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.
Overview
Brownie’s
Marine Group, Inc., a Florida corporation (referred to herein as “the Company”, “we”, or “BWMG”),
designs, tests, manufactures and distributes recreational diving, yacht based scuba air compressor and nitrox generations systems,
and water safety products through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida
corporation. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing
facility located in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor
Industries, Inc. In August 2017 the Company organized Brownie’s High Pressure Compressor Services, Inc., a wholly-owned
subsidiary subsidiary (“BHP”). Through BHP we expect to establish sales, distribution and service centers for high
pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. The
Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”. The Company’s website
is
www.Browniesmarinegroup.com
. Information on the website and other company websites is not a part of this report.
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, there were as yet no operations in the new
company.
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 is introducing the RES device at the FDIC trade show/conference in Indianapolis
in April of 2018.
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.
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.
RES
and HELO will be re-introduced to the public safety market at the FDIC conference in Indianapolis in late April 2018.
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
recently issued.
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 Brownie’s High Pressure Compressor Services, a wholly-owned
subsidiary of the Company formed in 2017, 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.
bLU3:
bLU3
is a development stage company that designs next generation electric surface supplied air diving systems. bLU3 is
a development stage line of 3 models targeting specific performance levels and price points – NEMO, NOMAD and NEPTUNE. Currently,
NEMO and NOMAD are functional design prototypes. Subject to financing, we intend to commence NEMO and NOMAD production
by 2019. We currently estimate that we require a minimum of $100,000 to complete the early engineering and prototype
phases to be followed by an additional $100,000 to 200,000 in high efficiency tooling investments to drive per unit cost sufficiently
low to open a broad consumer market. There are no assurances that we will receive funding or that funding will be received on
a timely basis.
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, and Garment integrated
personal flotation device (GI-PFD). In 2017, the Company formed a wholly-owned subsidiary, Brownie’s High Pressure and has
commenced operations under the name L&W Americas/LWA. 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:
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Water
safety and survival
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Garment
integrated flotation devices or life jacket
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Collar
for improved life jacket performance
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Combined
signaling and ballast for personal flotation device
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Inflatable
dive marker and collection bag.
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Three
dimensional dive flag
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Novel
dive raft and float system for divers
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Drop
weight Cummerbelt
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Buoyancy
compensator
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Utility
backpack
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Transport
harness or like garment with adjustable one size component for use by a wide range of individuals
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Active
control releasable ballast
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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
2017 and 2016, 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.
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, 2017 and 2016, were $16,380 and $1,973, 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.
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 Company’s owned by the Chief Executive Officer. Combined sales to these six entities for the years ended
December 31, 2017 and 2016, represented 36.58% and 33.58%, 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 eighteen
(18) full time employees and one (1) part time employee at our facility in Pompano Beach, Florida. Three (3) are classified as
exempt sales and administrative or management, and sixteen (16) 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 avoid the down time normally associated with seasonal business.
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.
Item
1B.
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Unresolved
Staff Comments
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Not
applicable to smaller reporting companies.
Our
Pompano Beach facilities are comprised of approximately 8,541 square feet of leased space the bulk of which is factory and warehouse
space. Terms of the initial lease include 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), 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. 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.
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Legal
Proceedings.
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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
is prepaid through its term and will remain in effect until its renewal date of August 14, 2018.
As
previously disclosed, the Company, Trebor and other third parties, are each named as co-defendants under an action filed in March
2015 in the Circuit Court of Broward County under Case No. CACE15-03238 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. The Company has obtained
different legal representation in this matter and attempted to have the default set aside. 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.
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Mine
Safety Disclosure.
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None.
PART
II
Item
5.
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Purchases
of Equity Securities.
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The
Company’s common stock is quoted on the OTC Markets under the symbol “BWMG”. The Company’s high and low
closing bid prices by quarter during 2017 and 2016, as provided by the OTC Markets (Pink) are provided below. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
On April 10, 2018, the quoted closing price of our common stock was $0.0301 per share.
