PART
I
General
BWMG,
through its wholly owned subsidiaries, designs, tests, and manufactures tankless dive systems, yacht-based SCUBA air compressor
and nitrox generation fill systems and acts as the exclusive distributor for North and South America for Lenhardt & Wagner
GmbH (“L&W”) compressors in the high-pressure breathing air and industrial gas markets. Our wholly owned subsidiaries
do business under their respective trade names on both a wholesale and retail basis from our headquarters and manufacturing facility
in Pompano Beach, Florida. Our wholly owned subsidiaries and related product lines are as follows:
Legacy
SSA Products
This
segment represents our surface supplied air (SSA) product line. Trebor began its business making surface supplied
air diving systems in the late 1960s. Our Brownie’s Third Lung systems have long been a dominant figure in gasoline powered,
high-performance, and now the battery powered surface supplied air diving 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. After years of inventing, testing and development, in 2010 we introduced our variable-speed battery powered hookah system
which provides divers with gasoline-free all day shallow diving experiences. These systems 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.
The
Legacy SSA segment has experienced growth in units sold for fiscal 2020 as compared to fiscal 2019, as we work to expand our dealer
network and the breadth of product that each of the dealers provide. By all appearances, in our business segment, the COVID-19
pandemic has forced the consumer to re-evaluate recreation as a family and gravitate toward activities that can be pursued together
and safely.
During
fiscal 2020 we began focusing on breaking the seasonality curve currently experienced by this segment and began aggressive marketing
campaigns in geographic regions that experience diving season when the US market is slowing down due to weather. Additionally,
we began to pursue more aggressively the boat builder market to offer our Legacy SSA systems as an option on newly built boats,
expanding our market beyond the traditional consumer markets for our products.
Our
Legacy SSA products include:
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Tankless Dive Systems: The Company produces a line of tankless dive products, commonly called hookah or recreational surface
supplied air systems. These systems allow one to four divers to enjoy the marine environment up to a depth of up to 45 feet without
the bulk and weight of conventional SCUBA gear. The removal of barriers to entry into the sport of diving and the reduction of
complicated and bulky SCUBA gear invites a broader range of the general public to participate more actively and enjoyably at their
own pace and schedule. The design of our product also reduces the effort required for both its transport and continued use while
exploring, cruising or traveling.
A
line of land-based systems is available for light-duty commercial applications that demand portability and performance. In addition
to the gasoline-powered units and the variable speed battery powered units, a series of AC 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 aquatic maintenance and marine environments.
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BIAS (Boat Integrated Air Systems): The Company developed several tankless products and complimentary accessories
that it believes makes boat diving even easier. The BIAS battery powered tankless kit allows boat builders, dealers and end users
to seamlessly install a pre-packaged kit directly into the boat. The E-Reel advances this idea by adding a level-winding battery
powered hose reel system to provide compact storage of up to 150 feet of hose. Boaters can perform their own in-water maintenance
and inspections, or just dive for enjoyment. In addition to supplying air to divers, BIAS is useful for supporting air horns,
inflating boat fenders/water toys, activating pneumatically operated doors, and more. The company strategy is to align the easy
to install, complete kit packages with boat builders, dealer and end users through a vertically targeted sales and marketing program
initiative starting summer of 2020.
Ultra
Portable Tankless Dive Systems
In
the continued expansion of our business, in December 2017, we formed a wholly-owned subsidiary BLU3, to develop and market a next
generation electric surface supplied air diving systems electric shallow dive system that is completely portable to the user.
The BLU3 line currently consists of two models targeting specific performance levels and price points – NEMO and NOMAD.
The first generation, NEMO, began shipping in the fourth quarter of 2019, and through December 31, 2020 we have shipped
in excess of 1,200 units.
Currently,
NOMAD is nearing the end of the design phase and it is expected to be in full production during the Spring,
2021. This product will expand the user’s dive capability to over 30 feet and continue to drive the vertical integration
of the diving experience.
The
NEMO has attracted a wide audience of users and is sold through a dealer network that has expanded to more than 20 countries.
The products have gotten significant exposure via its marketing partners, who share their user experiences on YouTube, Instagram,
Facebook and Tik Tok. These users have expanded the market for BLU3 outside of the traditional dive industry to the metal detector
and treasure hunting segments. BLU3 takes the NEMO to market via its online store, its dealer network, and a growing following
on Amazon.
The
BLU3 product lines are changing the way that people get into the water and explore the next atmosphere. The units are ultra-portable
and can travel with the consumer to their adventures, wherever they may be.
High
Pressure Gas Systems
Through
this segment, we design, manufacture, sell and install SCUBA tank fill systems for on-board yacht use under the brand “Yacht-Pro™”.
Our systems provide complete diving solutions for yachts, including 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. We also design 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. Our light duty compressor,
the new Yacht Pro Essential is specifically designed as a turn-key kit for the boat builder optimized to integrate to onboard
power systems and 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
Variable Speed Frequency Drive reducing the initial start-up power demand typically associated with high pressure compressor systems.
In
August 2017, we entered into an Exclusive Distribution Agreement with L&W. 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. Our wholly-owned subsidiary BHPCS, is party to the agreement. Through BHPCS we are conducting business direct to
end-users and establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive,
fire, CNG, military, scientific, recreational and aerospace industries under the brand name “L&W Americas/LWA”.
We have experienced encouraging penetration in the diving and yachting markets. Our objective is to maintain that momentum and
expand into other markets including industrial gases, fuel gases and specialty gas applications. Our goal is 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.
L&W
is one of the leading product development companies in the global market of high-pressure gas applications. We are exclusively
developing a sales, distribution and service capability to assist L&W with completing a worldwide network of L&W’s
agencies and service centers to further leverage the innovation and value inherent to L&W products.
During
the last three decades the range of L&W products has advanced as new markets developed by leveraging streamlined and vertically
integrated capabilities. In addition to breathing air compressors and related peripheral equipment, L&W also offers compressors,
storage and purification systems to meet the high-pressure requirements for natural gas filling stations. High-pressure inert
gases such as argon, helium or nitrogen for industrial applications including welding and laser cutting, and for general laboratory
use are also among the L&W product and custom engineering capabilities.
During
2021 we look to expand this segment of our business’s
customer base beyond that of the diving community. We believe the product lines from Lenhardt & Wagner GmbH, will allow
LW Americas to put high quality, competitive products into the first responder and industrial market that utilize compressed air
for many applications. 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.
