customers’ websites. In addition to these websites, numerous other websites have quick links to the Company’s website. Our products are available both domestically and internationally. Internet sales and inquiries are also supported by the Company. Information, which appears on our website, is not part of this report.

 

Distribution

 

Our products are distributed to our customers primarily by common carrier.

 

Product Research and Development (R&D)

 

We continuously work to provide our customers with both new and improved products. We offer research and development services to not only the related entities we license our patents and trademarks from, but also to other customers as well. R&D services for customers and the related entities are invoiced in the normal course of business. In addition, we are working on internal research and development projects as well as collaborating with others toward the goal of developing some of our own patentable products. Research and development costs for the years ended December 31, 2018 and 2017, were $113,920 and $16,380, respectively.

 

Government Regulations

 

The SCUBA industry is self-regulating; therefore, the Company is not subject to government industry specific regulation. Nevertheless, the Company strives to be a leader in promoting safe diving practices within the industry and believes it is at the forefront of self-regulation through responsible diving practices. The Company is subject to all regulations applicable to “for profit” companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its facility have been obtained. There can be no assurance that the Company’s operation and profitability will not be subject to more restrictive regulation or increased taxation by federal, state, or local agencies in the future.

 

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Customers

 

We are predominantly a wholesale distributor to retail dive stores, marine stores, and shipyards. This includes approximately 160 active independent Brownie dealers. We retail our products to include, but not limited to, boat owners, recreational divers and commercial divers. The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer, and three Companies owned by the Chief Executive Officer. Combined sales to these six entities for the years ended December 31, 2018 and 2017, represented 28% and 37%, respectively, of total net revenues.

 

Raw Materials

 

Principal raw materials for our business include machined parts such as rods; pistons; bearings; hoses; regulators; compressors; engines; high-pressure valves and fittings; sewn goods; and various plastic parts including pans, covers, intake staffs, and quick release connections which are typically purchased on a per order basis. Most materials are readily available from multiple vendors. Some materials require greater lead times than other materials. Accordingly, we strive to avoid out of stock situations through careful monitoring of these inventory lead times, and through avoiding single source vendors whenever possible.

 

Competition

 

We consider the most significant competitive factors in our business to be fair prices, feature advantages, shopping convenience, the variety of available products, knowledgeable sales personnel, rapid and accurate fulfillment of orders, and prompt customer service. We currently recognize one significant competitor in hookah sales and a variety of competitors in high-pressure tankfill systems sales. Products from the hookah competitor and those from one of the tankfill competitors appear to be very similar to ours at first glance, but lack many of what we believe are our patently superior feature advantages. Brownie’s competitors in the high pressure tankfill market are typically focused on traditional dive stores and fire department air service. Several are large multi-national companies that do not offer adaptation to the yacht market or Nitrox integration; both areas that Brownie’s long-term investments rise to a level to suit the buyer’s needs.

 

Overall, we are operating in a moderately competitive environment. We believe that the price structure for all the products we distribute compares favorably with the majority of our competitors based on quality and available features.

 

Personnel

 

We currently have nineteen (19) full time employees at our facility in Pompano Beach, Florida. Eight (8) are classified as exempt sales and administrative or management, and eleven (11) are classified as nonexempt factory or administrative support. We utilize consultants when needed in the absence of available in-house expertise. Our employees are not covered by a collective bargaining agreement.

 

Seasonality

 

The main product categories of our business, Brownie’s Third Lung and Brownie’s Tankfill, are seasonal in nature. The peak season for Brownie’s Third Lung’s products is the second and third quarters of the year. The peak season for Brownie’s Tankfill’s products is the fourth and first quarters of the year. Since the seasons complement one another, we are able to shift cross-trained factory and warehouse personnel between the two product categories as needed. Thus, the Company is able to minimize the down time normally associated with seasonal business.

 

Item 1A. Risk Factors.

 

Not applicable to smaller reporting companies. However, our principal risk factors are described under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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Item 1B. Unresolved Staff Comments

 

Not applicable to smaller reporting companies.

 

Item 2. Properties.

 

Our Pompano Beach facilities are comprised of two adjoining properties totaling approximately 16,566 square feet of leased space the bulk of which is factory and warehouse space. Terms of the initial lease covering approximately 8,541 square feet included a thirty-seven month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term.

 

On November 11, 2018, the Company entered a new lease agreement for an additional 8,025 square feet adjoining its existing facility in Pompano Beach, Florida. Terms of the new lease include a sixty-nine month term; a $6,527 security deposit; initial base rent of approximately $4,848 per month escalating at 3% per year during the term of the lease plus Florida state sales tax and payment of 10.11% of the buildings annual operating expenses (i.e. common area maintenance) subject to adjustment as provided in the lease.

 

We believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.

 

Item 3. Legal Proceedings.

 

From time to time the Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability insurance, which provided coverage for each claim up to $1,000,000. During the third quarter of 2014, the Company did not renew its product liability insurance since the renewal policy amount was cost prohibitive. As of August 15, 2017, the Company has obtained Product Liability Insurance, although prior claims are not covered under the new policy. The policy was renewed and is prepaid through its term and will remain in effect until its renewal date of August 14, 2019.

 

As previously disclosed, the Company, Trebor and other third parties, are each named as co-defendants under actions initially filed in March 2015 in the Circuit Court of Broward County under Case No. CACE15-03238 and CACE-16-0000242 by the Estate of Ernesto Rodriguez, claiming wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung product. This claim falls outside the Company’s period of insurance coverage. Plaintiff has claimed damages exceeding $1,000,000. A default judgment was entered against Trebor in 2015 due to its failure to timely respond to the complaint. On November 2, 2016, the court granted plaintiff’s motion for sanctions against our company for frivolous litigation relating to our attempt to have the matter dismissed and granted the plaintiff’s motion to strike our motion for summary judgment due to our initial default. The Company believes the claim to be a Workers Compensation claim relating exclusively against other non-affiliated defendants and without merit, and will aggressively defend this action and to appeal the default judgment. In the event Trebor is unable to overturn the default judgment and the defendants are determined to be at fault, we would seek to allocate damages among all of the other parties, including the plaintiff. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated due to the undetermined validity of any claim or claims made by plaintiff and the mitigating factors among the parties. Therefore, the Company has not recorded reserves and contingent liabilities related to this matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or reserve for these matters.

 

Item 4. Mine Safety Disclosure.

 

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issurer Purchases of Equity Securities.

 

The Company’s common stock is quoted on the OTC Markets Pink under the symbol “BWMG”. On June 6, 2019, the closing sale price of our common stock was $0.0122 per share.

 

Holders of Common Stock

 

As of June 6, 2019, the Company had in excess of 370 shareholders of record.

 

Dividends

 

We have not paid any dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings, if any, to finance the growth of the business. We cannot assure you that we will ever pay cash dividends. Whether we pay any cash dividends in the future will depend on our financial condition, results of operations and other factors that the Board of Directors will consider.

 

Sales of Unregistered Securities

 

Excluding unregistered securities previously disclosed in reports filed with the Securities and Exchange Commission during the period covered by this report, the Company sold additional securities without registration under the Securities Act of 1933, as amended, during the period covered by this report as provided below. The restricted shares were issued under the exemption from registration provided by Section 4(a)(2) of the Securities Act. The certificates representing the shares contain restrictive legends and the recipients of the shares were deemed to be accredited investors. The Company did not pay any commissions in connection with the issuance of the shares.

 

In December 2018, the Company issued 20,000,000 shares of common stock to our CEO as an incentive bonus. As the shares are subject to continued employment by the CEO through January 2, 2020, the Company has treated the shares as issued but not as yet outstanding. Expense for the issuance is being recognized over the full vesting period, and accordingly, the Company recognized stock compensation expense of $10,576 as of December 31, 2018.

 

In December 2018, the Company issued an aggregate of 2,260,963 shares of common stock to three members of our board of director as director fees with a fair value of $0.0195 per share totaling $44,089 and 4,000,412 common shares for services provided with an average fair value of $0.016 per share totaling $78,871.

 

In January 2019, the Company entered into an investment banking and corporate advisory agreement. The term of the agreement is for one year and provided for compensation of 2,700,000 shares of common stock. The shares were issued in February and March 2019.

 

In January 2019, the Company issued 1,000,000 shares of common stock to a consultant for general administrative advisory services.

 

In March 2019, the Company issued 3,333,333 shares of common stock to a director for consulting services.

 

In March, 2019 we issued an accredited investor, a unit of the securities of the Company, with the unit consisting of 50,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 eighteen month common stock purchase warrants exercisable at $0.01 per share in consideration of $500,000. The Company intends to use the proceeds from the sale for product research and development and working capital purposes. The Company did not pay any fees or commissions in connection with the sale of the unit.

 

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Item 6. Selected Financial Data.

 

Information not required by smaller reporting company.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

The Company currently designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. and manufactures and sells high pressure air and industrial gas compressor packages through its wholly owned subsidiary BHP. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Pompano Beach, Florida.

 

The Company formed BLU3, Inc. to develop and market an innovation electric shallow dive systems - their NEMO, NOMAD and NEPTUNE systems - that are completely portable to the user. As of December 31, 2018 the company had no revenues and limited operations. However, BLU3 expects to commence its first production run of the NEMO system in the second quarter 2019.

 

Significant Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a wide variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. We have identified certain accounting policies that are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are as follows:

 

Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation -The consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor Industries, Inc., Brownie’s High Pressure Compressor Services, Inc. and BLU3, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Cash and equivalents – Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.

 

Going Concern –The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these consolidated financial statements. We incurred net losses for the years ended December 31, 2018 and 2017 of $1,302,985 and $248,744, respectively. The Company had an accumulated deficit as of December 31, 2018 of $10,182,778.

 

Because the Company believes that existing operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing. The Company has issued common stock and a number of convertible debentures as an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or other securities, and obtaining some short term loans.

 

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If the Company fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

 

Accounts receivable – Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for doubtful accounts is estimated based on historical customer experience and industry knowledge.

 

Inventory – Inventory is stated at the lower of cost or net realizable value. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when indicated.

 

Property and equipment and leasehold improvements – Property and equipment and leasehold improvement is stated at cost less accumulated depreciation or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).

 

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

 

Revenue Recognition – On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive. The new revenue standard was applied using the modified retrospective method. As a result of the adoption of this standard, there was no impact on the prior year financial statements.

 

We recognize the sale of products under single performance obligations upon  shipment of the units as that is when ownership is transferred and our performance is completed. Revenues from repair and  maintenance activities is recognized when the repairs are completed and the units have been shipped.

 

Product development costs – Product development expenditures are charged to expenses as incurred.

 

Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which they occur.

 

Customer deposits – unearned revenue and returns policy – The Company typically takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice. The Company provides our customers with an industry standard one year warranty on systems sold.

 

Warranty policy - Under the provisions of FASB ASC 460, Guarantor’s Guarantees, the Company accrues a liability for estimated warranty policy costs based on historical information and experience. The Company provides our customers with an industry standard one year warranty on systems sold and recognizes a warranty reserve based on gross sales multiplied by the historical warranty expense return rate. The warranty reserve at December 31, 2018 was charged to cost of net revenues and is included in accrued expenses and is deemed sufficient to absorb any material or labor costs that might be incurred on sales recorded during the period.

 

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Income taxes – On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Jobs Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a United States corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017.

 

The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

 

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is determined through use of the quoted stock price.

 

Beneficial conversion features on convertible debentures – A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share value of the underlying stock into which it is convertible. The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined through use of the quoted stock price.

 

Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

 

Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

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Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.

 

At December 31, 2018, and 2017, the carrying amount of cash, accounts receivable, accounts receivable – related parties, accounts payable and accrued liabilities, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and convertible debentures approximate fair value because of the short maturity of these instruments.

 

Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.