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Calendar
Year 2016
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High
Bid
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Low
Bid
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First
Quarter
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$
|
.006
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|
|
$
|
.002
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Second
Quarter
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$
|
.006
|
|
|
$
|
.003
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Third
Quarter
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$
|
.006
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|
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$
|
.004
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Fourth
Quarter
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$
|
.031
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$
|
.004
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Calendar
Year 2017
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High
Bid
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Low
Bid
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First
Quarter
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$
|
.021
|
|
|
$
|
.012
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Second
Quarter
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|
$
|
.02
|
|
|
$
|
.009
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Third
Quarter
|
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$
|
.014
|
|
|
$
|
.0010
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Fourth
Quarter
|
|
$
|
.034
|
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$
|
.014
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|
Holders
of Common Stock
As
of April 5, 2018 the Company had in excess of 346 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 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 the 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 did not sell any additional securities without registration under the Securities Act of 1933, as amended,
during the period covered by this report.
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
Brownie’s
Marine Group, Inc., a Florida corporation (referred to herein as “the Company”, “we”, or “BWMG”),
designs, tests, manufactures and distributes recreational diving, yacht based scuba air compressor and nitrox generations systems,
and water safety products through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida
corporation. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing
facility located in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor
Industries, Inc. In August 2017, the Company organized Brownie’s High Pressure Compressor Services, Inc., a wholly-owned
subsidiary subsidiary (“BHP”). Through BHP we expect to establish sales, distribution and service centers for high
pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. The
Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”. The Company’s website
is
www.Browniesmarinegroup.com
. Information on the website is not a part of this report.
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, 2017 there were as yet no operations in the
new company.
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.
Reclassifications
– Certain reclassifications have been made to the 2016 financial statement amounts to conform to the 2017 financial
statement presentation.
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 financial statements. Although profitable for the years ended December
31, 2016, we incurred a loss for the year ended December 31, 2017 of $248,744. The Company had an accumulated deficit as of December
31, 2017 of $8,879,793.
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 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.
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.
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
– Revenues from product sales are recognized when the Company’s products are shipped or when service
is rendered. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage
of cost incurred to date to estimated total cost of each contract. This method is used because management considers the percentage
of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts. As of December
31, 2017 and 2016, there were no ongoing contracts accounted for using the percentage of completion method.
Contract
costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance,
job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which
the revisions are determined. Revenue and costs incurred for time and material projects are recognized as the work is performed.
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.
Historically, the cost of our warranty policy has been immaterial and no reserve has been established.
Income
taxes
– 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, derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
Comprehensive
income
– The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income
for all periods presented.
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.
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, 2017, and 2016, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer
deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest
– related parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities 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
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. We do not believe this ASU will have an impact on our results of operation, cash flows
or financial condition.
In
April 2016, the FASB issued ASU No. 2016-15,
“Classification of Certain Cash Receipts and Cash Payments”
ASU
2016- provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective
for annual periods beginning after December 15, 2017 with early adoption permitted. We do not believe this ASU will have an impact
on our results of operation, cash flows, other than presentation, 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. We do not believe this ASU will have an impact on our results of operation, cash flows, or financial condition.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting,
which relates to the accounting for employee share-based payments. This standard addresses several aspects of
the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards
as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASC 2016-09 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. We
are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash
flows or financial condition.
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 this period 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 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, 2017 as Compared to the Year Ended December 31, 2016
Net revenues.
For
the year ended December 31, 2017, total revenues declined approximately 10% with net revenues of $2,028,589 as compared to net
revenues of $2,264,134 for the year ended December 31, 2016, a decrease of $235,545. Sales to related parties remained relatively
stable between the periods totaling $742,018 and $760,356 for the same periods, respectively. This decrease was due in large part
to the loss of two of our larger customers during the year. This change in customer base is not believed to be attributable to
any particular identifiable sales trend or lack of demand for our growing product line but rather normal fluctuations in a competitive
in market.
Cost
of net revenues
. For the year ended December 31, 2017, we had cost of net revenues of $1,423,421 as compared with cost of
net revenues of $1,664,681 for the year ended December 31, 2016, a decrease of $241,260, or 14%. This was primarily attributable
to the overall drop in net revenues between the periods including the related decrease in materials and direct labor costs.
