Attached files

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EX-32.2 - Brownie's Marine Group, Incex32-2.htm
EX-32.1 - Brownie's Marine Group, Incex32-1.htm
EX-31.2 - Brownie's Marine Group, Incex31-2.htm
EX-31.1 - Brownie's Marine Group, Incex31-1.htm
EX-21.1 - Brownie's Marine Group, Incex21-1.htm
EX-10.11 - Brownie's Marine Group, Incex10-11.htm
EX-4.2 - Brownie's Marine Group, Incex4-2.htm
EX-4.1 - Brownie's Marine Group, Incex4-1.htm

 

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

(MARK ONE)

 

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

 

For the fiscal year ended December 31, 2017

 

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

 

For the transition period from _______ to _______.

 

Commission File No. 333-99393

 

BROWNIE’S MARINE GROUP, INC.

(Name of Small Business Issuer in Its Charter)

 

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

 

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

 

(954) 462-5570

(Issuer’s Telephone Number, Including Area Code)

 

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

Yes [  ] No [X]

 

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

Yes [  ] No [X]

 

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

Yes [X] No [  ]

 

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

Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [  ]

 

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

 

  Large accelerated filer [  ]   Accelerated file   [  ]
  Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company   [X]

 

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

Yes [  ] No [X]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2017 ($0.0139), was $807,672.

 

There were 102,801,362  shares of common stock outstanding as of April 5, 2018.

 

 

 

 

 

 

PART I

 

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

 

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

 

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

 

Item 1. Business.

 

Overview

 

Brownie’s Marine Group, Inc., 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.

 

1 

 

 

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.

 

2 

 

 

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.

 

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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.

 

4 

 

 

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.

 

5 

 

 

Patents

 

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

 

  Water safety and survival
     
  Garment integrated flotation devices or life jacket
     
  Collar for improved life jacket performance
     
  Combined signaling and ballast for personal flotation device
     
  Inflatable dive marker and collection bag.
     
  Three dimensional dive flag
     
  Novel dive raft and float system for divers
     
  Drop weight Cummerbelt
     
  Buoyancy compensator
     
  Utility backpack
     
  Transport harness or like garment with adjustable one size component for use by a wide range of individuals
     
  Active control releasable ballast

 

Marketing

 

Print Literature, Public Relations, and Advertising

 

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

 

Tradeshows

 

In 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.

 

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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.

 

7 

 

 

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.

 

Item 1A. Risk Factors.

 

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

 

Item 1B. Unresolved Staff Comments

 

Not applicable to smaller reporting companies.

 

Item 2. Properties.

 

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. Legal Proceedings.

 

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

 

8 

 

 

Item 4. Mine Safety Disclosure.

 

None.

 

PART II

 

Item 5. Purchases of Equity Securities.

 

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.

 

   Calendar Year 2016 
   High Bid   Low Bid 
First Quarter  $.006   $.002 
Second Quarter  $.006   $.003 
Third Quarter  $.006   $.004 
Fourth Quarter  $.031   $.004 

 

 

   Calendar Year 2017 
   High Bid   Low Bid 
First Quarter  $.021   $.012 
Second Quarter  $.02   $.009 
Third Quarter  $.014   $.0010 
Fourth Quarter  $.034   $.014 

 

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.

 

9 

 

 

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.

 

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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.

 

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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.

 

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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.

 

13 

 

 

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.

 

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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.

 

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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.

 

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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.

 

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

 

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

 

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

 

We depend on the services of our Chief Executive Officer.

 

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

 

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

 

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

 

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

 

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

 

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

 

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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.

 

19 

 

 

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

 

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

 

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.

 

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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.

 

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PART III

 

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

 

The following is a list of our executive officers and directors. All directors serve one-year terms or until each of their successors are duly qualified and elected.