 

New accounting pronouncements

 

In June 2018, the Financial Accounting Standards Board issued ASU 2018-7, “Compensation – Stock Compensation” (Topic 718) amending the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments specify that nonemployee share-based payments are measured at grant-date fair value with the grant date being defined when the parties reach a mutual understanding of the key terms and conditions of the share-based award. ASU 2018-07 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We believe the adoption of ASU 2018—07 will not have a material impact on our consolidated results of operations, cash flows or financial condition.

 

In March 2018, the FASB issued ASU 2018-05, “Income Taxes” (Topic 740) amending previous guidance on accounting and disclosures for income taxes addressing changes under the Tax Cuts and Jobs Act (the “Act”). This standard addresses the recognition of taxes payable or refundable in the current year and the recognition of deferred tax liabilities and deferred tax assets following passage of the Act. ASU 2018-5 has an enactment date of December 22, 2017. We do not believe this ASU had a material impact on our consolidated results of operation, cash flows or financial condition.

 

In April 2016, the FASB issued ASU 2016–10 Revenue from Contract with Customers (Topic 606): identifying Performance Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. The adoption of ASU 2016-10 is effective for reporting periods beginning after December 15, 2017. This ASU did not have a material impact on our consolidated results of operation, cash flows, or financial condition.

 

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In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We have reviewed the provisions of this standard and determined it will not have a material impact on our consolidated statement of operations however, the recognition of right of use assets and real estate operating lease liabilities will have a material impact on our consolidated balance sheet presentation. Adoption of this standard will result in additional right of use assets and additional liabilities of approximately $695,500 based on the present fair value of the remaining minimum rental payments under our current real property lease obligations.

 

In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. ASU No. 2015-11 does not apply to inventory measurement using the last-in, last-out (LIFO) or retail methods. ASU No. 2015-11 applies to all other inventory measurement methods, which includes first-in, first-out (FIFO) or average cost. Previously, inventory valuation was at the lower of cost or fair market value. This ASU changes the valuation to lower or cost of net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of the business, less reasonably predictable costs of completion, disposal, and transportation. ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. ASU 2015-11 should be applied prospectively with earlier application permitted. The Company opted for early adoption of ASU 2015-11 with no impact to financial condition, results of operations, or cash flows. The Company updated its consolidated financial statements to reflect inventory valuation at the lower of cost or net realizable value.

 

The Company believes there was no other new accounting guidance adopted, but not yet effective that either has not already been disclosed in prior reporting periods or is relevant to the readers of its consolidated financial statements.

 

The following discussion and analysis of the Company’s 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 United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates these estimates. 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.

 

Results of Operations for the Year Ended December 31, 2018 as Compared to the Year Ended December 31, 2017

 

Net revenues. For the year ended December 31, 2018, we had net revenues of $2,542,207, a 25% increase over the year ended December 31, 2017. The bulk of this increase was attributable to sales in our BHP subsidiary formed in August 2017, with sales of $320,798 in 2018 and sales of $33,581 in 2017. While there can be no assurance, the Company expects revenues to increase in the future under the Exclusive Distribution Agreement. Related party revenues declined by approximately 5% between periods as a result of a decrease in demand in recreational dive products primarily attributable to exceptionally heavy rain, storm conditions and resulting hurricane damage in Florida and the Bahamas during April and May of 2018.

 

As of December 31, 2018, there were no revenues recognized in BLU3, as we expect to deliver our first pre-orders in the second quarter of 2019. Our BLU3 products are currently in the development stage. However, the Company has been incurring engineering and development costs. In connection with this project, in April 2018, the Company entered into a patent license agreement contracting for certain intellectual property rights which we believe will enhance the capabilities of our portable shallow dive system currently under development.

 

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In November 2018, the Company announced its crowdfunding “Kick Starter” program for the NEMO system which was successfully concluded, preselling approximately 350 units, which has resulted in proceeds, net of related costs, of approximately $112,000. This amount, coupled with additional funds raised subsequent to December 31, 2018, is considered sufficient to commence commercial production of the NEMO product line in the second quarter 2019.

 

Cost of net revenues. Cost of net revenues increased sharply during the year ended December 31, 2018 to $2,226,584, a 56% increase over 2017. This increase was due in large part to the 25% increase in revenues during 2018. The cost of revenues as a percentage of revenues totaled 88% during 2018 compared to 70% for the year ended December 31, 2017. This increase in cost of sales as a percentage of total net sales was due in part to a change in product mix, including sales to related parties, to products with a lower margin due in part to weather conditions in Florida and the Bahamas in the second quarter of 2018 affecting sales. Due to the nature of a large portion of our business being dependent on recreational boating and diving, sales are seasonal and often dependent on weather conditions. However, while there can be no assurance, given the formation BHP in the third quarter 2017, the Company believes that as our operations under the L&W agreement target industrial applications, we will be less susceptible to weather or other seasonal fluctuations. In addition, for the year ended December 31, 2018, the Company recognized an additional reserve for obsolete or slow moving inventory of approximately $100,000 over the 2017 balance.

 

Operating expenses. Operating expenses, consisting of selling, general and administrative expenses and research and development costs increased sharply between the periods. Selling, general and administrative expenses and research and development costs totaled $1,326,865 for the year ended December 31, 2018, an increase of $506,629 or 62% over the prior year. The large bulk of this increase in general and administrative was due to an increase in the number of employees between the periods with an associated increase in salaries and benefits and an increase in consulting fees and employee benefits paid in stock totaling $214,687 compared to $100,000 in 2017. Employees were added in large part due to the formation of BHP and BLU3 including two sales managers, two engineers, a director of marketing and additional sales personnel. This increase in operating expenses is expected to continue as the Company adds additional production personnel in support of our expanding product lines with LWA and BLU3 as described and associated administrative support.

 

While there can be no assurance, the Company believes that the near term costs of “ramping up” its high pressure business, through LWA, and continued development of its BLU3 portable shallow dive system product line will provide the Company with increased product diversity and increase revenues in the future.

 

Research and development costs were up sharply, increasing to $113,920 during the year ended December 31, 2018, as compared to $16,380 in 2017. This increase is primarily attributable to our efforts to expand our product lines including our portable shallow dive system currently under development as described above. We expect research and development costs to continue to increase as we continue development of products aimed at increasing what we believe to be new innovative product offerings.

 

Under the patent license agreement, the Company paid an initial license fee in April 2018 through the issuance of 759,422 shares of common stock with a fair value of $30,000 which is being amortized on a straight line basis over its five year term which resulted in $4,500 in expense being recognized in 2018. The patent license agreement further provides for royalties to be paid based on annual net revenues achieved.

 

Other expense, net. Other expense consisting primarily of interest expense, increased substantially in 2018, totaling $289,223, an increase of $255,547 over 2017 partially offset by a $7,200 gain being recognized on the cancellation of a debt agreement. Of this increase, $248,750 was attributable to additional interest related to a convertible debenture debt settlement with related accrued interest, for stock with a fair value of $775,000 in the fourth quarter of 2018. In addition, 2018 interest expense includes amortization of beneficial conversion features on two notes issued in December 2017 and related interest recognized on these notes.

 

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Net loss. For the year ended December 31, 2018, we recognized a net loss of $1,302,985 as compared to a loss of $248,744 for comparable period in 2017. This increase in loss was primarily attributable to the increase in the cost of revenues as a percentage of net revenues from 70% to 88% as described above as well as a sharp increase in general and administrative expenses, including administrative salaries and benefits, research and development costs attributable to increased staffing and related costs associated with new product development efforts and a sharp increase in debenture interest paid in stock associated with the settlement of a convertible debt settlement as discussed above.

 

Liquidity and Capital Resources

 

The Company’s current ratio and working capital declined between December 31, 2018 and 2017. As of December 31, 2018, the Company had current assets of $966,101 and current liabilities of $948,601 or a current ratio of 1 to 1, representing a working capital balance of $17,500. At December 31, 2017, the Company had current assets of $1,285,546 and current liabilities of $1,021,550, or a current ratio also of 1.3 to 1.

 

The consolidated financial statements included herein have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of issuance of these consolidated financial statements. We incurred losses for the years ended December 31, 2018 and 2017 of $1,302,985 and $248,744, respectively. The Company had an accumulated deficit as of December 31, 2018 of $10,182,778.

 

Because the Company believes that existing operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, the Company will continue to raise additional funds as needed and is currently exploring alternative sources of financing. The Company has issued common shares and a number of convertible debentures as an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or other securities or obtaining short term loans.

 

If the Company fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

 

On March 7, 2019 we issued an accredited investor, a unit of the securities of the Company, with the unit consisting of 50,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 eighteen month common stock purchase warrants exercisable at $0.01 per share in consideration of $500,000. The Company intends to use the proceeds from the sale for BLU3 product research and development and working capital purposes. The Company did not pay any fees or commissions in connection with the sale of the unit.

 

Net cash used in operating activities totaled $89,314 for the year ended December 31, 2018. The cash used in operations was primarily the result of a net loss from operations of $1,302,985, being offset by certain non-cash expenses including; a non-cash provision for slow moving inventory of $99,957, shares issued for services with a fair value of $214,687, additional interest expense recognized on debentures settled in common stock of $248,417, a decrease in prepaid expenses and other assets of $203,567, an increase in customer deposits and unearned revenue of $148,658 and an increase in accounts payable and accrued liabilities of $288,856. The increase in customer deposits and unearned revenue was due primarily to deposits related to our newly formed LWA and BLU3 subsidiaries and the introduction of these new product lines. As of December 31, 2018, no sales have yet been recorded by our BLU3 subsidiary.

 

Risk Factors

 

The Company is subject to various risks that may materially harm its business, financial condition and results of operations. These may not be the only risks and uncertainties that the Company faces. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our future business operations. If any of these risks or uncertainties actually occurs, the Company’s business, financial condition or operating results could be materially harmed. In that case, the trading price of the Company’s common stock could decline and you could lose all or part of your investment.

 

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Our ability to continue as a going concern is in substantial doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.

 

The Company recorded a loss for the year ended December 31, 2018 of $1,302,985 and had an accumulated deficit of $10,182,778 at December 31, 2018. The Company is behind on payments due for certain vendor payables. The Company is working out all matters of delinquency on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue. Our continued existence is dependent upon generating working capital and obtaining adequate new debt or equity financing. Because of our historical losses, we may not have working capital to permit us to remain in business through the end of the year, without improvements in our cash flow from operations or new financing.

 

The optional conversion features of a services of convertible debentures issued by the Company would require the Company to issue a substantial number of shares of common stock, which will cause dilution to the Company’s stockholders and a potentially negative effect on our stock price.

 

During 2011 and 2012, the Company issued convertible debentures to several lenders and other third parties, which $10,000 remains outstanding and is past due. In December 2017 the Company issued an additional two secured convertible debentures for $50,000 each which are collateralized by all of our assets and guarantees by our operating subsidiaries and chief executive officer. At December 31, 2018, the outstanding principal and interest balance of these debentures was $120,161. The debentures convert under various conversion formulas, which may be a significant discount to market price of our common stock. The conversion of any of the debentures will result in the issuance of a significant number of shares of our common stock, which will cause dilution to our existing shareholders. Furthermore, the conversion at a significant discount to the market price of our common stock may have a negative effect on our stock price. These debentures were in default at December 31, 2018 and were subsequently extended for one additional year.

 

Our common stock may be affected by limited trading volume and may fluctuate significantly.

 

Our common stock is traded on the OTC Markets. There is a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’ ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.

 

Our company is a voluntary filer with the Securities and Exchange Commission and in the event that we cease reporting under the Exchange Act, investors would have limited information available to them about the company.

 

While we are voluntarily file reports with the SEC under Section 15(d) of the Exchange Act, we do not have a class of securities registered under Section 12(g) of the Exchange Act. To the extent that our duty to file Exchange Act reports has automatically suspended under Section 15(d) of the Exchange Act, as a voluntary filer, we may elect to cease reporting under the Exchange Act at such time which would limit the information available to investors and shareholders about the company.