Gross
profit
. Gross profit between years remained relatively unchanged. For the year ended December 31, 2017, we had a gross profit
of $605,168 as compared to gross profit of $599,453 for the year ended December 31, 2016, an increase of $5,715, or approximately
1%.
Operating
expenses.
For the year ended December 31, 2017, we had operating expenses of $820,236 as compared to operating expenses of
$617,226, an increase of $203,010 or approximately 33%. This increase is predominantly the result of an increase in administrative
salaries, including $77,508 to our previously uncompensated Chief Executive with increases in associated taxes, insurance and
benefits between the periods, $75,000 in fair value of shares provided to directors during the year and an increase in product
liability insurance costs.
Other
(income) expense, net
. For the year ended December 31, 2017, we had other (income) expense, net of an expense of $33,676 as
compared to other income, net of $247,799 for the prior year. This account is comprised of other (income), net and interest expense.
The overall difference is primarily comprised of the $93,459 debt settlement of a convertible debenture and its associated interest
and $141,219 derived from the cancellation of incentive bonuses in the second quarter of 2016. There was no similar transaction
in 2017. Interest expense increased $6,277 between the periods as a result of an increase in convertible debt between the periods.
Net
(Loss) income.
For the year ended December 31, 2017, the Company recorded a net loss of $248,744 compared to net income of
$230,026 in the prior year. It should be noted that a significant portion of the income recognized in 2016 was attributable to
a gain on debt settlement and cancellation of the Company’s incentive bonus program in 2016 with both transactions being
of a non-recurring nature. Absent this transaction in 2016, the Company would have recorded a small loss in the prior year. The
balance of the increase in loss incurred in 2017 was primarily attributable to the increase in selling, general and administrative
expenses as described above.
Liquidity
and Capital Resources
As
of December 31, 2017, the Company had current assets (primarily consisting of inventory and prepaid expenses) of $1,285,546 and
current liabilities of $1,021,550 or a current ratio of 1.3 to 1, representing a working capital balance of $263,996. At December
31, 2016, the Company had current assets of $1,017,870 and current liabilities of $914,885, or a current ratio of 1.1 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 these financial statements. Although profitable for the year ended December 31, 2016, we incurred a loss
for the year ended December 31, 2017 of $248,744. The Company had an accumulated deficit as of December 31, 2017 of $8,879,793.
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 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.
Net
cash (used in) provided by operating activities totaled ($326,760) and $75,192 for the years ended December 31, 2017 and 2016,
respectively. The cash used in operations in 2017 of $326,760 was primarily the result of a net loss from operations of $248,744,
coupled with an increase in inventory levels of $150,366, an increase in prepaid expenses of $167,251 and a reduction in current
liabilities of $34,854. These uses of cash were off-set by $100,000 in fair value of common shares issued as compensation and
an increase in accounts payable, accrued liabilities and customer deposits totaling $134,832. Cash flows provided by operations
in 2016 primarily were as a result of net income of $230,026, shares issued for payroll compensation of $36,000, an decrease in
accounts receivable of $58,448, and in increase in accounts payable of $65,070 These sources were reduced by a non-cash gain on
the cancellation of debt of $234,678 and a change in other current liabilities and related party royalties payable totaling $143,243.
Net
cash provided by (used in) financing activities totaled $285,909 and ($17,678) at December 31, 2017 and 2016, respectively. During
2017, the company received net proceeds from a Unit Offering of $192,042 and the sales of two convertible notes totaling $100,000,
these sources being offset by $6,133 in debt servicing. Net cash used in financing activities in 2016 primarily reflects principle
debt servicing on notes payable and notes payable – related parties of $17,206.
From October, 2017 through
April, 2018, the Company received gross proceeds of $242,042 pursuant to the sale of 4,827,003 Units consisting of four shares
of common stock and one two year common stock purchase warrant exercisable at $0.0115 per share. The price per Unit was $0.046.