 

Name  Age  Position
       
Robert M. Carmichael   55  President, Chief Executive Officer, Principal Financial Officer and Director
Dana Allen   64  Director
Mikkel Pitzner   49  Director

 

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

 

Dana Allen. Since November 22, 2017, Mr. Allen has served on the Company’s board of directors. Mr. Allen is founder and chief executive officer of AUN-TV, a network of 7 California broadcast TV stations. Mr. Allen founded Sequoia Data Corporation in 1987, a company based in Silicon Valley where he served as CEO and chairman until it merged with TMS in 1996, forming TMSSequoia, a public company. He later became CEO and Chairman of TMSSequoia in 1999. From 1998 to 2000 Mr. Allen was founding Chairman of NewsMax Media. Since 2002 he has managed his private investment portfolio. Mr. Allen holds nine US Patents. The first 7 are related to OCR (optical character recognition) and document imaging software. The two most recent patents are (1) a patent related to an improvement to internal-combustion engines that allows two stroke gas engines to run without any oil mixed into the gas, designed to decrease air pollution and (2) a patent for a method and device for underwater recovery of products or pollutants, designed to recover deep water oil spills.

 

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

 

Board of Directors

 

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

 

22 

 

 

Board leadership structure and board’s role in risk oversight

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Compensation of Directors

 

During 2017 our board of directors adopted a compensation policy for our directors under which directors received 2,000,000 shares of common stock for serving on the board during 2017. The following table provides information concerning the compensation paid to our independent directors for their services as members of our board of directors for 2017. For awards of stock, the aggregate grant date fair value is computed in accordance with FASB ASC Topic 718. The information in the following table excludes any reimbursement of out-of-pocket travel and lodging expenses which we may have paid:

 

23 

 

 

Director Compensation

 

Name   Fees earned
or paid in cash
($)
  Stock
awards
($)
  Option
awards
($)
  Non-equity incentive
plan compensation
($)
  Nonqualified deferred compensation earnings
($)
  All other compensation
($)
  Total
($)
 
                               
Robert Carmichael         25,000     -     -     -     -     25,000  
Dana Allen     600                     -     -     600  
Mikkel Pitzner     2,500     25,000     -     -     -     -     27,500  

 

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

 

Not applicable to our Company.

 

Code of Ethics

 

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

 

Shareholder Communications

 

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

 

Item 11. Executive Compensation

 

The following table shows all the cash compensation paid by the Company, as well as certain other compensation paid or accrued, during the years ended December 31, 2017 and 2016 to the Company’s named executive officer. No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the chart below, was paid to this executive officer during these fiscal years. Executive compensation excludes shares of common stock received for serving on the Company’s board of directors and certain transactions, which are disclosed under “Item 13. Certain Relationships and Related Transactions, and Director Independence.”

 

24 

 

 

Summary Compensation Table

 

Name and
Principal
Position(s)
  Year   Salary   Bonus   Stock Awards   Option Awards   Non-Equity Incentive Plan Compensation   All Other Compensation   Total 
                                 
Robert M. Carmichael, President, Principal   2017   $77,538   $   $   $   $   $20,483*  $98,021 
Executive Officer   2016   $   $   $   $   $   $20,217*  $20,217 

 

* health insurance

 

Outstanding Equity Awards at Fiscal Year End

 

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

 

Employment Agreements

 

None.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

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

 

25 

 

 

Equity Compensation Plan Information as of December 31, 2017

 

   Number of securities
to be issued upon exercise of outstanding options, warrants and rights (a)
  Weighted – average exercise price of outstanding options, warrants and rights (b)  Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a) (c) 
Equity Compensation Plans Approved by Security Holders   297  $1,350   0 
Equity Compensation Plans Not Approved by Security Holders          
Total   297  $1,350   0 

 

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

 

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

 

Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock held by them. Robert Carmichael owns 100% of the Company’s Series A Convertible Preferred Stock, each share of which has the number of votes 250 per share. The preferred stock votes with the Company’s common stock, except as otherwise required under Florida law. Accordingly, Mr. Carmichael owns approximately 60% 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.