 

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Our common stock is deemed to be “penny stock,” which may make it more difficult for investors to sell their shares due to suitability requirements.

 

Our common stock is deemed to be “penny stock” as that term is defined under the Securities Exchange Act of 1934. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Our common stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.

 

Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.

 

We depend on the services of our Chief Executive Officer.

 

Our success largely depends on the efforts and abilities of Robert M. Carmichael, our President and Chief Executive Officer. Mr. Carmichael has been instrumental in securing our existing financing arrangements. Mr. Carmichael is primarily responsible for the development of our technology and the design of our products. The loss of the services of Mr. Carmichael could materially harm our business because of the cost and time necessary to recruit and train a replacement. Such a loss would also divert management attention away from operational issues. We do not presently maintain a key-man life insurance policy on Mr. Carmichael.

 

We require additional personnel and could fail to attract or retain key personnel.

 

In addition, our continued growth depends on our ability to attract and retain a Chief Financial Officer, a Chief Operations Officer, and additional skilled associates. We are currently utilizing the services of two professional consultants to assist the Chief Executive Officer with finance and operations. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or Chief Operations Officer or further assistance in these areas may have a material adverse effect upon us. Also, there can be no assurance that we will be able to retain our existing personnel or attract additional qualified associates in the future.

 

Our failure to obtain and enforce intellectual property protection may have a material adverse effect on our business.

 

Our success depends in part on our ability, and the ability of our patent and trademark licensors, entities owned and controlled by Robert M. Carmichael, our President and Chief Executive Officer, to obtain and defend our intellectual property, including patent protection for our products and processes, preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing the proprietary rights of third parties, both in the United States and in other countries. Despite our efforts to protect our intellectual proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection.

 

Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future.

 

We may be unable to manage growth.

 

Successful implementation of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management and financial resources. If we fail to manage our growth effectively, our business, financial condition or operating results could be materially harmed, and our stock price may decline.

 

18
 

 

Reliance on vendors and manufacturers.

 

We deal with suppliers on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued supply or pricing. In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production facility capacity. Historically, we have purchased enough inventories of products or their substitutes to satisfy demand. However, unanticipated failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us to curtail or cease operations.

 

Dependence on consumer spending.

 

The success of the our business depends largely upon a number of factors related to consumer spending, including current and future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which effects demand for our products. Any significant deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect our financial results. The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher fuel prices; declines in the value of investments and residential real estate; and increases in federal and state taxation can all negatively affect our results. There can be no assurance that in this type of environment consumer spending will not decline, thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely affected by continuing or future downturns in the economy, boating industry, or dive industry. If declines in consumer spending on recreational marine accessories and dive gear are other than temporary, we could be forced to curtail or cease operations.

 

Government regulations may impact us.

 

The SCUBA industry is self-regulating; therefore, Brownie’s is not subject to government industry specific regulation. Nevertheless, Brownie’s strives to be a leader in promoting safe diving practices within the industry and is at the forefront of self-regulation through responsible diving practices. Brownie’s is subject to all regulations applicable to “for profit” companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive regulations in the future, which could force us to curtail or cease operations.

 

Bad weather could have an adverse effect on operating results.

 

Our business is significantly impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably rough surf, may decrease boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may not be indicative of results of any future period.

 

Investors should not rely on an investment in our stock for the payment of cash dividends.

 

We have not paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the future. Investors should not make an investment in our common stock if they require dividend income. Any return on an investment in our common stock will be as a result of any appreciation, if any, in our stock price.

 

The manufacture and distribution of recreational diving equipment could result in product liability claims and we have historically lacked product liability insurance.

 

We, like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or side effects, if any. We do not anticipate obtaining contractual indemnification from parties supplying raw materials, manufacturing our products or marketing our products. In any event, any such indemnification if obtained will be limited by our terms and, as a practical matter, to the creditworthiness of the indemnifying party. While we currently have product liability insurance, we are subject to a claim that arose during a period that the Company did not have product liability coverage. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our operations and financial conditions, which could force us to curtail or cease our business operations.

 

19
 

 

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

 

Our management has previously determined that we did not maintain effective internal controls over financial reporting. For a detailed description of these material weaknesses and our remediation efforts and plans, see “Part II — Item 9A — Controls and Procedures.” If the result of our remediation of the identified material weaknesses is not successful, or if additional material weaknesses are identified in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further implement expensive and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness of our financial reports which could have an adverse effect on our stock price and potentially subject us to litigation.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Not required for smaller reporting companies.

 

Item 8. Financial Statements.

 

Our consolidated financial statements appear beginning at page F-1.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under Exchange Act. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer who also serves as our principal financial and accounting officer, concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of (i) our failure to file our Current Reports on Form 8-K disclosing the issuance of equity grants to our Chief Financial Officer and a director in December 2018, and (ii) continuing material weaknesses in our internal control over financial reporting described below. A material weakness is a deficiency, or combination of deficiencies, that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected.

 

Our management, including our Chief Executive Officer who also serves as our principal financial and accounting officer, have evaluated the effectiveness of the design and operations of our disclosure controls and procedures (defined in Exchange Act Rules 13a-15(c) and 15d-15(e)) as of the end of the periods covered by this report. Based upon the evaluation, our Chief Executive Officer who also serves as our principal financial and accounting officer have concluded that the disclosure controls and procedures as of December 31, 2018 were not effective due to the material weaknesses identified below.

 

20
 

 

To address these material weaknesses, management performed additional procedures to ensure the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

 

Management’s Report on Internal Control over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. The framework used by management in making that assessment was the criteria set forth in the documents entitled “2013 Internal Controls – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, during the period covered by this report, such internal controls and procedures were not effective as of December 31, 2018 and the material weaknesses in internal controls over financial reporting (“ICFR”) existed as more fully described below.

 

A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCOAB”) Audit Standard No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses, which have caused management to conclude that as of December 31, 2018 our ICFR were not effective at the reasonable assurance level:

 

  There are an insufficient number of accounting department and administrative support;
     
  There are insufficient written policies and procedures to ensure the correct application of accounting and financial reporting with respect to GAAP and SEC disclosure requirements;
     
  Insufficient segregation of duties, oversight of work performed and lack of controls in our finance and accounting functions due to limited personnel;
     
  The Company’s systems that impact financial information and disclosures have ineffective information technology controls;
     
  Inadequate controls surrounding revenue recognition, to ensure that all material transactions and developments impacting the financial statements are reflected and properly recorded; and
     
  Management evaluation of 1) the disclosure controls and procedures and 2) internal control over financial reporting was not sufficiently comprehensive due to limited personnel

 

Notwithstanding the existence of these material weaknesses in our internal control over financial reporting, management believes that the consolidated financial statements included in this Form 10-K present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

21
 

 

Internal Control Remediation Efforts. Management expects to remediate the material weaknesses identified above as follows:

 

  Management has leveraged and will continue to leverage experienced consultants to assist with ongoing GAAP, U.S. Securities, and Exchange Commission compliance requirements. We intend to expand our finance department through the hiring of a certified public accountant to strengthen the segregation of duties, internal controls and enhance our current staff.
     
  Segregation of duties will be analyzed and adjusted Company-wide as part of the internal controls implementation and documentation of those controls and procedures that is expected to commence in 2019.
     
  The Company plans on evaluating various accounting systems to enhance our system controls.

 

We will continue to monitor and evaluate the effectiveness of our internal control over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow. We do not, however, expect that the material weaknesses in our disclosure controls will be remediated until such time as we have added to our accounting and administrative staff allowing improved internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting.

 

There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

PART III

 

Item 10. Directors, Executive Officers, and Corporate Governance.

 

The following is a list of our executive officers and directors.

 

Name   Age   Position
         
Robert M. Carmichael     56   President, Chief Executive Officer, Principal Financial Officer and Director
Charles Hyatt     51   Director
Mikkel Pitzner     50   Director

 

Robert M. Carmichael. Since April 16, 2004, Mr. Carmichael has served as BWMG’s President, Chief Executive Officer, Principal Financial Officer, and Director. From March 23, 2004 through April 16, 2004, Mr. Carmichael served as the Company’s Executive Vice-President and Chief Operating Officer. Mr. Carmichael has served as president of Trebor Industries since 1986. Mr. Carmichael is the holder and co-holder of numerous patents, some of which are used by Trebor Industries and several other major companies in the diving industry.

 

Charles Hyatt. Since April 1, 2018 Mr. Hyatt has served on the Company’s board of directors. Mr. Hyatt is an entrepreneur involved in the automotive industry and present owner of several franchise car dealerships in Myrtle Beach, South Carolina, including Myrtle Beach Hyundai (1999 – current) and Hyatt Buick & GMC (2001 – current). In the past his ownerships also included Myrtle Beach Suzuki (2004 – 2012), Sun Coast Mazda and Mitsubishi (2001 – 2009), Stone Mountain Chevrolet. From 1994 to 1997, Mr. Hyatt has served as Wholesale Purchase Director with Lamar Ferrel Chevrolet, and from 1991 to 1994 as General Manager of Bob Harris Ford. From 1988 – 1990 Mr. Hyatt was the Demonstration Director of Auto Dialysis, and from 1986 to 1998 the General Manager/Operational Partner of Ken Hyatt Dodge, Chrysler and Plymouth. Since 2013, Mr. Hyatt has owned and operates the Gilligan Island Funland Golf amusement park. Mr. Hyatt sits on the American Cross Heroes committee and is the winner of the Jefferson Award (2017) for his community involvement.

 

22
 

 

Mikkel Pitzner. Mr. Pitzner has served on the Company’s board of directors since August 1, 2017. Mr. Pitzner previously served on the Company’s board of directors from December 2010 through January 2016. During the years 1996 - 2010, Mr. Pitzner has served as chief executive officer of Copenhagen Limousine Service, a corporate limousine service company based in Denmark. During the years of 2001-2010 he has served as chief executive officer of The Private Car Company, also a corporate transportation company located in Denmark. Since 2007, he has been a partner and board member with FT Group Holding, an advertising company based in Denmark, with operations in Denmark, Sweden, Norway, Finland, Germany and Poland. From 2003 through 2005 he owned and operated Halcyon Denmark, an importer and distributor of Halcyon diving products. The Company’s chief executive officer is an affiliate of Halcyon Manufacturing, Inc. During the years of 2006-2013 he also served on the board of directors of VMC Pitzner, AGJ Pitzner, SMCE Pitzner, Corona Pitzner, construction companies in Denmark. Currently, Mr. Pitzner consults small to medium sized businesses of any industry as a turnaround business consultant. Mr. Pitzner was selected as a director for his general business management with specific experience in diving industry.

 

Board of Directors

 

Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified. If any director resigns, dies or is otherwise unable to serve out his or her term, or if the Board increases the number of directors, the Board may fill any vacancy by a vote of a majority of the directors then in office, although less than a quorum exists. A director elected to fill a vacancy shall serve for the unexpired term of his or her predecessor. Vacancies occurring by reason of the removal of directors without cause may only be filled by vote of the stockholders. Our Board of Directors may consist of up to five (5) seats.

 

Board leadership structure and board’s role in risk oversight

 

The board of directors is comprised of one member of our management, one non-management director and one independent director. Given the size of our company, our Board believes the current leadership structure is appropriate for our company. As our company grows, we expect to expand our board of directors through the appointment of independent directors. Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including credit risk, interest rate risk, liquidity risk, operational risk, strategic risk and reputation risk. Management is responsible for the day-to-day management of the risks we face and have responsibility for the oversight of risk management in their dual roles as directors.