In December 2017, the
Company entered into a $50,000, 6% Secured Convertible Promissory Note, due December 1, 2018, subject to extension. Interest
is payable monthly. 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 up 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.
In December 2017, the
Company entered into a $50,000, 6% Secured Convertible Promissory Note, due December 4, 2018, subject to extension. Interest
is payable monthly. 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 up 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.
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.
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, 2017 of $248,744 and had an accumulated deficit of $8,879,793 at December
31, 2017. The Company is behind on payments due for matured convertible debentures, notes payable, and 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. Working capital
limitations continue to impinge on our day-to-day operations.
The
optional conversion features of a series of convertible debentures issued by the Company could 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 remain outstanding and are past due.
In December 2017, the Company issued an additional two secured convertible debentures for $50,000 each. At December 31,
2017 the outstanding principal balance of these debentures, net of related unamortized debt discount, was $389,803. The debentures
convert under various conversion formulas, which may be at 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.
We have secured convertible
notes in the aggregate principal amount of $100,000 outstanding which mature in December 2018, unless extended at the discretion
of the lenders, and we may not have available capital to satisfy such notes when they becomes due.
The secured
notes are collateralized by all of our assets and guarantees by our operating subsidiaries and chief executive officer. We currently
do not have sufficient cash to satisfy the notes when it becomes due and there are no assurances we will be able to raise the
funds if necessary.
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 subject to 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.
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.
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.
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.
Our
Chief Executive Officer beneficially owns approximately 60% of the combined voting power of our Common Stock and Series A Convertible
Preferred Stock and is able to control voting issues and actions that may not be beneficial or desired by minority shareholders.
As
of April 5, 2018, Robert Carmichael, our only executive officer, beneficially owns approximately 18% of the combined voting power
of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate
transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, and also the power to prevent or cause a change in control.
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 defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information
required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management
to allow timely decisions regarding required disclosure. The Company’s management, under the supervision and with the participation
of Robert Carmichael, the Company’s Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried
out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2017. Based upon that evaluation and the identification
of the material weakness in the Company’s internal control over financial reporting as described below under “Management’s
Report on Internal Control over Financial Reporting,” the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Management,
with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of
our internal control over financial reporting as of December 31, 2017, based on the 2013 criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our internal control over financial
reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally accepted accounting principles because of the
Company’s limited resources and limited number of employees. To mitigate the current limited resources and limited employees,
we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we
grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the
internal control framework.
This
annual report does not include an attestation report of the company’s registered public accounting firm regarding internal
control over financial reporting.
Limitations
on Effectiveness of Controls and Procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations
include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the control. The design of any system of controls 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. Over time, controls may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Changes
in Internal Control over Financial Reporting
There
were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item
9B.
|
Other
Information.
|
None.
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.
Basis
of Presentation
– The 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.
Reclassifications
– Certain reclassifications have been made to the 2016 financial statement amounts and disclosures to conform to the
2017 financial statement presentation.
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 financial statements. Although profitable for the year ended December
31, 2016, we incurred a loss for the year ended December 31, 2017 of $248,744. The Company has an accumulated deficit as of December
31, 2017 of $8,879,793.
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 $16,848 and $18,000 at December 31, 2017 and 2016, 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
– Revenues from product sales are recognized when the Company’s products are shipped or when service
is rendered. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, when applicable, measured
by the percentage of cost incurred to date to estimated total cost of each contract. This method is used because management considers
the percentage of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts.
As of December 31, 2017 and 2016, there were no ongoing contracts accounted for using the percentage of completion method.
Contract
costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance,
job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which
the revisions are determined. Revenue and costs incurred for time and material projects are recognized as the work is performed.
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, 2017, and 2016, totaled $42,959 and $5,800,
respectively.
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, 2017 and 2016 the Company incurred research and development costs of $16,380 and $1,973, 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. The Company provides our customers with an industry standard one year warranty on systems sold.
Historically, the cost of our warranty policy has been immaterial and no reserve has been established. Customer deposits and unearned
revenue totaled $97,249 and $31,577 at December 31, 2017 and 2016, respectively.
Income
taxes
– 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.