Diving
and Boating Markets
The
diving and boating markets are key to the expansion of the Company’s brands. 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 SCUBA divers for revenue. According to industry data, many newly certified SCUBA divers fail to continue
in the sport. Brownie’s and many industry professionals believe this is the result of divers progressing from zero or limited
underwater environment experience to full SCUBA too rapidly. We believe that introducing novices to the 5 to 10 foot dive environment
through our Ultra-Portable Tankless Dive systems first with limited equipment encumbrances is key to building a sustainable participant
base of comfortable. Brownie’s Third Lung and BLU3 are creating product, training and easy access “resort” based
dive solutions to address the emerging 10 foot to 30 foot diving market.
We
continue to work with boaters to make diving easy and enhance their on-water experience by exploiting the many ways our subsidiaries’
innovation can add to their investment in boating.
Intellectual
Property
Trade
Names
The
Company either owns or has licensed from entities in which Robert M. Carmichael, our 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, YachtPro, NitroxMaker™, BLU3, diveBLU3.com, BLU3 Nemo, BLU3-Vent, HELO, RES, fast float rescue harness, tankfill.com,
browniestankfill, browniestankfill.com, browniespublicsafety.com, browniespublicsafety, Peleton Hose System, Twin-Trim, Kayak
Diving Hose Kit, Bell Bottom Flag Bag, Brownie’s Dogsnare, SHERPA, BC Keel, Garment integrated personal flotation device
(GI-PFD).
BHPCS
operates under the published name LW Americas and LWA.
Patents
The
Company owns multiple patents issued, pending, and in process related to the following:
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Water
safety and survival;
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Garment
integrated flotation devices or life jacket;
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Collar
for improved life jacket performance;
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Combined
signaling and ballast for personal flotation device;
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Inflatable
dive marker and collection bag;
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Three
dimensional dive flag;
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Novel
dive raft and float system for divers;
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Drop
weight Cummerbelt;
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Buoyancy
compensator;
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Utility
backpack;
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Transport
harness or like garment with adjustable one size component for use by a wide range of individuals; and
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Active
control releasable ballast.
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License
Agreement
In
April 2018 the Company entered into a Patent License Agreement (the “STS Agreement”) with Setaysha Technical Solutions,
LLC (“STS”) pursuant to which the Company licensed certain intellectual property, including patent rights, non-patent
rights and know how from STS for use in our Ultra-Portable Tankless Dive system products. Under the STS Agreement, the Company
paid an initial license fee in April 2018 through the issuance of 759,422 shares of common stock with a fair value of $30,000
which is being amortized on a straight-line basis over its five year term. The STS Agreement further provides for royalties to
be paid based on annual net revenues achieved. In December 2019, the Company entered into Addendum No. 1 to the Patent License
Agreement (“Addendum No. 1”) which amended the payments due upon the first commercial sale of Nemo. In accordance
with Addendum No. 1, $8,250 was paid in cash and $8,250 which was accrued as of December 31, 2019 and paid in 2020.
The Company issued 828,221 shares of common stock with a fair value of $18,635 in satisfaction of $13,500 for the first commercial
sale. The Company accrued $13,828 in December 2019 as royalty payments for the fourth quarter commercial sales of Nemo.
In June 2020, the Company entered into Amendment No. 2 to the Patent License Agreement (“Addendum No. 2”) which set
certain limits and expectations of the assistance from STS related to designing and commercializing certain diving products, and
revised the royalty payments due to STS as consideration for uncompensated services. The Company is obligated to pay STS a minimum
yearly royalty of $60,000, or $15,000 per fiscal quarter, beginning in December 2019 and increasing by 2.15% per year. The minimum
royalty was temporarily increased to $60,000 for fiscal years 2022, 2023 and 2024, with a fourth quarter true up against earned
royalties. Royalty recorded in relation to this agreement totaled $53,929 and $48,963 for the years ended December 31, 2020 and
2019.
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.
In May 2020, we engaged a professional marketing agency to modernize the Brownie’s Third Lung customer acquisition capabilities
with Sea Lion and BIAS products as key objectives. Through the fiscal year end, the marketing firm continues to
develop and implement strategies to leverage our existing browniedive.com web site and related support materials for
the current summer season while a completely new digital strategy is being developed in time for the fall season. Leveraging the
range of new battery powered tankless diving technologies and boat builder OEM kits to move the product reach beyond the current
regional scope to a global brand is central to the goal.
Tradeshows
In
2020, the Company was represented at The Fort Lauderdale International Boat Show. Due to the COVID-19 pandemic, most tradeshows
in 2020 were cancelled. For 2021, the company’s product will be directly or indirectly represented at the Palm Beach Boat
Show, The Annapolis Motor and Sailing Shows, The Fort Lauderdale Boat show, and Diving Equipment and Manufacturing show.
Websites
The
parent Company’s main website is www.browniesmarinegroup.com. Each of our subsidiaries and certain of our products have
a unique website: www.BrownieDive.com, www.diveBLU3.com, www.LWAmericas.com, www.Tankfill.com, Additionally,
many of our products are marketed on some of our customers’ websites. In addition to these websites, numerous other websites
have quick links to the Company’s website. Our products are available both domestically and internationally. Internet sales
and inquiries are also supported by the Company.
Distribution
Our
products are distributed to our customers primarily by common carrier.
Product
Research and Development (R&D)
We
continuously work to provide our customers with both new and improved products. We offer research and development services to
not only the related entities we license our patents and trademarks from, but also to other customers as well. R&D services
for customers and the related entities are invoiced in the normal course of business. In addition, we are working on internal
research and development projects as well as collaborating with others toward the goal of developing some of our own patentable
products. Research and development costs for 2020 and 2019, were $115,156 and $67,161, respectively.
Government
Regulation
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
have historically been predominantly a wholesale distributor to retail dive stores, marine stores, boat dealers and builders.
This includes more than 100 active independent Brownie’s and L&W dealers. In response to modern trends influenced by
the “Amazon affect” over the last few years and now more recently with COVID-19, a greater mix of consumer direct
engagement is occurring. We anticipate the continuation of consumer direct sales growth stimulated in part by the new marketing
efforts and broader consumer appeal of the battery-powered tankless dive systems. 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
M. Carmichael, the Company’s Chief Executive officer, and three companies owned by him. Combined sales to these six entities
for 2020 and 2019, represented 18% and 22%, respectively, of total net revenues.
The
majority of L&W high pressure compressors and NitroxMaker™ systems have been sold to commercial dive stores, dive operators
(resorts and liveaboard dive boats) and to law enforcement agencies.
Sales
of YachtPro™ compressor systems have been split between retail sales directly to consumers and wholesale sales to OEM boat
builders/resellers/brokers.
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 innovation, lifestyle, fair prices, shopping convenience,
the variety of available products, knowledgeable and prompt customer service, rapid and accurate fulfillment of orders. We currently
recognize one significant competitor in gasoline powered hookah sales and a variety of competitors in high-pressure tankfill systems
sales. Products from the gasoline powered hookah competitor and those from one of the tankfill competitors appear to be very similar
to ours at first glance, but seemingly lack forward moving innovation. The competitors in the high pressure tankfill market are
typically focused on traditional dive stores and fire department air service with several being large multi-national companies.