 

Committees of the board of directors; stockholder nominations; audit committee financial expert

 

We have not established any committees comprised of members of our board of directors, including an Audit Committee, a Compensation Committee or a Nominating Committee, or any committee performing similar functions. The functions of those committees are being undertaken by our board of directors as a whole.

 

We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our board of directors established a process for identifying and evaluating director nominees, nor do we have a policy regarding director diversity. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our board of directors and we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees. In considering a director nominee, it is likely that our Board will consider the professional and/or educational background of any nominee with a view towards how this person might bring a different viewpoint or experience to our Board.

 

23
 

 

None of our directors is an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or board of directors who:

 

  understands generally accepted accounting principles and financial statements;
     
  is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves;
     
  has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements;
     
  understands internal controls over financial reporting; and
     
  understands audit committee functions.

 

Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our board of directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our board of directors.

 

Compensation of Directors

 

The following table provides information concerning the compensation paid to our directors for their services as members of our board of directors for 2018. For awards of stock, the aggregate grant date fair value is computed in accordance with FASB ASC Topic 718. The information in the following table excludes any reimbursement of out-of-pocket travel and lodging expenses which we may have paid:

 

Director Compensation

 

Name  Fees earned
or paid in cash
($)
   Stock
awards
($)
   Option
awards
($)
   Non-equity incentive
plan compensation
($)
   Nonqualified deferred compensation earnings
($)
   All other compensation
($)
   Total
($)
 
                             
Robert Carmichael       -    19,499(1)        -         -        -         -    19,499 
Dana Allen   -    60,978(2)   -    -    -    -    60,978 
Mikkel Pitzner(3)   -    13,812(3)   -    -    -    -    13,812 

 

(1) Mr. Carmichael received 999,934 shares for his services on our board of directors with a grant date fair value of $19,499.
   
(2) In January 2018, the Company issued 2,000,000 shares of common stock to Mr. Dana Allan for his services for serving on our board of directors. The grant date fair value of the shares issued was $50,200. Mr. Allan also received 552,742 shares for his services on our board of directors with a grant date fair value of $10,778. Mr. Allen resigned as a director effective March 31, 2019.
   
(3) Mr. Pitzner received 708,287 shares for his services on our board of directors with a grant date fair value of $13,812.

 

Compliance with Section 16(a) Of the Securities Act Of 1934

 

Not applicable to our Company.

 

24
 

 

Code of Ethics

 

The Company has adopted a formal code of ethics that applies to our principal executive officer and principal accounting officer, all other officers, directors and employees. The code of ethics was provided as an exhibit to the 10-K for the year ended December 31, 2008. The Company undertakes to provide to any person without charge, upon written request to the Company’s Chief Executive Officer, a copy of the code of ethics.

 

Shareholder Communications

 

Although we do not have a formal policy regarding communications with our Board, shareholders may communicate with the Board by writing to us at Brownie’s Marine Group, Inc., 3001 NW 25th Avenue, Suite 1, Pompano Beach, Florida 33069, Attention: Mr. Robert Carmichael. Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

 

Item 11. Executive Compensation

 

The following table shows all the cash compensation paid by the Company, as well as certain other compensation paid or accrued, during the years ended December 31, 2018 and 2017 to the Company’s named executive officer. On December 11, 2018, the Company awarded 20,000,000 common shares to Mr. Carmichael, the Company’s President and CEO subject to his continued employment through January 2, 2020. The shares were valued at a fair value of $.01 per share with the related expense totaling $200,000 being recognized over the vesting period. The Company recognized compensation expense of $10,576 as of December 31, 2018. No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the chart below, was paid to this executive officer during these fiscal years. Executive compensation excludes shares of common stock received for serving on the Company’s board of directors and certain transactions, which are disclosed under “Item 13. Certain Relationships and Related Transactions, and Director Independence.”

 

Summary Compensation Table

 

Name and
Principal
Position(s)
  Year   Salary   Bonus   Stock Awards   Option Awards   Non-Equity Incentive Plan Compensation   All Other Compensation   Total 
                                 
Robert M. Carmichael,
President, Principal
   2018   $120,000   $   $10,576   $   $   $20,764*  $151,340 
Executive Officer   2017   $77,538   $   $   $   $   $20,483*  $98,021 

 

* Health insurance

 

Outstanding Equity Awards at Fiscal Year End

 

   Option Awards  Stock Awards 
Name  Number of securities underlying unexercised options (#) exercisable   Number of securities underlying unexercised option (#) un- exercisable   Equity Incentive plan awards: Number of securities underlying unexercised unearned options (#)   Option exercise price ($) per share   Option expiration date  Number of shares or units of stock that have not vested (#)   Market value of shares of units of stock that have not vested ($)   Equity Incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)   Incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) 
                                            
Robert M. Carmichael, Principal Executive Officer   234            1,350   March 2, 2019                

 

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Employment Agreements

 

None.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

On August 22, 2007, the Company adopted an Equity Incentive Plan (the “Plan”). Under the Plan, Stock Options may be granted to Employees, Directors, and Consultants in the form of Incentive Stock Options or Nonstatutory Stock Options. Stock Purchase Rights, time vested and/performance invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan. The initial maximum number of shares that may be issued under the Plan shall be 297 shares and no more than 71 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period. Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company. The term of the Plan shall be ten years. The Board of Directors may amend, alter, suspend, or terminate the Plan at any time. The table below includes information as of December 31, 2018. The Plan expired in August 2017.

 

Equity Compensation Plan Information as of December 31, 2018

 

  

Number of securities
to be issued upon exercise of outstanding options, warrants and

rights (a)

   Weighted – average exercise price of outstanding options, warrants and rights (b)   Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a) (c) 
Equity Compensation Plans Approved by Security Holders   297   $1,350     
Equity Compensation Plans Not Approved by Security Holders            
Total   297   $1,350     

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock by: (1) all persons who are beneficial owners of five percent (5%) or more of any class of our voting securities; (2) each of our directors; (3) each of our Named Executive Officers; and (4) all current directors and executive officers as a group.

 

Applicable percentage ownership in the following table is based on 218,119,561 shares of common stock outstanding as of June 6, 2019. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of June 6, 2019, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise disclosed these persons’ address is c/o Brownie’s Marine Group, Inc., 3001 NW 25th Avenue, Suite 1, Pompano Beach, FL 33069.

 

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Title of Class  Name and Address of
Beneficial Owner
  Amount and Nature
of Beneficial Ownership
    Percent of Class 
Executive Officers and Directors              
Common  Robert Carmichael   18,527,216(1)  8.5%
Common  Charles Hyatt   100,000,000(2)  37.3%
Common  Mikkel Pitzner   7,925,520     3.6%
Common  All directors and executive officers as a group (3 persons)   126,452,736(1,2)  47.2%
               
5% Shareholders              
Common  Joe Perez(3)   50,000,000     22.9%
               
Series A Convertible Preferred Stock              
   Robert Carmichael   425,000     100%
Series A Convertible Preferred Stock  All directors and executive officers as a group (1 person)   425,000     100%

 

(1) Includes the following: aggregate of 31,481 shares issuable upon conversion of 425,000 shares of Series A Preferred Stock. Excludes 20,000,000 shares, which vest on January 2, 2020.
(2) Includes 50,000,000 shares of common stock underlying warrants exercisable at $0.01 per share.
(3) Address is 135 Weston Road, Suite 328, Weston, FL 33326.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers with similar sales volumes. Combined net revenues from these entities for years ended December 31, 2018 and 2017, totaled $696,362 and $738,506, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2018, was $49,443, $7,731, and $8,646, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2017, was $27,381, $10,763, and $13,227, respectively.

 

The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”) and 940 Associates, Inc. fully owned by the Company’s Chief Executive Officer and the Chief Executive Officer directly. Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended to Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are consistent with those extended to Brownie’s strategic partners. Strategic partner terms on a per order basis include promotion of BWMG’s technologies and “Brownie’s” brand, offered only on product or services not offered for resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services. BGL is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and “Brownie’s” brand in the yachting and exploration community world-wide through its operations. Combined net revenues from these three entities for years ended December 31, 2018, and 2017, were $10,416 and $3,512, respectively. Accounts receivable from BGL, 940 Associates, Inc. and the Chief Executive Officer totaled $12,603 and $4,043 at December 31, 2018 and 2017, respectively.

 

The Company has Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. For this license agreement the Company pays 940A 2.5% of gross revenues on Brownie’s Third Lung per quarter. Total royalty expense for the above agreements for the years ended December 31, 2018 and 2017, as disclosed on the face of the Company’s Consolidated Statements of Operations totaled $52,221 and $54,745, respectively. In November 2016, the Company entered into a conversion agreement under which the Company issued 10,000,000 shares of restricted common stock in satisfaction of $88,850 past due and payable to 940A under that certain Exclusive License Agreement by and between the parties as of March 1, 2017. As of the date of the conversion agreement, the Company was more than 31 months in arrears on its royalty payments totaling approximately $151,000. In addition, 940A agreed to forebear on any default under the License Agreement due to the Company’s remaining past due amount for a period of three months from the effective date of the conversion agreement. The shares issued were valued at $0.008885 per share, the closing price of the stock on the effective date of the conversion agreement.

 

27
 

 

On March 1, 2017, the Company and 940A entered into an additional conversion agreement. Under the agreement the Company issued 940A 4,587,190 shares of restricted common stock in satisfaction of $63,303, which represented all remaining past due and payable amounts to 940A under the Exclusive License Agreement. As of the date of the additional conversion agreement the Company was more than 3 months in arrears on royalty payments due under the Exclusive License Agreement. The shares were issued at a price per share of $0.0138, which exceeded the closing price of the Company’s common stock as reported on the OTC Markets on the date immediately preceding the closing. No default notice had been received prior to the conversion agreements.

 

On August 1, 2017, the Company entered into a six month employment agreement with Blake Carmichael, the son of the Company’s chief executive officer and an electrical engineer, to serve as the Company’s products development manager, electrical engineer and marketing team member. Under the terms of the employment agreement, in addition to a monthly salary of $3,600, the Company issued Mr. Carmichael 2,000,000 shares of common stock valued at $25,000. Mr. Carmichael is also entitled to performance bonuses at the discretion of the board of directors. On January 31, 2018, Mr. Blake Carmichael’s employment agreement expired and was not renewed. He continues with the Company as a full time employee focused on the operations of the Company’s BLU3 subsidiary.

 

Please see Note 7 to the Company’s audited consolidated financial statements appearing elsewhere in this report for a description of transactions with related parties during 2018 and 2017.

 

Director independence

 

The Company has one independent director, Mr. Charles Hyatt is considered “independent” as defined under Rule 5605 of the Nasdaq Marketplace Rules.

 

Item 14. Principal Accounting Fees and Services.

 

The following table shows the fees that were billed for the audit and other services provided by Liggett & Webb, PA for the year ended December 31, 2018 and RBSM, LLP for the year ended December 31, 2017.

 

   2018   2017 
Audit Fees – Liggett & Webb, PA  $28,000   $- 
Audit Fees – RBSM, LLP  $16,500    47,500 
Audit-Related Fees – Liggett & Webb, PA   -    - 
Audit Fees – RBSM, LLP   -    - 
Tax Fees – Liggett & Webb, PA   -    - 
Tax Fees – RBSM, LLP   -    3,000 
All Other Fees – Liggett & Webb, PA   -    - 
All Other Fees – RBSM, PA   -    - 
Total  $44,500   $50,500 

 

Audit Fees — This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

 

28
 

 

 

Audit-Related Fees — This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the Securities and Exchange Commission and other accounting consulting.

 

Tax Fees — This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.

 

All Other Fees — This category consists of fees for other miscellaneous items.

 

Our board of directors has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the board, or, in the period between meetings, by a designated member of the board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to 2018 and 2017 were pre-approved by the entire board of directors.