 

Applicable percentage ownership in the following table is based on 102,801,412 shares of common stock outstanding as of April 5, 2018. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of April 5, 2018, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise disclosed these persons’ address is c/o Brownie’s Marine Group, Inc., 3001 NW 25 th Avenue, Suite 1, Pompano Beach, FL 33069.

 

Title of Class  Name and Address of Beneficial Owner  Amount and Nature of Beneficial Ownership   Percent of Class 
Executive Officers and Directors             
Common  Robert Carmichael   17,419,242(*)   18%
Common  Dana Allen   2,000,000    2%
Common  Mikkel Pitzner   2,217,233    2%
Common  All directors and executive officers as a group (3 persons)   21,419,242(*)   21%
              
5% Shareholders             
Common  None          
Series A Convertible Preferred Stock  Robert Carmichael   425,000    100%
Series A Convertible Preferred Stock  All directors and executive officers as a group (1 person)   425,000    100%

 

(*) Includes the following: aggregate of 234 shares of common stock underlying currently exercisable options exercisable at $1,350 per share; and 31,481 shares issuable upon conversion of 425,000 shares of Series A Preferred Stock.

 

26 

 

 

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

 

The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers with similar sales volumes. Combined net revenues from these entities for years ended December 31, 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, fully owned by 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, 940 Associates and 3D Buoy totaled $4,043 and $9,819 at December 31, 2017 and 2016, respectively.

 

The Company has Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. For this license agreement the Company pays 940A 2.5% of gross revenues 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 under that certain Exclusive License Agreement by and between the parties as of March 1, 2017. As of the date of the conversion agreement, the Company was more than 31 months in arrears on its royalty payments totaling approximately $151,000. In addition, 940A agreed to forebear on any default under the License Agreement due to the Company’s remaining past due amount for a period of three months from the effective date of the conversion agreement. The shares issued were valued at $0.008885 per share, the closing price of the stock on the effective date of the conversion agreement.

 

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

 

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On August 1, 2017, the Company entered into a six month employment agreement with Blake Carmichael, the son of the Company’s chief executive officer and an electrical engineer, to serve as the Company’s products development manager, electrical engineer and marketing team member. Under the terms of the employment agreement, in addition to a monthly salary of $3,600, the Company issued Mr. Carmichael 2,000,000 shares of common stock valued at $25,000. Mr. Carmichael is also entitled to performance bonuses at the discretion of the board of directors. On January 31, 2018, Mr. Blake Carmichael’s employment agreement expired and was not renewed. He continues with the Company as a full time employee focused on the operations of the Company’s bLU3 subsidiary.

 

Director independence

 

The Company has two independent directors, Mr. Allen and Mr. Pitzner. Mr. Allen and Mr. Pitzner are considered “independent” as defined under Rule 5605 of the Nasdaq Marketplace Rules.

 

Item 14. Principal Accounting Fees and Services.

 

The following table shows the fees that were billed for the audit and other services provided by RBSM, LLP for the years ended December 31, 2017 and 2016.

 

   2017   2016 
Audit Fees  $47,500   $37,187 
Audit-Related Fees   -    - 
Tax Fees   3,000    - 
All Other Fees   -    - 
Total  $50,500   $37,187 

  

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

 

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

 

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

 

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

 

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

 

28 

 

 

PART IV

 

Item 15. Exhibits, Financial Statements Schedules

 

Our consolidated financial statements appear beginning at F-1.

 

Exhibit
No.
  Description   Location
2.2   Merger Agreement, dated June 18, 2002 by and among United Companies Corporation, Merger Co., Inc. and Avid Sportswear & Golf Corp.   Incorporated by reference to Exhibit 2.02 Amendment No. 1 to Form S-4 filed June 24, 2002.
         
2.3   Articles of Merger of Avid Sportswear & Golf Corp. with and into Merger Co., Inc.   Incorporated by reference to Exhibit 2.03 Amendment No. 1 to Form S-4 filed June 24, 2002.
         