Comprehensive
income
– The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income
for all periods presented.
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.
For
the years ended December 31, 2017 and 2016, the Company converted accrued liabilities of principal and interest to related parties
to stock totaling $63,303 and $570, respectively. During the year ended December 31, 2016, the Company issued shares for employee
compensation with a fair value of $36,000.
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, 2017, and 2016, 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,
and notes payable, 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.
Potentially dilutive shares included in dilutive earnings per share totaled 34,929,502 at December 31, 2016. At December
31, 2017, 61,512,122 potentially dilutive shares were not recognized as their inclusion would be anti-dilutive. These shares reflect
shares potentially issuable under convertible note agreements during the period ending December 31, 2017.
New
accounting pronouncements
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. We do not believe this ASU will have an impact on our results of operation, cash flows
or financial condition.
In
April 2016, the FASB issued ASU No. 2016-15,
“Classification of Certain Cash Receipts and Cash Payments”
ASU
2016-15 provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective
for annual periods beginning after December 15, 2017 with early adoption permitted. We do not believe this ASU will have an impact
on our results of operation, cash flows, other than presentation, 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. We do not believe this ASU will have an impact on our results of operation, cash flows, or financial condition.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of
the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards
as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASC 2016-09 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. We
are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash
flows or financial condition.
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 of cost or 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 our financial statements.
2.
INVENTORY
Inventory
consists of the following as of:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
614,541
|
|
|
$
|
402,407
|
|
Work
in process
|
|
|
—
|
|
|
|
—
|
|
Finished
goods
|
|
|
208,345
|
|
|
|
270,113
|
|
|
|
$
|
822,886
|
|
|
$
|
672,520
|
|
3.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consisted of the following:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Prepaid
inventory
|
|
$
|
27,715
|
|
|
$
|
30,076
|
|
Prepaid
insurance
|
|
|
7,453
|
|
|
|
6,968
|
|
Prepaid
other current assets
|
|
|
216,419
|
|
|
|
47,292
|
|
|
|
$
|
251,587
|
|
|
$
|
84,336
|
|
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following as of:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Tooling
and equipment
|
|
$
|
125,832
|
|
|
$
|
121,782
|
|
Computer
equipment and software
|
|
|
27,469
|
|
|
|
31,519
|
|
Vehicles
|
|
|
44,160
|
|
|
|
44,160
|
|
Leasehold
improvements
|
|
|
43,779
|
|
|
|
43,779
|
|
|
|
|
241,240
|
|
|
|
241,240
|
|
Less:
accumulated depreciation and amortization
|
|
|
(213,742
|
)
|
|
|
(184,332
|
)
|
|
|
$
|
27,498
|
|
|
$
|
56,908
|
|
Depreciation
and amortization expense totaled $29,410 and $36,391 for the years ended December 31, 2017 and 2016, respectively.
5.
OTHER ASSETS
Other
assets of $6,649, at December 31, 2017 and 2016, 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, 2017 and 2016, represented 36.58% and 33.58%, respectively,
of total net revenues.
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, 2017 and 2016, totaled $738,506 and $750,338 ,
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. Accounts receivable from Brownie’s
SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2016, was $40,012,
$5,809, and $18,410, respectively.
The
Company sells products to Brownie’s Global Logistics, LLC. (“BGL”), 940 Associates, Inc. and 3D Buoy,LLC affiliated
with the Company’s Chief Executive Officer. 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, 2017, and 2016, were $3,512 and $9,130, respectively. Accounts receivable from BGL, 3D Buoy and 940
Associates, Inc. totaled $4,043 and $9,819 at December 31, 2017, and December 31, 2016, respectively.
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, 2017 and 2016, as disclosed on the face of the Company’s Consolidated
Statements of Operations totaled $54,745 and $56,057, 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 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. 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.
Equity
based compensation
– During November 2013, Alexander F. Purdon, then an employee of the Company, exceeded 10% ownership
whereby he was reclassified to related party. The Company paid Mr. Purdon’s employment compensation in restricted shares
of stock in lieu of cash. The number of shares paid is based on the weighted average price per share during the months the services
were rendered. For the year ended December 31, 2016, stock based compensation shares issued to Mr. Purdon totaled 360,000 shares
with a fair value of $36,000. The agreement with Mr. Purdon terminated August 31, 2016.