 

PART IV

 

Item 15. Exhibits, Financial Statements Schedules

 

        Incorporated by Reference   Filed
No.   Exhibit Description   Form   Date Filed   Exhibit Number  

or Furnished

Herewith

2.2   Merger Agreement, dated June 18, 2002 by and among United Companies Corporation, Merger Co., Inc. and Avid Sportswear & Golf Corp.   S-4   6/24/02   2.02    
                     
2.3   Articles of Merger of Avid Sportswear & Golf Corp. with and into Merger Co., Inc.   S-4   6/24/02   2.03    
                     
2.4   Plan of Conversion   8-K   10/28/15   2.1    
                     
3.1   Articles of Conversion (Nevada)   8-K   10/28/15   3.1    
                     
3.2   Certificate of Conversion (Florida)   8-K   10/28/15   3.2    
                     
3.3   Articles of Incorporation (Florida)   8-K   10/28/15   3.3    
                     
3.5   Articles of Amendment   8-K   12/16/15   3.5    
                     
3.6   Bylaws   8-K   10/28/15   3.4    
                     
4.1   Form of Unit Warrant   10-K   4/17/18   4.1    
                     
4.2   Form of 2017 Secured Convertible Promissory Note   10-K   4/17/18   4.2    
                     
4.3   10% Unsecured Convertible Debenture dated May 3, 2011   8-K   11/20/18   4.3    
                     
4.4   Warrant dated March 7, 2019   8-K   3/12/19   4.4    

 

29
 

 

                     
10.1   Share Exchange Agreement, dated March 23, 2004 by and among the Company, Trebor Industries, Inc. and Robert Carmichael   8-K   4/9/04   16.1    
                     
10.2   Non-Exclusive License Agreement –BC Keel Trademark   10-QSB   8/15/05   10.18    
                     
10.3   Exclusive License Agreement - Brownie’s Third Lung, Brownie’s Public Safety, Tankfill, and Related Trademarks and Copyrights   10-QSB   8/15/05   10.20    
                     
10.4   Exclusive License Agreement – Brownie’s Third Lung and Related Trademarks and Copyright   10-KSB   4/4/07   10.26    
                     
10.5   Promissory Note effective April 22, 2015 payable to Robert M. Carmichael   10-Q   5/11/15   10.1    
                     
10.6   Conversion Agreement effective November 21, 2016   8-K   11/21/16   10.1    
                     
10.7   Conversion Agreement effective March 1, 2017   8-K   3/3/17   10.1    
                     
10.8   Mikkel Pitzner Independent Director Agreement dated August 1, 2017   8-K   8/8/17   10.1    
                     
10.9   Advisory Agreement dated August 7, 2017   8-K   8/8/17   10.2    
                     
10.10   Dana Allen Independent Director Agreement dated November 22, 2017   8-K/A   12/6/17   10.1    
                     
10.11   Lease Agreement Commencing September 1, 2014, as amended   10-K   4/17/18   10.11    
                     
10.12   Joe Perez Note Conversion Agreement dated November 15, 2018   8-K   11/20/18   10.12    
                     
10.13   Subscription Agreement dated March 7, 2019   8-K   3/12/19   10.13  
                     
10.14   Non Management Director Agreement dated April 1, 2019   8-K   4/4/19   10.1  
                     
10.15   Exclusive Distribution Agreement with Lenhardt & Wagner GmbH dated August 7, 2017           Provided herewith
                     
10.16   Lease Agreement dated November 11, 2018           Provided herewith
                     
21.1   Subsidiaries of the Registrant   10-K   4/17/18   21.1    
                     
31.1   Certification Pursuant to Rule 13a-14(a)/15d-14(a)               Filed Herewith
                     
31.2   Certification Pursuant to Rule 13a-14(a)/15d-14(a)               Filed Herewith
                     
32.1   Certification Pursuant to Section 1350               Filed Herewith
                     
32.2   Certification Pursuant to Section 1350               Filed Herewith
                     
101   XBRL Interactive Data File               Filed Herewith

 

Item 16. Form 10-K Summary

 

None.

 

30
 

 

SIGNATURES

 

In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: June 7, 2019 Brownie’s marine group, Inc.
     
  By: /s/ Robert M. Carmichael
    Robert M. Carmichael
    President, Chief Executive Officer, Chief
    Financial Officer and Principal Accounting Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date: June 7, 2019 By: /s/ Robert M. Carmichael
    Robert M. Carmichael
    Director

 

  By:  
    Charles Hyatt
    Director

 

  By: /s/ Mikkel Pitzner
    Mikkel Pitzner
    Director

 

31
 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS FOR CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

    PAGE(S)
     
Report Of Independent Registered Public Accounting Firm - Liggett & Webb P.A.  
     
Report Of Independent Registered Public Accounting Firm – RBSM LLP  
     
Consolidated Balance Sheets As Of December 31, 2018 And 2017   F-1
     
Consolidated Statements Of Operations For The Years Ended December 31, 2018 And 2017   F-2
     
Consolidated Statements Of Stockholders’ Equity For The Years Ended December 31, 2018 And 2017   F-3
     
Consolidated Statements Of Cash Flows For The Years Ended December 31, 2018 And 2017   F-4, F-5
     
Notes To The Consolidated Financial Statements   F-6 to F-20

 

32
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of:

Brownie’s Marine Group, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Brownie’s Marine Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2018 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2018 and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and the results of its operations and its cash flows for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced net losses for consecutive periods and has a large accumulated deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

LIGGETT & WEBB, P.A.

Certified Public Accountants

 

We have served as the Company’s auditor since 2018.

 

Boynton Beach, Florida

June 7, 2019

 

   
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of
Brownie’s Marine Group, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Brownie’s Marine Group, Inc. and Subsidiaries (the Company) as of December 31, 2017 and the related consolidated statement of operations, stockholders’ equity, and cash flows for the year ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the consolidated results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

The Company's Ability to Continue as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has an accumulated deficit, recurring losses, and expects continuing future losses, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ RBSM LLP  
   
We have served as the Company’s auditor since 2015.  
   
Henderson, NV  
   
April 17, 2018  

 

   
 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   December 31, 
   2018   2017 
ASSETS        
         
Current assets          
Cash  $78,784   $150,898 
Accounts receivable, net of $9,200 and $16,848 allowance for doubtful accounts, respectively   27,204    4,494 
Accounts receivable – related parties   78,423    55,681 
Inventory, net   723,170    822,886 
Prepaid expenses and other current assets   58,520    251,587 
Total current assets   966,101    1,285,546 
           
Property and equipment, net   3,718    27,498 
           
Deferred tax asset, net       2,520 
Other assets   26,147    6,649 
           
Total assets  $995,966   $1,322,213 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities          
Accounts payable and accrued liabilities  $325,309   $392,738 
Accounts payable – related parties   125,243     
Customer deposits and unearned revenue   245,907    97,249 
Other liabilities   142,142    141,760 
Convertible debentures, net   110,000    389,803 
Total current liabilities   948,601    1,021,550 
           
Total liabilities   948,601    1,021,550 
           
Commitments and contingencies (See Note 13)          
           
Stockholders’ equity          
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding   425    425 
Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 181,086,228 shares issued and 161,086,228 shares outstanding at December 31, 2018 and 98,192,717 shares issued and outstanding at December 31, 2017, respectively   16,109    9,819 
Common stock payable; $0.0001 par value; 138,941 and 138,941 shares, respectively   14    14 
Additional paid-in capital   10,213,595    9,170,198 
Accumulated deficit   (10,182,778)   (8,879,793)
Total stockholders’ equity   47,365    300,663 
           
Total liabilities and stockholders’ equity  $995,966   $1,322,213 

 

See Accompanying Notes to Consolidated Financial Statements

 

 F-1 
 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Years Ended December 31, 
   2018   2017 
         
Net revenues          
Net revenues  $1,835,429   $1,286,571 
Net revenues - related parties   706,778    742,018 
Total net revenues   2,542,207    2,028,589 
           
Cost of net revenues          
Cost of net revenues   1,809,066    878,875 
Cost of net revenues – related parties   365,297    489,801 
Royalties expense - related parties   52,221    54,745 
Total cost of net revenues   2,226,584    1,423,421 
           
Gross profit   315,623    605,168 
           
Operating expenses          
Selling, general and administrative   1,212,945    803,856 
Research and development costs   113,920    16,380 
Total operating expenses   1,326,865    820,236 
           
Loss from operations   (1,011,242)   (215,068)
           
Other (income) expense, net          
Other (income) expense, net       (3,569)
Gain on cancellation of debt   (7,200)    
Interest expense   296,423    37,245 
Total other expense, net   289,223    33,676 
           
Net loss before provision for income taxes   (1,300,465)   (248,744)
           
Provision for income tax expense   2,520     
           
Net loss  $(1,302,985)  $(248,744)
           
Basic loss per common share  $(0.01)  $(0.00)
Diluted loss per common share  $(0.01)  $(0.00)
           
Basic weighted average common shares outstanding   105,922,735    78,599,195 
Diluted weighted average common shares outstanding   105,922,735    78,599,195 

 

See Accompanying Notes to Consolidated Financial Statements

 

 F-2 
 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

   Preferred Stock   Common Stock   Common Stock
Payable
       Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
                                     
Balance, December 31, 2016   425,000   $425    68,906,212   $6,890    138,941   $14   $8,792,782   $(8,631,049)  $169,062 
                                              
Payment of related party debt in stock           4,587,190    459            62,844        63,303 
                                              
Shares issued for services           8,000,000    800            99,200        100,000 
                                              
Unit offering           16,699,315    1,670            190,372        192,042 
                                              
Beneficial Conversion Features                           25,000        25,000 
                                              
Net loss                               (248,744)   (248,744)
                                              
Balance, December 31, 2017   425,000    425    98,192,717    9,819    138,941    14    9,170,198    (8,879,793)   300,663 
                                              
Shares issued for services           9,525,394    953            203,158        204,111 
                                              
Unit offering           2,608,695    261            29,739        30,000 
                                              
Shares issued for licensing fee           759,422    76            29,924        30,000 
                                              
Conversion of convertible note and related interest           50,000,000    5,000            770,000        775,000 
                                              
Incentive bonus shares to CEO                           10,576        10,576 
                                              
Net loss                               (1,302,985)   (1,302,985)
                                              
Balance, December 31, 2018   425,000   $425    161,086,228   $16,109    138,941   $14   $10,213,595   $(10,182,778)  $47,365 

 

See Accompanying Notes to Consolidated Financial Statements

 

 F-3 
 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Years Ended December 31, 
   2018   2017 
         
Cash flows provided by operating activities:          
Net loss  $(1,302,985)  $(248,744)
           
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation and amortization   36,580    29,410 
Gain on cancellation of debt   (7,200)    
Provision for slow-moving inventory   99,957     
Shares issued for services   214,687    100,000 
Amortization of debt discount   22,940    2,060 
Collection of accounts receivable written-off   7,415     
Change in deferred tax asset, net   2,520     
Additional shares issued as part of conversion of debt   248,417     
           
Changes in operating assets and liabilities:          
Change in accounts receivable, net   (30,125)   (3,468)
Change in accounts receivable - related parties   (22,742)   12,558 
Change in inventory   (241)   (150,366)
Change in prepaid expenses and other current assets   203,567    (167,251)
Change in accounts payable and accrued liabilities   288,856    69,160 
Change in customer deposits and unearned revenue   148,658    65,672 
Change in other liabilities   382    (34,854)
Change in royalties payable – related parties       (937)
Net cash used in operating activities   (89,314)   (326,760)
           
Cash flows from investing activities:          
Purchase of fixed assets   (12,800)    
Net cash used in investing activities   (12,800)    
           
Cash flows from financing activities:          
Proceeds from unit offering   30,000    192,042 
Principal payments on note payable       (6,133)
Proceeds from convertible notes payable       100,000 
Net cash provided by financing activities   30,000    285,909 
           
Net change in cash   (72,114)   (40,851)
           
Cash, beginning of period   150,898    191,749 
           
Cash, end of period  $78,784   $150,898 

 

See Accompanying Notes to Consolidated Financial Statements

 

 F-4 
 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Year Ended December 31, 
   2018   2017 
         
Supplemental disclosures of cash flow information:          
           
Cash paid for interest  $   $ 
           
Cash paid for income taxes  $   $ 
           
Supplemental disclosures of non-cash investing activities and financing activities:          
           
Convertible debentures converted to equity  $526,583   $ 
           
Common shares issued for services  $   $50,000 
           
Common shares issued in payment of related party payable  $   $63,303 
           
Common stock issued for licensing fee  $30,000   $ 
           
Initial debt discount on convertible notes  $   $25,000 

 

See Accompanying Notes to Consolidated Financial Statements

 

 F-5 
 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Description of business and summary of significant accounting policies

 

Description of business –Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company,” “our” or “BWMG”) designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. and manufactures and sells high pressure air and industrial gas compressor packages through its wholly owned subsidiary Brownie’s High Pressure Compressor Services, Inc. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. and Brownie’s High Pressure Compressor Services, Inc. The Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”.