2.4   Plan of Conversion   Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on October 28, 2015
         
3.1   Articles of Conversion (Nevada)   Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on October 28, 2015.
         
3.2   Certificate of Conversion (Florida)   Incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed on October 28, 2015.
         
3.3   Articles of Incorporation (Florida)   Incorporated by reference to Exhibit 3.3 to Current Report on Form 8-K filed on October 28, 2015.
         
3.5   Articles of Amendment   Incorporated by reference to Exhibit 3.5 to Current Report on Form 8-K filed on December 16, 2015.
         
3.6   Bylaws   Incorporated by reference to Exhibit 3.4 to Current Report on Form 8-K filed on October 28, 2015.
         
4.1   Form of Unit Warrant   Provided herewith.
         
4.2   Form of 2017 Secured Convertible Promissory Note    Provided herewith.
         
10.1   Share Exchange Agreement, dated March 23, 2004 by and among the Company, Trebor Industries, Inc. and Robert Carmichael   Incorporated by reference to Exhibit 16.1 to Current Report on Form 8-K filed April 9, 2004
         
10.2   Non-Exclusive License Agreement –BC Keel Trademark   Incorporated by reference to Exhibit 10.18 to Form 10QSB for the quarter ended December 31, 2005 filed August 15, 2005.
         
10.3   Exclusive License Agreement - Brownie’s Third Lung, Brownie’s Public Safety, Tankfill, and Related Trademarks and Copyrights   Incorporated by reference to Exhibit 10.20 to Form 10QSB for the quarter ended December 31, 2005 filed August 15, 2005.
         
10.4   Exclusive License Agreement – Brownie’s Third Lung and Related Trademarks and Copyright   Incorporated by reference to Exhibit 10.26 to Form 10KSB for the year ended December 31, 2006 filed April 4, 2007.

 

29 

 

 

10.5   Promissory Note effective April 22, 2015 payable to Robert M. Carmichael.   Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended March 31, 2015 filed May 11, 2015.
         
10.6   Conversion Agreement effective November 21, 2016   Incorporated by reference to Exhibit 10.1 to Form 8-K filed November 21, 2016.
         
10.7   Conversion Agreement effective March 1, 2017   Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on March 3, 2017.
         
10.8   Mikkel Pitzner Independent Director Agreement dated August 1, 2017   Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 8, 2017.
         
10.9   Advisory Agreement dated August 7, 2018   Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 8, 2017.
         
10.10   Dana Allen Independent Director Agreement dated November 22, 2017   Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A filed on December 6, 2017.
         
10.11   Lease Agreement Commencing September 1, 2014, as amended   Provided herewith.
         
21.1   Subsidiaries of the Registrant   Provided herewith.
         
31.1   Certification Pursuant to Rule 13a-14(a)/15d-14(a)   Provided herewith.
         
31.2   Certification Pursuant to Rule 13a-14(a)/15d-14(a)   Provided herewith.
         
32.1   Certification Pursuant to Section 1350   Provided herewith.
         
32.2   Certification Pursuant to Section 1350   Provided herewith.
         
101   XBRL Interactive Data File   Provided herewith.

 

30 

 

 

 

SIGNATURES

 

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

 

Date: April 17, 2018 Brownie’s marine group, Inc.
     
  By: /s/ Robert M. Carmichael
    Robert M. Carmichael
    President, Chief Executive Officer, Chief
    Financial Officer and Principal Accounting Officer

 

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

 

Date: April 17, 2018 By: /s/ Robert M. Carmichael
    Robert M. Carmichael
    Director

 

By: /s/ Dana Allen
    Dana Allen
    Director

 

By: /s/ Mikkel Pitzner
    Mikkel Pitzner
    Director

 

31 

 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS FOR CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

 

  PAGE(S)
   
Report Of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets As Of December 31, 2017 And 2016 F-3
   
Consolidated Statements Of Operations For The Years Ended December 31, 2017 And 2016 F-4
   
Consolidated Statements Of Stockholders’ Equity For The Years Ended December 31, 2017 And 2016 F-5
   
Consolidated Statements Of Cash Flows For The Years Ended December 31, 2017 And 2016 F-6
   
Notes To The Consolidated Financial Statements F-8 TO F-22

 

 

 F-1 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Brownie’s Marine Group, Inc. and Subsidiaries (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for the each of years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

The Company’s Ability to Continue as a Going Concern

 

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

 

Basis for Opinion

 

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

 

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

 

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

 

/s/RBSM LLP
 
We have served as the Company’s auditor since 2015.
 