In
April 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 current or foreseeable share prices and cancelled bonuses payable. As a result of this action, the Company recognized
other income in the amount of $140,336.
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.
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 bLU 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.
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 (“IP), the Company
issued Mr. Carmichael 234 stock options at a $1,350 exercise price expiring ten years from the effective date of grant, or March
2, 2019. None of the options have been exercised to-date.
8.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities consists of the following as of:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Accounts
payable trade and other
|
|
$
|
143,347
|
|
|
$
|
110,020
|
|
Accrued
payroll & fringe benefits
|
|
|
29,023
|
|
|
|
20,416
|
|
Accrued
payroll taxes & withholding
|
|
|
8,689
|
|
|
|
16,400
|
|
Accrued
interest
|
|
|
211,679
|
|
|
|
176,742
|
|
|
|
$
|
392,738
|
|
|
$
|
323,578
|
|
Balances
due certain vendors are in arrears to varying degrees. The Company is handling all delinquent accounts on a case-by-case basis.
9.
OTHER LIABILITIES
Other
liabilities consist of the following as of
:
|
|
December
31, 2017
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
126,572
|
|
(*)
|
|
$
|
160,782
|
(*)
|
Asset
purchase agreement payable
|
|
|
12,857
|
|
|
|
|
12,857
|
|
On-line
training liability
|
|
|
2,331
|
|
|
|
|
2,975
|
|
|
|
$
|
141,760
|
|
|
|
$
|
176,614
|
|
(*)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.
NOTES PAYABLE
Notes
payable consists of the following:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Promissory
note payable, secured by vehicle underlying loan having carrying value of $6,133 at December 31, 2016, bearing interest at
1.9% per annum, due in monthly principal and interest payments of $523, maturing on December 5, 2017.
|
|
$
|
—
|
|
|
$
|
6,133
|
|
|
|
|
|
|
|
|
|
|
Less
amounts due within one year
|
|
|
—
|
|
|
|
(6,133
|
)
|
|
|
|
|
|
|
|
|
|
Long-term
portion of notes payable
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2017 and 2016, principal payments on the notes payable are as follows:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
—
|
|
|
$
|
6,133
|
|
2018
|
|
|
|
|
|
|
|
|
2019
|
|
|
—
|
|
|
|
—
|
|
2020
|
|
|
—
|
|
|
|
—
|
|
2021
|
|
|
—
|
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
6,133
|
|
11.
CONVERTIBLE DEBENTURES
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
|
|
|
|
|
|
Convertible
debentures consist of the following at December 31, 2016:
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
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
170,000
|
|
|
|
(1
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
2,687
|
|
|
|
(2
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
4,055
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
312,743
|
|
|
$
|
—
|
|
|
$
|
312,743
|
|
|
$
|
176,742
|
|
|
|
|
|
(1)
|
On
May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture. The Debenture bears 10% interest per annum.
The lender may 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 may 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.
|
|
|
(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 are treated as extinguishment
of the old debentures and recorded as new for accounting purposes.
|
|
|
|
The
conversion price under the debentures is $0.37125 and 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 4.99% of the outstanding Common Stock of the Company
at any one time.
|
(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.
|
(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 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.
|
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.
Management is in the process of reviewing “the Act”, but has not completed its analysis at
the statement date.
The
components of the provision for income tax expense are as follows for the years ended:
|
|
|
December
31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Current
taxes
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Current
taxes
|
|
|
—
|
|
|
|
—
|
|
Change
in deferred taxes
|
|
|
—
|
|
|
|
—
|
|
Change
in valuation allowance
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Provision
for income tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The
following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31,
2017:
Deferred
tax assets:
|
|
|
|
|
Equity
based compensation
|
|
$
|
394,504
|
|
Allowance
for doubtful accounts
|
|
|
17,000
|
|
Net
operating loss carryforward
|
|
|
625,893
|
|
On-line
training certificate reserve
|
|
|
2,331
|
|
Total
deferred tax assets
|
|
|
1,039,728
|
|
Valuation
allowance
|
|
|
(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, 2017 was 24.63%. 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 99% reserve against the deferred tax assets attributable to the equity based compensation.