 

On August 7, 2017, Brownie’s Marine Group, Inc. entered into an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”), a German-based company engaged in the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean (the “Territory”). Pursuant to an intercompany assignment, Brownie’s High Pressure Compressor Services, Inc., our newly-formed wholly-owned subsidiary (“BHP”), is party to the agreement. Through BHP we expect to conduct business and build the brand name “L&W Americas/LWA”, establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. Our goal will be to build a network of jobbers, dealers, installers and high-pressure compressor distributors throughout the Territory by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product OEM integration relationships.

 

In December 2017, the Company formed a new wholly-owned subsidiary BLU3, Inc. The Company was formed to develop and market an innovation electric shallow dive system that is completely portable to the user. As of December 31, 2018 the company has had limited operations.

 

Basis of Presentation – The consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”).

 

Definition of fiscal year – The Company’s fiscal year end is December 31.

 

Principles of Consolidation -The consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor Industries, Inc., Brownie’s High Pressure Compressor Services, Inc. and BLU3, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and equivalents – Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.

 

Going Concern – The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these consolidated financial statements. We incurred net losses for the years ended December 31, 2018 and 2017 of $1,302,985 and $248,744, respectively. The Company had an accumulated deficit as of December 31, 2018 of $10,182,778.

 

 F-6 
 

 

Because the Company believes that existing operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, the Company will continue to raise additional funds as needed and is currently exploring alternative sources of financing. The Company has issued a number of common shares and convertible debentures as an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or other securities or obtaining short term loans.

 

If BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

 

Accounts receivable – Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for doubtful accounts are estimated based on historical customer experience and industry knowledge. The allowances for doubtful accounts totaled $9,200 and $16,848 at December 31, 2018 and 2017, respectively.

 

Inventory – Inventory is stated at the lower of cost or net realizable value. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when indicated.

 

Property and equipment and leasehold improvements – Property and equipment and leasehold improvement is stated at cost less accumulated depreciation or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated useful lives of the assets or term of the lease, which are primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).

 

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

 

Revenue Recognition

 

On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive. The new revenue standard was applied using the modified retrospective method. As a result of the adoption of this standard, there was no impact on the prior year financial statements.

 

We recognize the sale of products under single performance obligations upon shipment of the units as that is when ownership is transferred and our performance is completed. Revenues from repair and maintenance activities is recognized when the repairs are completed and the units have been shipped.

 

Product development costs – Product development expenditures are charged to expenses as incurred.

 

Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which they occur. Advertising and trade show expense incurred for the years ended December 31, 2018 and 2017, totaled $89,415 and $42,959, respectively.

 

 F-7 
 

 

Research and development costs – The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. During the years ended December 31, 2018 and 2017 the Company incurred research and development costs of $113,920 and $16,380, respectively.

 

Customer deposits and unearned revenue and returns policy – The Company typically takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice. Customer deposits and unearned revenue totaled $245,907 and $97,249 at December 31, 2018 and 2017, respectively.

 

Warranty policy – Under the provisions of FASB ASC 460, Guarantor’s Guarantees, the Company accrues a liability for estimated warranty policy costs based on historical information and experience. The Company provides our customers with an industry standard one year warranty on systems sold and recognizes a warranty reserve based on gross sales multiplied by the historical warranty expense return rate The warranty reserve at December 31, 2018 was charged to cost of net revenues and is included in accrued expenses and is deemed sufficient to absorb any material or labor costs that might be incurred on sales recorded during the period. The Company recognized a reserve for warranty work in 2018 of $8,834.

 

Income taxes – On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Jobs Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a United States corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017.

 

The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

 

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is determined through use of the quoted stock price.

 

 F-8 
 

 

For the years ended December 31, 2018 and 2017, the Company converted accrued liabilities of principal and interest to related parties to stock totaling $0 and $63,303, respectively. During the years ended December 31, 2018 and 2017, the Company recognized share based compensation with a fair value of $214,687 and $100,000, respectively.

 

Beneficial conversion features on convertible debentures – A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share value of the underlying stock into which it is convertible. The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined through use of the quoted stock price.

 

Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

 

Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.

 

At December 31, 2018, and 2017, the carrying amount of cash, accounts receivable, accounts receivable – related parties, accounts payable and accrued liabilities, customer deposits and unearned revenue, other liabilities, and convertible debentures, approximate fair value because of the short maturity of these instruments.

 

Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. At December 31, 2018 and December 31, 2017, 17,706,135 and 61,512,122, respectively, potentially dilutive shares were not recognized as their inclusion would be anti-dilutive. These shares reflect shares potentially issuable under convertible note agreements, outstanding warrants, outstanding stock options and the conversion of preferred stock.

 

New accounting pronouncements

 

In June 2018, the Financial Accounting Standards Board issued ASU 2018-7, “Compensation – Stock Compensation” (Topic 718) amending the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments specify that nonemployee share-based payments are measured at grant-date fair value with the grant date being defined when the parties reach a mutual understanding of the key terms and conditions of the share-based award. ASU 2018-07 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We do not believe the adoption of ASU 2018—07 will have an impact on our operations, cash flows or financial condition.

 

 F-9 
 

 

In March 2018, the FASB issued ASU 2018-05, “Income Taxes” (Topic 740) amending previous guidance on accounting and disclosures for income taxes addressing changes under the Tax Cuts and Jobs Act (the “Act”). This standard addresses the recognition of taxes payable or refundable in the current year and the recognition of deferred tax liabilities and deferred tax assets following passage of the Act. ASU 2018-5 has an enactment date of December 22, 2017. We do not believe this ASU had a material impact on our results of operation, cash flows or financial condition.

 

In April 2016, the FASB issued ASU 2016–10 Revenue from Contract with Customers (Topic 606) identifying Performance Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. The adoption of ASU 2016-10 was effective for reporting periods beginning after December 15, 2017. The adoption of ASC 2016-10 did not have a material effect on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

 

This standard will not have a material impact on our consolidated statement of operations however, the recognition of right of use assets and real estate operating lease liabilities will have a material impact on our consolidated balance sheet presentation. Adoption of this standard will result in additional right of use assets and additional liabilities of approximately $695,500 based on the present fair value of the remaining minimum rental payments under our current real property lease obligations.

 

The Company believes there was no other new accounting guidance adopted, but not yet effective that either has not already been disclosed in prior reporting periods or is relevant to the readers of our consolidated financial statements.

 

2. INVENTORY

 

Inventory consists of the following as of:

 

   December 31, 
   2018   2017 
         
Raw materials  $225,954   $614,541 
Finished goods   497,216    208,345 
   $723,170   $822,886 

 

 F-10 
 

 

For the year ended December 31, 2018, the Company recognized an additional reserve for obsolete or slow moving inventory of approximately $100,000.

 

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of the following:

 

   December 31, 
   2018   2017 
         
Prepaid inventory  $39,260   $27,715 
Prepaid insurance   4,615    7,453 
Prepaid other current assets   14,645    216,419 
   $58,520   $251,587 

 

4. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consists of the following as of:

 

   December 31, 
   2018   2017 
         
Tooling and equipment  $138,632   $125,832 
Computer equipment and software   27,469    27,469 
Vehicles   44,160    44,160 
Leasehold improvements   43,779    43,779 
    254,040    241,240 
Less: accumulated depreciation and amortization   (250,322)   (213,742)
   $3,718   $27,498 

 

Depreciation and amortization expense totaled $36,580 and $29,410 for the years ended December 31, 2018 and 2017, respectively.

 

5. OTHER ASSETS

 

Other assets at December 31, 2018 of $26,147 consisted of refundable deposits $6,649 and an unamortized license fee of $19,498. Other assets at December 31, 2017 of $6,649 consisted of refundable deposits.

 

6. CUSTOMER CREDIT CONCENTRATIONS

 

The Company sells to three (3) entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer, and three (3) Company’s owned by the Chief Executive Officer as further discussed in Note 7 - RELATED PARTIES TRANSACTIONS. Combined sales to these six (6) entities for the years ended December 31, 2018 and 2017, represented 27.80% and 36.58%, respectively, of total net revenues.

 

In excess of 90% of our total net revenues are made up of product sales to customers within the state of Florida.

 

7. RELATED PARTIES TRANSACTIONS

 

Net revenues and accounts receivable – related parties – The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers with similar sales volumes. Combined net revenues from these entities for years ended December 31, 2018 and 2017, totaled $696,362 and $738,506, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2018, was $49,443, $7,731, and $8,646, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2017, was $27,381, $10,763, and $13,227, respectively.

 

 F-11 
 

 

The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”) and 940 Associates, Inc. fully owned by the Company’s Chief Executive Officer and the Chief Executive Officer directly. Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended to Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are consistent with those extended to Brownie’s strategic partners. Strategic partner terms on a per order basis include promotion of BWMG’s technologies and “Brownie’s” brand, offered only on products or services not offered for resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services. BGL is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and “Brownie’s” brand in the yachting and exploration community world-wide through its operations. Combined net revenues from these three entities for years ended December 31, 2018, and 2017, were $10,416 and $3,512, respectively. Accounts receivable from BGL, 940 Associates, Inc. and the Chief Executive Officer totaled $12,603 and $4,043 at December 31, 2018, and December 31, 2017, respectively.

 

Accounts payable – related parties – The Company had accounts payable to related parties of $125,243 and $0 at December 31, 2018 and 2017, respectively. The balance payable at December 31, 2018 was due to Brownie’s Global Logistics, LLC, a company affiliated with the Company’s Chief Executive Officer and directly to the CEO.

 

Royalties expense – related parties – The Company has Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. This license agreement agrees the Company to pay 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the years ended December 31, 2018 and 2017, as disclosed on the face of the Company’s Consolidated Statements of Operations totaled $52,221 and $54,745, respectively. In November 2016, the Company entered into a conversion agreement under which the Company issued 10,000,000 shares of restricted common stock in satisfaction of $88,850 past due and payable to 940A. As of the date of the conversion agreement, the Company was more than 31 months in arrears on its royalty payments totaling approximately $151,000. In addition, 940A agreed to forebear on any default under the License Agreement on the Company’s remaining past due amount for a period of three months from the effective date of the conversion agreement. The shares issued were valued at $0.008885 per share, the closing price of the stock on the effective date of the conversion agreement. No default notice had been received prior to the conversion agreements.