We compete with the large multi-national companies by constantly adapting to the yacht market or Nitrox integration. Currently,
there is limited competition for our BLU3, Sea Lion and BIAS systems products.
Overall,
we are operating in a moderately competitive environment. The price structure for all the products we distribute compares favorably
with the majority of our competitors based on quality and available features. Our key advantage is in our ability to create new
products that are separating us from others in the market and in some cases creating new markets.
Human
Capital
As
of December 31, 2020, our full-time count for our and our subsidiaries’ employees was 20. Additionally, we employ
3 full time contract employees. To date, we have not experienced any work stoppages as a result of labor disputes, and we consider
our relationship with our employees to be good. None of our employees are subject to collective bargaining agreements or represented
by unions. Our key human capital objectives in managing our business include attracting, developing and retaining top talent.
We
want to attract a pool of diverse and innovative candidates and support their career growth once they become employees. In addition,
we seek to hire based on talent rather than solely on educational pedigree.
Seasonality
Our
product lines have historically been seasonal in nature in the U.S. The peak season for Legacy Products is the second and third
quarters of the year. The peak season for High Pressure products is the fourth and first quarters of the year. We are able to
shift cross-trained factory and warehouse personnel between the two product categories as needed to flatten the seasonal impact.
The new BLU3 product line may emerge as less seasonally influenced enterprise due to the global appeal. The Company is able to
minimize the down time normally associated with seasonal business cycles. The Company continues to address the seasonality of
the business by expanding its reach beyond the traditional markets in the U.S. and reaching to other areas of the world
that may somewhat offset the seasonality.
Additional
information
Information
on the history of our company can be found in Note 1 to the notes to our consolidated financial statements appearing later in
this report.
We
file annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities
and Exchange Commission (“SEC” or the “Commission”). The Commission also maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the Commission.
Other
information about the Company can be found on our website www.browniesmarinegroup.com. Reference in this document to that
website address does not constitute incorporation by reference of the information contained on the website.
Investing
in our common stock involves risks. In addition to the other information contained in this report, you should carefully consider
the following risks before deciding to purchase our common stock. The occurrence of any of the following risks might cause you
to lose all or a part of your investment, and certain of these risks may be further exacerbated by the continuing impact of the
COVID-19 pandemic on the Company and our industry. Some statements in this report, including statements in the following risk
factors, constitute forward-looking statements. Please refer to “Cautionary Statement Regarding Forward-Looking Statements”
for more information regarding forward-looking statements.
FINANCIAL
RISKS
We
have a history of losses.
We
incurred net losses of $1,351,619 and $1,421,740, respectively, for 2020 and 2019. At December 31, 2019 we had an accumulated
deficit of $12,956,137. While our revenues increased 53.5% for 2020 from 2019, and our gross profit margin increased from 15.1%
in 2019 to 32.1% in 2020, our gross profit is not sufficient to cover our operating expenses of $2,797,449 and $1,732,093,
respectively, which includes non-cash stock compensation expenses of $1,408,844 and $474,954 for the year
ending December 31, 2020 and 2019, respectively. In 2020, our selling, general and administrative expenses, or “SG&A”,
increased 61.1% from 2019. There are no assurances that we will be able to increase our revenues to a level which supports profitable
operations and provides sufficient capital to pay our operating expenses and other obligations as they become due.
Our
auditors have raised substantial doubts as to our ability to continue as a going concern.
Our
consolidated financial statements appearing later in this report have been prepared assuming we will continue as a going concern.
We have sustained recurring losses from operations and have used approximately $556,000 in net cash in our operation in
2020 as compared to approximately $510,000 in 2019. These factors, among others, raise substantial doubt about our ability to
continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty. Our principal sources of liquidity are sales of equity and debt securities. In addition, in April 2020 we
obtained an unsecured $159,600 PPP Loan. We do not have any firm commitments to raise additional working capital. As we are a
small company who stock is quoted on the OTC Markets, we expect to encounter difficulty in raising working capital upon terms
and conditions satisfactory to us, if at all.
We
rely on revenues from related parties.
As
discussed in detail later in this report, we generate revenues from sales to related parties, which accounted for 18.4%
of our net revenues in 2020 and 22.3% of our net revenues in 2019. The loss of revenues from these related parties would have
a material adverse impact on our business, results of operations and financial condition in future periods.
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.
BUSINESS
AND OPERATIONAL RISKS
We
are dependent upon certain key members of management.
Our
success will depend to a significant degree on the abilities and efforts of our senior management. Moreover, our success depends
on our ability to attract, retain and motivate qualified management, marketing, technical and sales personnel. These people are
in high demand and often have competing employment opportunities. The labor market for skilled employees is highly competitive
and we may lose key employees or be forced to increase their compensation to retain these people. Employee turnover could significantly
increase our recruitment, training and other related employee costs. The loss of key personnel, or the failure to attract qualified
personnel, could have a material adverse effect on our business, financial condition or results of operations.
We
require additional personnel and could fail to attract or retain key personnel.
Our
continued growth depends on our ability to attract and retain
an experienced Chief Financial Officer, and additional skilled associates. We are currently utilizing the services of two
professional consultants to assist our Chief Executive Officer and Chief Financial Officer with finance and operations.
The loss of the services of these consultants prior to our ability to attract and retain an experienced Chief Financial
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 to obtain and defend our intellectual property, including patent protection for our products and processes,
preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing the proprietary
rights of third parties, both in the United States and in other countries. Despite our efforts to protect our intellectual proprietary
rights, existing copyright, trademark and trade secret laws afford only limited protection.
Our
industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property
rights. Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future.
We
rely on third party 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. Certain of our product components are manufactured in China. We have
experienced delays and also expect continued delays in our supply chain, including component products, which are manufactured
in China. Our senior management will continue to monitor our situation on a daily basis, however, we expect that these factors
and others we have yet to experience will materially adversely impact our company, its business and operations for the foreseeable
future.
We
dependent on consumer discretionary spending.
The
success of 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.
Our
failure to adequately protect personal information could have a material adverse effect on our business.