Henderson, NV
 
April 16, 2018

 

  F-2 

 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   December 31, 
   2017   2016 
ASSETS          
           
Current assets          
Cash  $150,898   $191,749 
Accounts receivable, net of $16,848 and $18,000 allowance for doubtful accounts, respectively   4,494    1,026 
Accounts receivable – related parties   55,681    68,239 
Inventory   822,886    672,520 
Prepaid expenses and other current assets   251,587    84,336 
Total current assets   1,285,546    1,017,870 
           
Property and equipment, net   27,498    56,908 
           
Deferred tax asset, net   2,520    2,520 
Other assets   6,649    6,649 
           
Total assets  $1,322,213   $1,083,947 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities          
Accounts payable and accrued liabilities  $392,738   $323,578 
Customer deposits and unearned revenue   97,249    31,577 
Royalties payable – related party       64,240 
Other liabilities   141,760    176,614 
Convertible debentures, net   389,803    312,743 
Notes payable – current portion       6,133 
Total current liabilities   1,021,550    914,885 
           
Total liabilities   1,021,550    914,885 
           
Commitments and contingencies          
           
Stockholders’ equity          
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding   425    425 
Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 98,192,717 and 68,906,212 shares issued and outstanding at December 31, 2017 and 2016, respectively   9,819    6,890 
Common stock payable; $0.0001 par value; 138,941 and 138,941 shares, respectively   14    14 
Additional paid-in capital   9,170,198    8,792,782 
Accumulated deficit   (8,879,793)   (8,631,049)
Total stockholders’ equity   300,663    169,062 
           
Total liabilities and stockholders’ equity  $1,322,213   $1,083,947 

 

See Accompanying Notes to Consolidated Financial Statements

 

  F-3 

 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Years Ended December 31, 
   2017   2016 
         
Net revenues          
Net revenues  $1,286,571   $1,503,778 
Net revenues - related parties   742,018    760,356 
Total net revenues   2,028,589    2,264,134 
           
Cost of net revenues          
Cost of net revenues   878,875    1,154,560 
Cost of net revenues – related parties   489,801    454,064 
Royalties expense - related parties   54,745    56,057 
Total cost of net revenues   1,423,421    1,664,681 
           
Gross profit   605,168    599,453 
           
Operating expenses          
Selling, general and administrative   803,856    615,253 
Research and development costs   16,380    1,973 
Total operating expenses   820,236    617,226 
           
Loss from operations   (215,068)   (17,773)
           
Other (income) expense, net          
Other (income) expense, net   (3,569)   (44,661)
Cancellation of debt       (234,678)
Interest expense   37,245    30,968 
Interest expense - related parties       572 
Total other (income) expense, net   33,676    (247,799)
           
Net (loss) income before provision for income taxes   (248,744)   230,026 
           
Provision for income tax expense        
           
Net (loss) income  $(248,744)  $230,026 
           
Basic (loss) income per common share  $(0.00)  $0.00 
Diluted (loss) income per common share  $(0.00)  $0.00 
           
Basic weighted average common shares outstanding   78,599,195    68,485,426 
Diluted weighted average common shares outstanding   78,595,195    103,414,928 

 

See Accompanying Notes to Consolidated Financial Statements

 

  F-4 

 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

   Preferred Stock   Common Stock   Common Stock
Payable
       Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
                                     