 

On March 1, 2017, the Company and 940A entered into a conversion agreement. Under the agreement the Company issued 940A 4,587,190 shares of restricted common stock in satisfaction of $63,303, which represented all past due and payable amounts to 940A under that certain Exclusive License Agreement by and between the parties as of March 1, 2017. As of the date of the agreement the Company was more than 3 months in arrears on royalty payments due under the Exclusive License Agreement. The shares were issued at a price per share of $0.0138, which exceeded the closing price of the Company’s common stock as reported on the OTC Markets on the date immediately preceding the closing. No default notice had been received prior to the conversion agreements.

 

In December 2018, Mr. Robert Carmichael, a director and Chief Executive Officer of the Company was issued 999,934 common shares in payment of accrued director fees through December 31, 2018. The shares were valued at $0.0195 per share, totaling $19,499, the fair value on the date of grant.

 

On August 1, 2017, Mr. Mikkel Pitzner was appointed by the Company’s board of directors to serve on the Company’s board of directors, filling a vacancy on the board. Mr. Pitzner shall serve on the board of directors and shall hold office until the next election of directors by stockholders and until his successor is elected and qualified or until his earlier resignation or removal. The Company has agreed to pay Mr. Pitzner an annual fee of $6,000 and has issued Mr. Pitzner 2,000,000 shares of restricted common stock valued at $25,000 and an additional 1,666,667 with a fair value of $20,883 under a two month consulting agreement expiring in January 2019. In December 2018, Mr. Pitzner was issued 708,287 common shares in payment of accrued director fees through December 31, 2018. The shares were valued at $0.0195 per share, totaling $13,812, the fair value on the date of grant.

 

 F-12 
 

 

Commencing in February, 2019, the Company began paying Mr. Pitzner $9,300 per month, inclusive of a $1,300 auto allowance, for consulting services. These payments are not covered by a written agreement.

 

On August 1, 2017 the Company entered into six month advisory agreement with Wesley P. Siebenthal to provide certain advisory services to the Company and serve as its Chief Technology Advisor. As compensation for the services, the Company issued him 2,000,000 shares of its common stock valued at $25,000.

 

On August 1, 2017, the Company entered into a six month employment agreement with Blake Carmichael, the son of the Company’s chief executive officer and an electrical engineer, to serve as the Company’s products development manager, electrical engineer and marketing team member. Under the terms of the employment agreement, in addition to a monthly salary of $3,600, the Company issued Mr. Carmichael 2,000,000 shares of common stock valued at $25,000. Mr. Carmichael is also entitled to performance bonuses at the discretion of the board of directors. On January 31, 2018, Mr. Blake Carmichael’s employment agreement expired and was not renewed. He continues with the Company as a full time employee focused on the operations of the Company’s BLU3 subsidiary.

 

Effective August 1, 2017, the board of directors issued Mr. Robert Carmichael, the Company’s chief executive officer, chief financial officer and member of the Company’s board of directors, 2,000,000 shares of restricted common stock valued at $25,000 in consideration of serving on the Company’s board of directors.

 

In January 2018, the Company issued 2,000,000 shares of common stock to Mr. Dana Allan for his services for serving on our board of directors. The grant date fair value of the shares issued was $50,200. Mr. Allan also received 552,742 shares for his services on our board of directors with a grant date fair value of $10,778. Mr. Allen resigned as a director effective March 31, 2019.

 

In December 2018, the Company issued 20,000,000 shares of common stock to our CEO as an incentive bonus. As the shares are subject to continued employment by the CEO through January 2, 2020, the Company has treated the shares as issued but not as yet outstanding. Expense for the issuance is being recognized over the full vesting period, and accordingly, the Company recognized stock compensation expense of $10,576 as of December 31, 2018.

 

Stock options outstanding from patent purchase – Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued patents. In exchange for the Intellectual Property, the Company issued Mr. Carmichael 234 stock options at a $1,350 exercise price expiring ten years from the effective date of grant. The options expired on March 2, 2019 without being exercised.

 

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consists of the following as of:

 

   December 31, 2018   December 31, 2017 
         
Accounts payable trade and other  $249,833   $143,347 
Accrued payroll & fringe benefits   48,065    29,023 
Accrued Warranty Expense   8,834     
Accrued payroll taxes & withholding   8,415    8,689 
Accrued interest   10,162    211,679 
   $325,309   $392,738 

 

Balances due certain vendors are in arrears to varying degrees. The Company is handling all delinquent accounts on a case-by-case basis.

 

 F-13 
 

 

9. OTHER LIABILITIES

 

Other liabilities consist of the following as of:

 

   December 31, 2018   December 31, 2017 
         
Short-term loans  $126,572(*)  $126,572(*)
Asset purchase agreement payable   12,857    12,857 
Accrued royalties expense   2,027     
On-line training liability   686    2,331 
   $142,142   $141,760 

 

(*)Initial balance of $200,000 non-convertible note dated July 7, 2013. The note carries a 0% interest rate and is due on demand.

 

10. CONVERTIBLE DEBENTURES

 

Convertible debentures consist of the following at December 31, 2018:

 

Origination
Date
  Maturity
Date
  Interest
Rate
   Origination
Principal
Balance
   Original
Discount
Balance
   Period End
Principal
Balance
   Period End
Discount
Balance
   Period End
Balance,
Net
   Accrued
Interest
Balance
   Reg. 
8/31/2011  8/31/2013   5%   10,000    (4,286)   10,000        10,000    3,694    (2)
12/01/17  12/01/19   6%   50,000    (12,500)   50,000        50,000    3,250    (4)
12/05/17  12/04/19   6%   50,000    (12,500)   50,000        50,000    3,218    (5)
                     $110,000   $   $110,000   $10,162      

 

Convertible debentures consist of the following at December 31, 2017:

 

Origination
Date
  Maturity
Date
  Interest
Rate
   Origination
Principal
Balance
   Original
Discount
Balance
   Period End
Principal
Balance
   Period End
Discount
Balance
   Period End
Balance,
Net
   Accrued
Interest
Balance
   Reg. 
5/3/2011  5/5/2012   10%   300,000    (206,832)   300,000        300,000    200,000    (1)
8/31/2011  8/31/2013   5%   10,000    (4,286)   10,000        10,000    3,191    (2)
2/10/2012  2/10/2014   10%   39,724        2,743        2,743    4,331    (3)
12/01/17  12/01/18   6%   50,000    (12,500)   50,000    (11,470)   38,530    250    (4)
12/05/17  12/04/18   6%   50,000    (12,500)   50,000    (11,470)   38,530    217    (5)
                     $412,743   $(22,940)  $389,803   $207,989      

 

(1) On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture. The Debenture carried an interest rate of 10% interest per annum. The lender could at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company could prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 300,000 and 600,000 warrants at $337.50 and $472.50 per share, respectively. As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $206,832, which was recorded as a discount against the debenture. The Company accreted the discount to interest expense. The Company recognized the FMV of the related warrants as $45,000 using the Black-Scholes valuation model.
   
  On November 15, 2018, the Company entered into a Note Conversion Agreement pursuant to which the Noteholder converted $526,583 of principal and accrued interest due into 50,000,000 shares of the Company’s common stock in full satisfaction of this obligation. The Company recorded a loss on this conversion of this debt of $248,417 which was charged to interest expense.

 

 F-14 
 

 

(2) The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the beneficial conversion feature of the convertible debenture at $4,286, which was accreted to interest expense over the period of the note.
   
(3) The Company entered into three new debenture agreements upon sale/assignment of the original lenders. Because the stated terms of the new debenture agreement and principal amounts were significantly different from the original debenture, including analysis of value of the beneficial conversion feature at the assignment/purchase date, the transactions were treated as extinguishment of the old debentures and recorded as new for accounting purposes.
   
  The conversion price under the debentures was $0.37125 and the lender could convert at any time until the debenture plus accrued interest was paid in full. Various other fees and penalties applied if payments or conversions were not done timely by the Company. The lender was limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time.
   
  On June 15, 2018, the Company entered into a Note Satisfaction, Settlement and General Release Agreement with the lender. Under the terms of the agreement, the lender released and discharged the Company from any further obligation due the lender with no further consideration. The Company recognized income of $2,743 in principal and $4,457 in related accrued interest.
   
(4) The Company entered into a 6% Secured Convertible Promissory Note, due December 1, 2018, subject to extension. The Note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor Industries, Inc. and Brownie’s High Pressor Compressor Services, Inc. and the personal guarantee of Robert M. Carmichael, the Company’s Chief Executive Officer.
   
  The conversion price under the Note range from $0.02 per share if converted in the first year to $0.125 if converted in year five. The lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of the outstanding Common Stock of the Company at any one time. The Note was extended subsequent to year end for one additional year with a reduction in the conversion price to $0.01 per share.
   
(5) The Company entered into a 6% Secured Convertible Promissory Note, due December 4, 2018, subject to extension. The Note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor Industries, Inc. and Brownie’s High Pressure Compressor Services, Inc. and the personal guarantee of Robert M. Carmichael, the Company’s Chief Executive Officer.
   
  The conversion price under the Note range from $0.02 per share if converted in the first year to $0.125 if converted in year five. The lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of the outstanding Common Stock of the Company at any one time. The Note was extended subsequent to year end for one additional year with a reduction in the conversion price to $0.01 per share.

 

12. INCOME TAXES

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a United States corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017.

 

 F-15 
 

 

The components of the provision for income tax expense are as follows for the years ended:

 

   December 31, 
   2018   2017 
Current taxes          
Federal  $   $ 
State        
Current taxes        
Change in deferred taxes   2,520     
Change in valuation allowance        
           
Provision for income tax expense  $2,520   $ 

 

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2018 and 2017:

 

   December 31, 
   2018   2017 
Deferred tax assets:          
Equity based compensation  $154,400   $394,504 
Allowance for doubtful accounts   2,300    17,000 
Net operating loss carryforward   1,161,700    625,893 
Allowance for slow moving inventory   25,300    2,331 
Total deferred tax assets   1,343,700    1,039,728 
Valuation allowance   (1,343,700    (1,037,208)
           
Deferred tax assets net of valuation allowance       2,520 
           
Less deferred tax assets – non-current, net of valuation allowance       2,520 
           
Deferred tax assets – current, net of valuation allowance  $   $ 

 

The effective tax rate used for calculation of the deferred taxes as of December 31, 2018 was 25.35%. The Company has established a valuation allowance against deferred tax assets of $1,343,700, due to the uncertainty regarding realization, comprised primarily of a 100% reserve against the net operating carryforward, 100% reserve against the allowance for doubtful accounts, and 100% reserve against the deferred tax assets attributable to the equity based compensation.

 

The effective tax rate used for calculation of the deferred taxes as of December 31, 2017 was 0%. The Company has established a valuation allowance against deferred tax assets of $1,037,208 or 99.8%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve against the net operating carryforward, 100% reserve against the allowance for doubtful accounts and slow moving inventory, and 100% reserve against the deferred tax assets attributable to the equity based compensation.

 

The significant differences between the statutory tax rate and the effective tax rates for the Company for the years ended are as follows:

 

   December 31, 
   2018   2017 
Statutory tax rate   21.00%   21.00%
State tax, net of Federal benefits   4.35%   3.63%
Change in valuation allowance   (25.35)%   (24.63)%
Effective tax rate   %   %

 

 F-16 
 

 

13. COMMITMENTS AND CONTINGENCIES

 

From time to time the Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability insurance, which provided coverage for each claim up to $1,000,000. During the third quarter of 2014, the Company did not renew its product liability insurance since the renewal policy amount was cost prohibitive. As of August 15, 2017, the Company has obtained Product Liability Insurance, although prior claims are not covered under the new policy. The initial term of the policy was through August 14, 2018 and was renewed through August 14, 2019.