A
wide variety of local, state, national, and international laws, directives and regulations apply to the collection, use, retention,
protection, disclosure, transfer, and other processing of personal data (including with respect to the European Union’s
General Data Protection Regulation and U.S. state laws such as the California Consumer Privacy Act). These data protection and
privacy-related laws and regulations continue to evolve and may result in ever-increasing regulatory and public scrutiny and escalating
levels of enforcement and sanctions and increased costs of compliance. Our failure to comply with applicable laws and regulations,
or to protect such data, could result in enforcement actions against us, including fines, imprisonment of company officials and
public censure, claims for damages by end-customers and other affected individuals, damage to our reputation and loss of goodwill
(both in relation to existing end-customers and prospective end-customers), any of which could have a material adverse effect
on our operations, financial performance, and business. Changing definitions of personal data and personal information, within
the European Union, the United States, and elsewhere may limit or inhibit our ability to operate or expand our business, including
limiting strategic partnerships that may involve the sharing of data. The evolving data protection regulatory environment may
require significant management attention and financial resources to analyze and modify our information technology infrastructure
to meet these changing requirements all of which could reduce our operating margins and impact our operating results and financial
condition.
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.
The
manufacture and distribution of recreational diving equipment could result in product liability claims.
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. 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.
The
worldwide impact from the COVID-19 pandemic may negatively impact our business.
While
we have been relatively successful in navigating such impact to date, we have previously been affected by temporary manufacturing
closures, and employment and compensation adjustments. There are also ongoing related risks to our business depending on the progression
of the pandemic, and recent trends in certain regions have indicated potential returns to limited or closed government functions,
business activities and person-to-person interactions. Global trade conditions and consumer trends may further adversely impact
us and our industries. For example, pandemic-related issues have exacerbated port congestion and intermittent supplier shutdowns
and delays, resulting in additional expenses to expedite delivery of critical parts. Similarly, increased demand for personal
electronics has created a shortfall of microchip supply, and it is yet unknown how we may be impacted. We cannot predict the duration
or direction of current global trends from this pandemic, the sustained impact of which is largely unknown, is rapidly evolving
and has varied across geographic regions. Ultimately, we continue to monitor macroeconomic conditions to remain flexible and to
optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements
globally and deploy our production, workforce and other resources accordingly.
SHAREHOLDER
RISKS
The
issuance of shares of our common stock upon conversion of outstanding 6% secured convertible notes may cause immediate and substantial
dilution to our existing shareholders. We may not have sufficient funds to repay the notes at maturity.
We
presently have $100,000 principal amount of 6% secured convertible notes outstanding which were originally issued in 2017. These
securities are convertible at the option of the holders in shares of our common stock at a conversion price of $0.01. The issuance
of shares of our common stock upon any conversion of the 6% secured convertible notes will result in dilution to the interests
of other shareholders. In addition, these notes mature on December 31, 2021. There are no assurances we will have sufficient
funds available to satisfy the notes at maturity, or that one or both of the holders will elect to convert the notes into shares
of our common stock. Each of these notes are secured by an amount of our assets sufficient to satisfy the obligations under the
note. If we were to default under the repayment of the note, the noteholder could seek to foreclose on a portion of our assets
which would materially adversely impact our business as it is currently conducted.
The
issuance of shares of our common stock upon exercise of our outstanding options may cause immediate and substantial
dilution to our existing shareholders.
We
presently have vested and unvested options that if exercised
would result in the issuance of an additional 199,730,020 shares of our common stock. The issuance of shares upon exercise
of options will result in dilution to the interests of other shareholders.
Our
common stock may be affected by limited trading volume and may fluctuate significantly.
Our
common stock is quoted on the OTCQB tier of the OTC Markets. There is a limited public market for our common stock and there
can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our
shareholders’ ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be
more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in
the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without
regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results
and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate
substantially.
Our
company is a voluntary filer with the Securities and Exchange Commission and in the event that we cease reporting under the Exchange
Act, investors would have limited information available to them about the company.
While
we are voluntarily file reports with the SEC under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), we do not have a class of securities registered under Section 12(g) of the Exchange Act. To the extent that our duty
to file Exchange Act reports has automatically suspended under Section 15(d) of the Exchange Act, as a voluntary filer, we may
elect to cease reporting under the Exchange Act at such time which would limit the information available to investors and shareholders
about the company.
Our
common stock is deemed to be “penny stock,” which may make it more difficult for investors to sell their shares due
to suitability requirements.
Our
common stock is deemed to be “penny stock” as that term is defined under the Exchange Act . Penny stocks generally
are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges.
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.
|
Item
1B.
|
Unresolved
Staff Comments
|
Not
applicable to smaller reporting companies.
Our
Pompano Beach, Florida facilities are comprised of two adjoining properties totaling approximately 16,566 square feet of leased
space the bulk of which is factory and warehouse space. Terms of the initial lease covering approximately 8,541 square feet included
a 37-month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month
over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e., common areas maintenance),
subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on
October 1, 2017, extending the term for an additional 84 months, expiring September 30, 2024. The base rent was increased to $4,626
per month with a 3% annual escalation throughout the amended term.
On
November 11, 2018, the Company entered a new lease agreement for an additional 8,025 square feet adjoining its existing facility in Pompano
Beach, Florida. Terms of the new lease include a 69-month term; a $6,527 security deposit; initial base rent of approximately $4,848
per month escalating at 3% per year during the term of the lease plus Florida state sales tax and payment of 10.11% of the building’s
annual operating expenses (i.e., common area maintenance) subject to adjustment as provided in the lease.
We
believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity
to meet demand for the foreseeable future.
|
Item
3.
|
Legal
Proceedings.
|
From
time to time the Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business, including
matters relating to product liability claims. Currently, the Company is not subject to any legal proceedings.
|
Item
4.
|
Mine
Safety Disclosure.
|
Not
applicable to our company.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Description of business and summary of significant account policies
Description
of business –Brownie’s Marine Group, Inc., a Florida corporation (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., a Florida corporation organized in 1981 (“Trebor”), and manufactures and sells high pressure air and industrial compressor
packages (“Legacy SSA Products”) through its wholly owned subsidiary Brownie’s High Pressure Compressor Services, Inc.,
a Florida corporation organized in 2017 (“BHPCS”). In addition, in December 2017, the Company formed BLU3, Inc., a
Florida corporation organized in 2017 (“BLU3”), to develop and market innovation electric shallow dive systems (“Ultra
Dive Systems”). When used herein, the “Company” or “BWMG” includes Brownie’s Marine
Group, Inc., and our wholly-owned subsidiaries Trebor, BHP and BLU3.
Basis
of Presentation – The consolidated financial statements of the Company have been prepared in accordance with the accounting
principles generally accepted in the United States of America (“GAAP”).
Definition
of fiscal year – The Company’s fiscal year end is December 31.
Principles
of Consolidation -The consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor,
BHP and BLU3. 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.
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 issuance of these financial statements. We incurred net losses for the years ended December 31, 2020 and 2019 of
$1,351,619 and $1,421,740, respectively. The Company had an accumulated deficit as of December 31, 2020 of $12,956,137.