Balance, December 31, 2015   425,000   $425    86,825,138   $8,681    195,610   $20   $8,665,565   $(8,861,075)  $(186,384)
                                              
Conversion of related party interest to stock           124,326    13            557        570 
                                              
Return of prior employee compensation           (28,403,252)   (2,840)   (56,669)   (6)   2,846         
                                              
Stock issued for employee compensation           360,000    36            35,964        36,000 
                                              
Common stock issued for royalty payable           10,000,000    1,000            87,850        88,850 
                                              
Net Income                               230,026    230,026 
                                              
Balance, December 31, 2016   425,000    425    68,906,212    6,890    138,941    14    8,792,782    (8,631,049)   169,062 
Payment of related party debt in stock           4,587,190    459            62,844        63,303 
                                              
Shares issued for services            8,000,000    800              99,200         100,000 
                                             
Unit offering           16,699,315    1,670            190,372        192,042 
                                              
Beneficial Conversion Features                                 25,000         25,000 
                                              
Net loss                               (248,744)   (248,744)
                                              
Balance, December 31, 2017   425,000   $425    98,192,717   $9,819    138,941   $14   $9,170,198   $(8,879,793)  $300,663 

 

See Accompanying Notes to Consolidated Financial Statements

 

  F-5 

 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Years Ended December 31, 
   2017   2016 
         
Cash flows provided by operating activities:          
Net (loss) income  $(248,744)  $230,026 
           
Adjustments to reconcile net (loss) income to net cash provided by operating activities:          
Depreciation and amortization   29,410    36,391 
Gain on cancellation of debt       (234,678)
Shares issued for interest expense – related party       570 
Shares issued for services   100,000    36,000 
Amortization of debt discount   2,060     
           
Changes in operating assets and liabilities:          
Change in accounts receivable, net   (3,468)   58,448 
Change in accounts receivable - related parties   12,558    (26,969)
Change in inventory   (150,366)   (18,307)
Change in prepaid expenses and other current assets   (167,251)   (26,325)
Change in other current assets - related parties       3,020 
Change in accounts payable and accrued liabilities   69,160    65,070 
Change in customer deposits and unearned revenue   65,672    6,339 
Change in other liabilities   (34,854)   (54,937)
Change in royalties payable - related parties   (937)   (88,306)
Net cash (used in) provided by operating activities   (326,760)   75,192 
           
Cash flows from investing activities:          
Purchase of fixed assets       (7,587)
Net cash used in investing activities       (7,587)
           
Cash flows from financing activities:          
Proceeds from unit offering   192,042     
Principal reduction on convertible debentures        (472)
Principal payments on note payable   (6,133)   (6,108)
Proceeds from convertible notes payable   100,000     
Principal payments on note payable - related parties       (11,098)
Net cash provided by (used in) financing activities   285,909    (17,678)
           
Net change in cash   (40,851)   49,927 
           
Cash, beginning of period   191,749    141,822 
           
Cash, end of period  $150,898   $191,749 

 

See Accompanying Notes to Consolidated Financial Statements

 

  F-6 

 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Year Ended December 31, 
   2017   2016 
         
Supplemental disclosures of cash flow information:          
Cash paid for interest  $    $976
           
Cash paid for income taxes  $   $ 
           
Supplemental disclosures of non-cash investing activities and future operating activities:          
           
Common shares issued for services  $50,000   $ 
           
Common shares issued in payment of related party payable  $63,303   $ 
           
Conversion of royalties payable to stock – related party  $   $88,306 
           
Initial debt discount on convertible notes  $25,000   $ 

 

See Accompanying Notes to Consolidated Financial Statements

 

  F-7 

 

 

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Description of business and summary of significant accounting policies

 

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

 

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

 

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.

 

  F-8 

 

 

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.

 

  F-9 

 

 

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.

 

  F-10 

 

 

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.

 

  F-11 

 

 

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.

 

  F-12 

 

 

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.

 

  F-13 

 

 

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.

 

  F-14 

 

 

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.

 

  F-15 

 

 

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