 

In addition, as previously disclosed, the Company, Trebor and other third parties, are each named as a co-defendants under actions initially filed in March 2015 in the Circuit Court of Broward County under Case No. CACE-15-03238 and CACE -16-0000242 by the Estate of Ernesto Rodriguez, claiming wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung product. This claim falls outside the Company’s period of insurance coverage. Plaintiff has claims damages exceeding $1,000,000. A default judgment was entered against Trebor in 2015 due to its failure to timely respond to the complaint. On November 2, 2016, the court granted plaintiff’s motion for sanctions against our company for frivolous litigation relating to our attempt to have the matter dismissed and granted the plaintiff’s motion to strike our motion for summary judgment due to our initial default. The Company believes the claim to be a Workers Compensation claim relating exclusively against other non-affiliated defendants and without merit, and will aggressively defend this action and to appeal the default judgment. In the event Trebor is unable to overturn the default judgment and the defendants are determined to be at fault, we would seek to allocate damages among all of the other parties, including the plaintiff. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated due to the undetermined validity of any claim or claims made by plaintiff and the mitigating factors among the parties. Therefore, the Company has not recorded reserves and contingent liabilities related to this matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or reserve for these matters.

 

On August 14, 2014, the Company entered into a new lease commitment. Terms of the new lease include thirty-seven-month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term.

 

On November 11, 2018, the Company entered a new lease agreement for approximately 8,025 square feet adjoining its existing facility in Pompano Beach, Florida. Terms of the new lease include a sixty-nine month term commencing on January 1, 2019, or the date the Company takes possession of the premises, if earlier; a $6,527 security deposit; initial base rent of approximately $4,848 per month escalating at 3% per year during the term of the lease plus Florida state sales tax and payment of 10.11% of the buildings annual operating expenses (i.e. common area maintenance) which is approximately $1,679 per month subject to adjustment as provided in the lease.

 

We believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.

 

Base rent expense, attributable to the Company’s headquarters facility totaled approximately $106,000 and $72,000 for the years ended December 31, 2018 and 2017, respectively.

 

The following is an estimate of future minimum rental payments required under our lease agreement on August 14, 2014 and as amended December 1, 2016 and November 11, 2018 and the additional lease for adjoining space entered into November 11, 2018:

 

   Operating lease 
year 1  $116,227 
year 2   119,713 
year 3   123,303 
year 4   127,005 
year 5 and thereafter   230,628 
   $716,876 

 

 F-17 
 

 

On August 7, 2017 the Company entered into an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”), a German-based company engaged in the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean (the “Territory”). Pursuant to an intercompany assignment, Brownie’s High Pressure Compressor Services, Inc., our newly-formed wholly-owned subsidiary (“BHP”), is party to the agreement. Through BHP we expect to conduct business and build the brand name “L&W Americas/LWA”, establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. Under the terms of the agreement, we were granted a non-exclusive, non-transferrable and irrevocable right to use certain of L&W’s trademarks in connection with the marketing, use, sale and service of the products in the Territory. The agreement is for an initial term of five years, and will automatically renew for one additional five year term unless terminated by either party upon one year written notice prior to the expiration of the then current term. Either party may terminate the agreement without cause upon one year prior written notice to the other party. In addition, L&W may terminate the agreement for cause upon 120 days prior notice to us, subject to certain cure periods.

 

14. EQUITY AND EQUITY INCENTIVE PLAN

 

Common Stock

 

The Company had 161,086,228 and 98,192,717 common shares outstanding at December 31, 2018 and 2017, respectively.

 

On January 6, 2018, the Company issued 217,391 Units consisting of 869,565 shares of common stock and 217,391 common stock purchase warrants exercisable at $0.0115 per share for a fair value of $10,000. The warrants are exercisable at any time for a period of two years from date of issuance.

 

In January 2018, the Company issued 2,000,000 shares of common stock to Mr. Dana Allan for his services for serving on our board of directors. The grant date fair value of the shares issued was $50,200.

 

On February 2, 2018, the Company issued 434,783 Units consisting of 1,739,130 shares of common stock and 434,783 common stock purchase warrants exercisable at $0.0115 per share for a fair value of $20,000. The warrants are exercisable at any time for a period of two years from date of issuance.

 

On April 4, 2018, the Company issued 142,857 shares of common stock to an employee of the Company with a value of $0.014 per share totaling $2,000 which was charged to stock based compensation.

 

On April 6, 2018, the Company entered into a Patent License Agreement issuing 759,422 shares of common stock with a fair value of $0.0395 per share totaling $30,000.

 

In May 2018, the Company issued 200,000 shares of common stock to two consultants with a value of $0.0425 per share totaling $8,500 which was charged to consulting fees expense.

 

Between May 2018 and November 2018, the Company issued 449,550 common shares to a consultant with an average fair value of $0.02 per share totaling $8,949 which was charged to stock based compensation.

 

In July 2018, the Company issued an aggregate of 722,160 shares of stock to sixteen employees under a one-time employee stock incentive grant. The shares were fair valued at $0.0209 per share based on market value at the time of the grant, with a total value recognized of $16,000.

 

In September 2018, the Company issued 199,002 shares of common stock to a consultant with a value of $0.0224 per share totaling $4,451 which was charged to consulting fee expense.

 

 F-18 
 

 

On November 15, 2018, the Company entered into a Note Conversion Agreement pursuant to which the Noteholder converted $526,583 of principal and accrued interest due into 50,000,000 shares of the Company’s common stock in full satisfaction of this obligation. The Company recorded a loss on this conversion of this debt of $248,417 which was charged to interest expense.

 

In December 2018, the Company issued 2,083,197 common shares to a consultant with a fair value of $0.0195 per share totaling $40,622 which was charged to stock based compensation.

 

In December 2018, the Company issued 20,000,000 shares of common stock to our CEO as an incentive bonus. As the shares are subject to continued employment by the CEO through January 2, 2020, the Company has treated the shares as issued but not as yet outstanding. Expense for the issuance is being recognized over the full vesting period, and accordingly, the Company recognized stock compensation expense of $10,576 as of December 31, 2018.

 

In December 2018, the Company issued 2,260,963 common shares to three members of our board of director as director fees with a fair value of $0.0195 per share totaling $44,089 and 4,000,412 common shares for services provided with an average fair value of $0.016 per share totaling $78,871.

 

In March 2017, the Company issued 4,587,190 shares of restricted common stock in satisfaction of $63,303 past due and payable under an exclusive license agreement with 940 Associates, Inc., an entity owned by the Company’s Chief Executive Officer.

 

On August 1, 2017, Mikkel Pitzner was appointed by the Company’s board of directors to serve on the Company’s board of directors, filling a vacancy on the board. Mr. Pitzner shall serve on the board of directors and shall hold office until the next election of directors by stockholders and until his successor is elected and qualified or until his earlier resignation or removal. The Company has agreed to pay Mr. Pitzner an annual fee of $6,000 and has issued Mr. Pitzner 2,000,000 shares of restricted common stock valued at $25,000 and an additional 1,666,667 with a fair value of $20,883 under a two month consulting agreement expiring in January 2019. In December 2018, Mr. Pitzner was issued 708,287 common shares in payment of accrued director fees through December 31, 2018. The shares were valued at $0.0195 per share, totaling $13,812, the fair value on the date of grant.

 

Commencing in February, 2019, the Company began paying Mr. Pitzner $9,300 per month, inclusive of a $1,300 auto allowance, for consulting services. These payments are not covered by a written agreement.

 

On August 1, 2017 the Company entered into six month advisory agreement with Wesley P. Siebenthal to provide certain advisory services to the Company and serve as its Chief Technology Advisor. As compensation for the services, the Company issued him 2,000,000 shares of its common stock valued at $25,000.

 

On August 1, 2017, the Company entered into a six month employment agreement with Blake Carmichael, the son of the Company’s chief executive officer and an electrical engineer, to serve as the Company’s products development manager, electrical engineer and marketing team member. Under the terms of the employment agreement, in addition to a monthly salary of $3,600, the Company issued Mr. Carmichael 2,000,000 shares of common stock valued at $25,000. Mr. Carmichael is also entitled to performance bonuses at the discretion of the board of directors.

 

Effective August 1, 2017, the board of directors issued Mr. Robert Carmichael, the Company’s chief executive officer, chief financial officer and member of the Company’s board of directors, 2,000,000 shares of restricted common stock valued at $25,000 in consideration of serving on the Company’s board of directors.

 

During the year ended December 31, 2017, the Company issued 16,699,315 shares in a Unit Offering with net proceeds of $192,042.

 

During December 2017, the Company issued two convertible notes totaling $100,000. The combined fair value of the conversion feature of the notes was valued at $25,000 which was recorded as a beneficial conversion feature and was amortized over the one year maturity of the notes.

 

Preferred Stock

 

During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business Corporation Act. Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock. As of December 31, 2018 and December 31, 2017, the 425,000 shares of preferred stock are owned by the Company’s Chief Executive Officer. The preferred shares have 250 to 1 voting rights over the common stock, and are convertible into 31,481 shares of common stock. The preferred stock votes with the Company’s common stock, except as otherwise required under Florida law.

 

 F-19 
 

 

Equity Incentive Plan

 

On August 22, 2007, the Company adopted an Equity Incentive Plan (the “Plan”). Under the Plan, Stock Options may be granted to Employees, Directors, and Consultants in the form of Incentive Stock Options or Nonstatutory Stock Options. Stock Purchase Rights, time vested and/performance invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan. The maximum number of shares that may be issued under the Plan shall be 297 shares, and no more than 75 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period. Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company. The term of the Plan shall be ten years. The Plan expired on August 22, 2017. All 297 options issued under the Plan remain outstanding at December 31, 2018.

 

Equity Compensation Plan Information as of December 31, 2018

 

   Number of securities
to be issued upon exercise of outstanding options, warrants and rights (a)
   Weighted – average exercise price of outstanding options, warrants and rights (b)   Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a) (c) 
Equity Compensation Plans Approved by Security Holders   297   $1,350     
Equity Compensation Plans Not Approved by Security Holders            
Total   297   $1,350     

 

15. EQUITY BASED INCENTIVE/RETENTION BONUSES

 

On November 2, 2012, the Board of Directors consented to grant equity based bonuses to certain key employees and consultants as an incentive to retain their services. Stock incentive bonuses were to vest, and be paid out on May 2, 2013, contingent upon continued employment or service. The stock bonus price per share was calculated based on last closing price as reported on per the OTCBB prior to the grant date for a total of $75,100. Shares were set aside and reserved for this transaction. The Company accrued operating expense ratably from the time of the awards through May 2, 2013, when vested. Of the 61,852 vested shares, only 5,185 were issued. On April 29, 2016, the Board of Directors determined it was not in the best interest of either the Company or the recipients to pay bonuses based on the current and foreseeable share price and cancelled the bonuses payable. The results of this action, 56,669 shares to be issued are included in a reduction of shares payable as reflected on the equity and balance sheet at December 31, 2018.

 

16. SUBSEQUENT EVENTS

 

In January 2019, the Company entered into an investment banking and corporate advisory agreement. The term of the agreement is for one year and provided for compensation of 2,700,000 common shares with a fair value of $29,700 plus related expenses. The shares were issued in February and March 2019.

 

In January 2019, the Company issued 1,000,000 common shares with a fair value of $12,500 to a consultant for general administrative advisory services.

 

In March 2019, the Company issued 3,333,333 common shares with a fair value of $31,250 to a director for consulting services.

 

In March, 2019 we issued an accredited investor, a unit of the securities of the Company, with the unit consisting of 50,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 eighteen month common stock purchase warrants exercisable at $0.01 per share in consideration of $500,000. The Company intends to use the proceeds from the sale for product research and development and working capital purposes. The Company did not pay any fees or commissions in connection with the sale of the unit.

 

In April, 2019, the Company reached a settlement agreement with a customer regarding returned merchandise agreeing to refund $65,000. The Company determined the returned merchandise had little or no value and the adjustment was charged to Cost of Revenues at December 31, 2018. In addition, the Company recognized $1,500 in related legal fees in this matter as of December 31, 2018.

 

 F-20