On
March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration
and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying
degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness.
These measures have had a significant adverse impact upon many sectors of the economy, including retail commerce.
While
we are not able to estimate the ultimate impact of the COVID-19 pandemic on our financial condition and future results of operations,
depending on the prolonged impact of the COVID-19 outbreak, this situation has had a significant impact on one of our operating
companies in our reported results of operations for the year ended December 31, 2020. The extent to which the coronavirus
impacts our results and financial condition, however, will depend on future developments, which are highly uncertain and cannot be predicted,
including new information that may emerge and the actions to contain and treat its impacts, among others.
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 seek to continue to raise additional
funds as needed and is currently exploring alternative sources of financing including commercial banks and other lending institutions.
The Company has issued a number of common shares and has historically issued convertible notes to finance working capital needs
and may continue to seek to raise additional capital through sale of restricted common stock or other securities or obtaining
short term loans. The Company has no firm commitment for any additional capital and there are no assurances it will be successful
in obtaining additional funds.
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.
Cash and equivalents – Only
highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents.
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 estimates that are developed by using standard quantitative
measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific
customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the
potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in
economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company
identifies could have a favorable or unfavorable effect on required reserve balances. The allowances for doubtful
accounts totaled $16,872 and $17,784 at December 31, 2020 and 2019, respectively.
Inventory
– The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value.
Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future
demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory
reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the
Company. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels
or competitive conditions could have a favorable or unfavorable effect on required reserve balances.
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
We
account for our revenues in accordance with the Accounting Standard Codification topic
606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principal is that a company
should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which
the company expects to receive.
We
recognize the sale of products under single performance obligations upon shipment of the units as that is when ownership is transferred
and our performance is completed. Revenues from repair and maintenance activities is recognized when the repairs are completed
and the units have been shipped.
Lease
Accounting
On
January 1, 2019, we adopted ASC 842 and all the related amendments using the modified retrospective method. The
comparative information has not been restated and continues to be reported under the lease accounting standard in effect for those
periods.
The
lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected
the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and
initial direct costs for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts
entered into prior to adoption are leases or contain leases.
We
categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those
leases that would allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance
leases are recorded in property and equipment, net. All other leases are categorized as operating leases. We did not have any finance
leases as of December 31, 2020. Our leases generally have terms that range from three years for equipment and three to six
years for property. We elected the accounting policy to include both the lease and non-lease components of our agreements as a single
component and account for them as a lease.
Lease
liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings
available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord
incentives, plus any direct costs from executing the leases. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful
life or the lease term.
When
we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased
asset, and it is reasonably certain that we will exercise the option, we consider these options in determining the classification
and measurement of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating
expenses over the term of the lease.
Supplemental
balance sheet information related to leases was as follows:
|
Operating Leases
|
|
Classification
|
|
December 31, 2020
|
|
|
December
31, 2019
|
|
|
Right-of-use assets
|
|
Operating lease assets
|
|
$
|
446,981
|
|
|
$
|
545,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
Current operating lease liabilities
|
|
$
|
107,691
|
|
|
$
|
98,060
|
|
|
Non-current lease liabilities
|
|
Long-term operating lease liabilities
|
|
|
339,290
|
|
|
|
446,975
|
|
|
Total lease liabilities
|
|
|
|
$
|
446,981
|
|
|
$
|
545,035
|
|
Lease
term and discount rate were as follows:
|
|
|
December 31, 2020
|
|
|
December 31,
2019
|
|
|
Weighted average remaining lease term (years)
|
|
|
3.69
|
|
|
|
4.68
|
|
|
Weighted average discount rate
|
|
|
5.91
|
%
|
|
|
5.91
|
%
|
The
components of lease costs were as follows:
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Operating lease cost
|
|
$
|
127,650
|
|
|
$
|
131,340
|
|
|
Variable lease cost
|
|
|
5,729
|
|
|
|
4,160
|
|
|
Total lease costs
|
|
$
|
133,379
|
|
|
$
|
135,500
|
|
Supplemental
disclosures of cash flow information related to leases were as follows:
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Cash paid for operating lease liabilities
|
|
$
|
127,654
|
|
|
$
|
151,567
|
|
|
Operating right of use assets obtained in exchange for operating lease liabilities
|
|
$
|
-
|
|
|
$
|
635,613
|
|
Maturities
of lease liabilities were as follows as of December 31, 2020:
|
|
|
Trebor
Industries
Office Lease
|
|
|
BMG
Office
Lease
|
|
|
Copier
|
|
|
Total
lease
payments
|
|
|
2021
|
|
|
61,119
|
|
|
|
61,725
|
|
|
|
8,388
|
|
|
|
131,232
|
|
|
2022
|
|
|
62,953
|
|
|
|
63,576
|
|
|
|
8,388
|
|
|
|
134,917
|
|
|
2023
|
|
|
64,842
|
|
|
|
65,484
|
|
|
|
2,796
|
|
|
|
133,122
|
|
|
2024
|
|
|
49,717
|
|
|
|
50,586
|
|
|
|
—
|
|
|
|
100,303
|
|
|
Total
|
|
|
238,631
|
|
|
|
241,371
|
|
|
|
19,572
|
|
|
|
499,574
|
|
|
Less: Imputed
interest
|
|
|
(25,484
|
)
|
|
|
(25,778
|
)
|
|
|
(1,331
|
)
|
|
|
(52,593
|
)
|
|
Present value of lease liabilities
|
|
$
|
213,147
|
|
|
$
|
215,593
|
|
|
$
|
18,241
|
|
|
$
|
446,981
|
|
Product
development costs – Product development expenditures are charged to expenses as incurred.
Advertising
and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time
production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which
they occur. Advertising and trade show expense incurred for the years ended December 31, 2020 and 2019, totaled $154,642 and $56,047
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, 2020 and 2019 the Company incurred research and development costs of $115,156 and $67,161,
respectively.
Customer
deposits and unearned revenue and returns policy – The Company typically takes a minimum 50% deposit against custom
and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery,
shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted,
nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as
stated on each sales invoice. Customer deposits and unearned revenue totaled $20,353 and $121,208 at December 31, 2020 and 2019,
respectively.
Warranty
policy – Under the provisions of the Financial Accounting Standards Board (“FASB”) ASC 460, Guarantor’s
Guarantees, the Company accrues a liability for estimated warranty policy costs based on standard quantitative measures based
on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation
of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs
associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product
quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.
The Company provides our customers with an industry standard one year warranty on systems sold and recognizes a warranty reserve
based on gross sales multiplied by the historical warranty expense return rate. The warranty reserve
charged to cost of net revenues and is included in accrued expenses and is deemed sufficient to absorb any material or labor costs that
might be incurred on sales recorded during the period. The Company recorded a reserve for warranty work of $13,680 and $13,695
at December 31, 2020 and 2019 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.