The
following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31,
2016:
Deferred
tax assets:
|
|
|
|
|
Equity
based compensation
|
|
$
|
210,263
|
|
Allowance
for doubtful accounts
|
|
|
15,000
|
|
Net
operating loss carryforward
|
|
|
1,015,748
|
|
On-line
training certificate reserve
|
|
|
818
|
|
Total
deferred tax assets
|
|
|
1,241,829
|
|
Valuation
allowance
|
|
|
(1,239,309
|
)
|
|
|
|
|
|
Deferred
tax assets net of valuation allowance
|
|
|
2,520
|
|
|
|
|
|
|
Less
deferred tax assets – non-current, net of valuation allowance
|
|
|
2,330
|
|
|
|
|
|
|
Deferred
tax assets – current, net of valuation allowance
|
|
$
|
190
|
|
The
effective tax rate used for calculation of the deferred taxes as of December 31, 2016 was 37.63%. The Company has established
a valuation allowance against deferred tax assets of $1,239,309 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 99% 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,
|
|
|
|
2017
|
|
|
2016
|
|
Statutory
tax rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State
tax, net of Federal benefits
|
|
|
3.63
|
%
|
|
|
3.63
|
%
|
Change
in valuation allowance
|
|
|
(37.63
|
)%
|
|
|
(37.63
|
)%
|
Effective
tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
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 policy is already prepaid and will remain in effect until its renewal date of August 14, 2018.
As
previously disclosed, the Company and Trebor were co-defendants under an action filed by an individual in September 2013 in the
Circuit Court of Broward County claiming personal injury resulting from use of a Brownie’s Third Lung. Plaintiff claimed
damages in excess of $1,000,000. This matter was settled during the three months ended September 30, 2016 by the Company’s
insurance carrier at no additional cost to the Company.
In
addition, as previously disclosed, the Company, Trebor and other third parties, are each named as a co-defendants under an action
filed in March 2015 in the Circuit Court of Broward County under Case No. CACE15-03238 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. The Company has obtained
different legal representation in this matter and attempted to have the default set aside. 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. 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 $72,000 and $48,000 for the years
ended December 31, 2017 and 2016, 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:
|
|
Operating
lease
|
|
year
1
|
|
$
|
55,933
|
|
year
2
|
|
|
57,611
|
|
year
3
|
|
|
59,339
|
|
year
4
|
|
|
61,119
|
|
year
5 and thereafter
|
|
|
188,754
|
|
|
|
$
|
422,756
|
|
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 98,192,717 and 68,906,212 common shares outstanding at December 31, 2017 and 2016, respectively.
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.
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.
In
April 2016, under an employment agreement with our wholly-owned subsidiary Trebor, Inc., an employee received 360,000 shares of
restricted common stock in full payment for services rendered.
In
November 2016, the Company issued 10,000,000 shares of restricted common stock in satisfaction of $88,850 past due and payable
under an exclusive license agreement with 940 Associates, Inc., an entity owned by the Company’s Chief Executive Officer.
During
the year ended December 31, 2016, the Company satisfied related party accrued interest due of $570 through the issuance of 124,326
shares of the Company common stock.
During
December 31, 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 is being 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, 2017
and December 31, 2016, 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.
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.
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,
2016.
16.
SUBSEQUENT EVENTS
On
January 6, 2018 the Company issued 217,391 Units consisting of 869,565 common shares and 217,391 common stock purchase warrants
exercisable at $0.0115 per share. 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 common shares to Mr. Dana Allan for his services for serving on our board of directors.
The grant date fair value of the shares issued was $25,000.
On
February 2, 2018 the Company issued 434,783 Units consisting of 1,739,130 common shares and 434,783 common stock purchase warrants
exercisable at $0.0115 per share. The warrants are exercisable at any time for a period of two years from date of issuance.