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.
During
the years ended December 31, 2020 and 2019, the Company recognized share based compensation with a fair value of $550,149 and
$342,890, respectively.
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, 2020, and 2019, the carrying amount of cash, accounts receivable, accounts receivable – related parties, accounts
payable and accrued liabilities, accounts payable-related parties, customer deposits and unearned revenue, other liabilities,
loans payable and convertible debentures, approximate fair value because of the short maturity of these instruments.
Loss
per common share – Basic loss per share excludes any dilutive effects of options, warrants and convertible securities.
Basic loss per share is computed using the weighted-average number of outstanding common shares during the applicable period.
Diluted loss per share is computed using the weighted average number of common and dilutive common stock equivalent shares
outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.
At December 31, 2020 and December 31, 2019, 210,500,305 and 98,498,711, respectively, potentially dilutive shares were
not recognized as their inclusion would be anti-dilutive. These shares reflect shares potentially issuable under convertible note
agreements, outstanding warrants, outstanding stock options and the conversion of preferred stock.
New
accounting pronouncements
The
Company has reviewed other ASU’s and has noted that they will have no material impact on its financial statements.
Note
2. Inventory
Inventory
consists of the following as of:
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
408,841
|
|
|
$
|
314,529
|
|
|
Finished goods
|
|
|
454,950
|
|
|
|
404,579
|
|
|
Total Inventory,
net
|
|
$
|
863,791
|
|
|
$
|
719,108
|
|
As
of December 31, 2020 and 2019, the Company recorded reserves for obsolete or slow moving inventory of approximately
$227,657 and $175,957 respectively.
Note
3. Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following:
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Prepaid inventory
|
|
$
|
85,028
|
|
|
$
|
48,523
|
|
|
Prepaid expenses
and other current assets
|
|
|
26,136
|
|
|
|
-
|
|
|
Total prepaid
expenses and other current assets
|
|
$
|
111,164
|
|
|
$
|
48,523
|
|
Note
4. Property and Equipment, Net
Property
and equipment consist of the following as of:
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Tooling and equipment
|
|
$
|
233,839
|
|
|
$
|
235,356
|
|
|
Computer equipment and software
|
|
|
27,469
|
|
|
|
27,469
|
|
|
Vehicles
|
|
|
79,557
|
|
|
|
44,160
|
|
|
Leasehold
improvements
|
|
|
43,779
|
|
|
|
43,779
|
|
|
Total property and equipment
|
|
|
384,644
|
|
|
|
350,764
|
|
|
Less: accumulated
depreciation and amortization
|
|
|
(241,231
|
)
|
|
|
(247,687
|
)
|
|
Total property and equipment, net
|
|
$
|
143,413
|
|
|
$
|
103,077
|
|
Depreciation
and amortization expense totaled $21,005 and $9,282 for the years ended December 31, 2020 and 2019, respectively.
Note
5. Other Assets
Other
assets at December 31, 2020 of $13,649 consisted of refundable deposits of $6,649 and an unamortized license fee of $7,000. Other
assets at December 31, 2019 of $20,149 consisted of refundable deposits of $6,649 and an unamortized license fee of $13,500.
Note
6. Customer Credit Concentrations
The
Company sells to three entities owned by the brother of Robert M. Carmichael and three companies owned by Robert M. Carmichael as further
discussed in note 7 - Related Parties Transactions. Combined sales to these six entities for the years ended December 31, 2020 and 2019,
represented 18% and 22%, respectively, of total net revenues.
In
excess of 90% of our total net revenues are made up of product sales to customers within the state of Florida .
Note
7. Related Party Transactions
The
Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys,
companies owned by the brother of Robert M. Carmichael. 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, 2020 and 2019, totaled
$821,474 and $653,315, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach
Divers, and Brownie’s Yacht Toys at December 31, 2020, was $29,443, $6,643, and $8,237, respectively. Accounts receivable
from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31,
2019, was $28,555, $10,914, and $4,973, respectively.
The
Company sells products to Brownie’s Global Logistics, LLC. (“BGL”) and 940 Associates, Inc. (“940 A”),
entities wholly-owned by Robert M. Carmichael. 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 the Company’s strategic partners. Strategic partner terms on a per order
basis include promotion of BWMG’s technologies and “Brownie’s” brand, offered only on products or services not
offered for resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services. BGL
is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and “Brownie’s” brand
in the yachting and exploration community world-wide through its operations. Combined net revenues from these three entities for years
ended December 31, 2020, and 2019, were $16,943 and $9,427, respectively. In addition, from time to time Mr. Carmichael purchases products
from us for his personal use. He either pays the amount at the time of purchase or we provide him a courtesy account which he settles
from time to time. Accounts receivable from BGL, 940 A and Mr. Carmichael totaled $23,321, and $4,230, which is net of
credit memo of $14,944 for 940 A at December 31, 2020, and December 31, 2019, respectively.
The
Company had accounts payable to related parties of $102,360 and $263,544 at December 31, 2020 and 2019, respectively. The balance
payable at December 31, 2020 was due to BGL.
The
Company has Exclusive License Agreements with 940 A to license the trademark “Brownies Third Lung”, “Tankfill”,
“Brownies Public Safety” and various other related trademarks as listed in the agreement. This Exclusive License Agreement
provides that the Company will pay 940 A 2.5% of gross revenues per quarter as a royalty. Total royalty expense for the years ended December
31, 2020 and 2019, totaled $67,808 and $50,642, respectively.
Effective
July 29, 2019 the Company agreed to pay the members of the Company’s Board of Directors, including Mr. Carmichael, a management
director, an annual fee of $18,000 for serving on the Company’s Board of Directors for the year ending December 31, 2019.
As of December 31, 2019, the Company has accrued $49,500 in Board of Directors’ fees. On August 21, 2020 the Company’s
Board of Directors approved the continuation of the 2019 Board compensation policy for the year ending December 31, 2020. As of
December 31, 2020, the Company had accrued an additional $36,000 in Board of Directors’ fees.
On
August 1, 2017, Mr. Mikkel Pitzner was appointed to serve on the Company’s Board of Directors. The Company agreed
to pay Mr. Pitzner an annual fee of $6,000 and issued Mr. Pitzner 5,000,000 shares of restricted common stock under a consulting
agreement expiring in January 2019. During the year ended December 31, 2019 the Company issued 3,333,333 shares of restricted
common stock with a total fair value of $62,500. During the year ended December 31, 2019, the Company recognized $31,250 of stock
compensation pursuant to this agreement. Commencing in February 2019, the Company began paying Mr. Pitzner, then a member of the
Company’s Board of Directors, $9,300 per month, inclusive of a $1,300 auto allowance, for consulting services. These payments
were not covered by a written agreement. In August 2019 the agreement with Mr. Pitzner was terminated, and Mr. Pitzner
has been paid in full.
On
August 1, 2017, the Company entered into a six month employment agreement with Blake Carmichael, the son of Robert M. Carmichael,
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 was also entitled to performance bonuses at the discretion of the Board of Directors.
On January 31, 2018, Mr. Carmichael’s written employment agreement expired. He continues with the Company as a full-time
employee and serves as chief executive officer of BLU3. In April 2018, his salary was adjusted to $75,000 per year. There is no
written employment agreement between the Company and Mr. Carmichael.
In
December 2018, the Company issued 20,000,000 shares of common stock to Robert M. Carmichael as an incentive bonus. As the vesting of
the shares was subject to continued employment by Mr. Carmichael through January 2, 2020, for the years ended December 31, 2020, the
Company treated the shares as issued but not as yet outstanding for the twelve months ended December 31, 2019. Expense for the issuance
is being recognized over the full vesting period, and accordingly, the Company recognized stock compensation expense of $1,280 and $188,144
during the years ended December 31, 2020 and 2019. See note 11.
Effective
March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael. The Company purchased several patents
it had previously been paying royalties on and several related unissued patents. In exchange for the purchase, the Company issued
Mr. Carmichael 234 stock options at a $1,350 exercise price expiring ten years from the effective date of grant. The options expired
on March 2, 2019 without being exercised.
On
March 7, 2019 the Company entered into a Subscription Agreement with Mr. Charles F. Hyatt, an accredited investor, pursuant to
which the Company sold a unit of the securities consisting of 50,000,000 shares of common stock and 50,000,000 18 month common
stock purchase warrants exercisable at $0.01 per share (the “Hyatt Warrants”) in consideration of $500,000 in a private
transaction. The Company used the proceeds from the sale for product research and development and working capital purposes. The
Company did not pay any fees or commissions in connection with the sale of the unit. Subsequently, on March 29, 2019 Mr. Hyatt
was appointed to the Company’s Board of Directors to fill a vacancy.
Effective July 29, 2019 the Company issued
options to purchase up to an aggregate of 12,457,142 shares of common stock to Mr. Pitzner. The options were issued pursuant to
a stock option grant agreements and are exercisable at $0.018 per share for a period of five years from the date of issuance,
subject to vesting over a period of six months. The fair value of the options totaled $52,280 using the Black-Scholes option pricing
model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend yield of
0%, iv) expected volatility of 172%. In August 2019 8,304,761 options belonging to Mr. Pitzner were cancelled. Stock option expense
recognized during for the year ended December 31, 2019 was $17,429.
Effective July 29, 2019 the Company issued
options to purchase up to an aggregate of 10,380,952 shares of common stock to Blake Carmichael. The options were issued pursuant
to a stock option grant agreements and are exercisable at $0.018 per share for a period of five years from the date of issuance,
subject to vesting over a period of six months. The fair value of the options totaled $43,582 using the Black-Scholes option pricing
model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend yield of
0%, iv) expected volatility of 172%. Stock option expense recognized during for the years ended December 31, 2020 and 2019 was
$5,362 and $38,212, respectively.
Effective
July 29, 2019 the Company issued Robert M. Carmichael options to purchase up to 20,761,904 shares of common stock. The options were issued
pursuant to a Grant Agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to
vesting over a period of six months. The fair value of the options totaled $87,147 using the Black-Scholes option pricing model with
the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected
volatility of 172%. Stock option expense of $10,274 and $76,423 was recognized during the years ended December 31, 2020
and 2019, respectively.
In January 2020 the Company issued 2,647,065 shares
of common stock in exchange for $45,000 to an accredited investor and daughter of Mr. Charles F. Hyatt, a member of our Board of Directors.
In February 2020 the Company issued 12,500,000
shares of common stock related to the exercise of common stock purchase warrants at an exercise price of $.01, for a total conversion
price of $125,000. The shares were issued to Mr. Hyatt, a member of the Board of Directors.
In April, 2020 the Company issued 10,000,000 shares
of common stock related to the exercise of common stock purchase warrant at an exercise price of $.01 per share. The Company received
proceeds of $100,000 upon such exercise from Mr. Hyatt.
Also, in April 2020 the Company sold an aggregate
of 20,000,000 shares of its common stock at a purchase price $0.025 per share to Mr. Hyatt, resulting in proceeds to the Company of $500,000.
On April 14, 2020 the Company entered into a Non-Qualified
Stock Option Agreement with Mr. Carmichael. Under the terms of the option agreement, as additional compensation the Company granted Mr.
Carmichael an option to purchase up to an aggregate of 125,000,000 shares of the Company’s common stock at an exercise price of
$.045 per share. This option is further detailed in Note 11. During the year ended December 31, 2020 the Company expensed $655,515 in
relation to this option agreement.
On May 21, 2020, the Company issued to Mr. Carmichael a total 725,087 shares with a fair value of $31,904 for
his work on the BLU3-VENT project.
On
August 31, 2020, September 30, 2020 and October 31, 2020 the Company issued and aggregate of 2,795,000 shares
with a fair market value of $45,292 to Christopher Constable on behalf of Brandywine, LLC in accordance with a consulting
contract dated August 10, 2020. This consulting agreement was terminated upon the execution of Mr. Constable’s employment agreement.
On November 5, 2020 the company entered into a
Non-Qualified Stock Option agreement with Christopher Constable as part of his employment agreement. Under the terms of the option agreement,
the Company granted Mr. Constable a 5-year option to purchase 5,434,783 shares of the Company’s common stock at an exercise price
of $.0184, the “Compensation Options”. The Compensation Options were immediately vested. The fair value of the options on
the date of the grant was $106,199 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest
rate of .16%, ii) expected life of 2.5 years, iii) dividend yield of 0%, iv) expected volatility of 341%. Stock option expense recognized
during the year ended December 31, 2020 for this option was $106,890.
Also, on November 5, 2020 the Company entered into a Non-Qualified Option Agreement with Mr. Constable. Under
the terms of this option agreement, as additional compensations, the Company granted an option (the “Bonus Option”) to purchase
up to an aggregate of 30,000,000 shares of the Company’s common stock at an exercise price of $.0184 per share. This option is
further detailed in Note 11. During the year ended December 31, 2020, the company did not book any expense related to this option agreement.
Note
8. Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consists of the following as of:
|
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
Accounts payable trade
and other
|
|
$
|
244,626
|
|
|
$
|
414,422
|
|
|
Accrued payroll and fringe benefits
|
|
|
96,241
|
|
|
|
65,915
|
|
|
Accrued warranty expense
|
|
|
13,680
|
|
|
|
13,695
|
|
|
Accrued payroll taxes and withholding
|
|
|
9,268
|
|
|
|
7,984
|
|
|
Accrued interest
|
|
|
23,162
|
|
|
|
16,662
|
|
|
|
|
$
|
386,977
|
|
|
$
|
518,678
|
|
Balances
due certain vendors are in arrears to varying degrees. The Company is handling all delinquent accounts on a case-by-case basis.
Note
9. Other Liabilities
Other
liabilities consist of the following as of:
|
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
Asset purchase agreement
payable
|
|
$
|
12,857
|
|
|
$
|
12,857
|
|
|
Accrued expenses
|
|
|
2,460
|
|
|
|
16,216
|
|
|
Accrued vendor settlement
|
|
|
-
|
|
|
|
23,176
|
|
|
Accrued Board of Directors fees
|
|
|
85,500
|
|
|
|
49,500
|
|
|
Accrued legal
settlement
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
$
|
100,817
|
|
|
$
|
151,749
|
|
Note
10. Convertible Debentures, and Loans Payable
Convertible
Debentures
Convertible
debentures consist of the following at December 31, 2020:
Origination
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Origination
Principal
Balance
|
|
|
Original
Discount
Balance
|
|
|
Period
End
Principal
Balance
|
|
|
Period
End
Discount
Balance
|
|
|
Period
End
Balance,
Net
|
|
|
Accrued
Interest
Balance
|
|
|
Reg.
|
|
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
4,694
|
|
|
|
(1
|
)
|
|
12/01/17
|
|
12/31/21
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
9,250
|
|
|
|
(2
|
)
|
|
12/05/17
|
|
12/31/21
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
9,218
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,000
|
|
|
$
|
—
|
|
|
$
|
110,000
|
|
|
$
|
23,162
|
|
|
|
|
|
Convertible
debentures consist of the following at December 31, 2019:
Origination
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Origination
Principal
Balance
|
|
|
Original
Discount
Balance
|
|
|
Period
End
Principal
Balance
|
|
|
Period
End
Discount
Balance
|
|
|
Period
End
Balance,
Net
|
|
|
Accrued
Interest
Balance
|
|
|
Reg.
|
|
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
4,194
|
|
|
|
(1
|
)
|
|
12/01/17
|
|
12/31/20
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
6,250
|
|
|
|
(2
|
)
|
|
12/05/17
|
|
12/31/20
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
6,218
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,000
|
|
|
$
|
—
|
|
|
$
|
110,000
|
|
|
$
|
16,662
|
|
|
|
|
|
|
(1)
|
The
Company borrowed $10,000 in exchange for a convertible debenture. The lender at its option may convert all or part of the
note plus accrued interest into common stock at a price of 30% discount as determined from the average four highest closing
bid prices over the preceding five trading days. The Company valued the beneficial conversion feature of the convertible debenture
at $4,286, which was accreted to interest expense over the period of the note. As of February 22, 2021 the noteholder
requested conversion and the note was converted into 422,209 shares at a conversion price of $.035 per share.
|
|
|
|
|
(2)
|
On
December 1, 2017 the Company entered into a $50,000 principal amount 6% secured convertible promissory note, due December
1, 2018, subject to extension. The note is secured with such assets of the Company equal to the principal and accrued interest,
and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor and BHP and the personal guarantee of Robert M.
Carmichael.
|
|
|
|
|
|
The
conversion price under the note initially ranged from $0.02 per share if converted in the first year to $0.125 per share if
converted in year five. The lender may convert at any time until the note 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 2019, the maturity date of the note
was extended for one additional year to December 31, 2019 with a reduction in the conversion price to $0.01 per share. The
Company recorded a loss on extinguishment of debt of $32,000 upon the modification of conversion price. Subsequent to December
31, 2019, the maturity date was further extended to December 1, 2020 and on December 21, 2020, the maturity
date was further extended to December 31, 2021.
|
|
(3)
|
On
December 5, 2017 the Company entered into a $50,000 principal amount 6% secured convertible promissory note, due December
4, 2018, subject to extension. The note is secured with such assets of the Company equal to the principal and accrued interest,
and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor and BHP and the personal guarantee of Robert M.
Carmichael.
|
|
|
|
|
|
The
conversion price under the note initially ranged from $0.02 per share if converted in the first year to $0.125 per share if
converted in year five. The lender may convert at any time until the note 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 2019, the note was extended for one
additional year to December 31, 2019 with a reduction in the conversion price to $0.01 per share. The Company recorded a loss
on extinguishment of debt of $99,000 upon the modification of conversion price. Subsequent to December 31, 2019, the maturity
date was further extended to December 31, 2020 2020 and on December 21, 2020, the maturity date was further
extended to December 31, 2021.
|
Loans
Payable
Gonzales
Note
The
Company entered into a non-interest-bearing loan agreement of $200,000 with Mr. Tom Gonzales on July 1, 2013.The loan is payable
upon demand. During the years ended December 31, 2020 and 2019, the Company repaid $60,000 and $16,572 respectively. The loan
balance was $40,000 and $100,000 as of December 31, 2020 and 2019 respectively.
Hoboken
Note
The
Company entered into a non-interest-bearing loan of $10,000 with Hoboken Street Association on October 15, 2016. The loan balance
was $10,000 as of December 31, 2020 and 2019 respectively. On February 22, 2021 the debt on this note was forgiven as part
of the conversion of the convertible note due to Hoboken Street Association as discussed in the convertible note
section above.
Marlin
Note
On
September 30, 2019 BLU3 financed the purchase of certain plastic molding equipment through Marlin Capital Solutions (“Marlin
Capital”). The loan amount at inception was $96,725. It entered into an Equipment Finance Agreement with Marlin Capital
pursuant to which it agreed to make 36 equal monthly installments of $3,143.80. The Equipment Finance Agreement contains customary
events of default. The loan balance was $60,070 as of December 31, 2020.
|
|
|
Payment
Amortization
|
|
|
2021
|
|
$
|
32,975
|
|
|
2022
|
|
|
27,095
|
|
|
Total Loan Payments
|
|
$
|
60,070
|
|
|
Current portion
of Loan payable
|
|
|
(32,975
|
)
|
|
Non-Current Portion
of Loan Payable
|
|
$
|
27,095
|
|
Mercedes
Benz Note
On
August 21, 2020 the Company executed an installment sales contract with Mercedes Benz Coconut Creek for the purchase of a 2019
Mercedes Benz Sprinter delivery van. The installment agreement is for $55,841 with a zero interest rate payable over 60 months
with a monthly payment of $931 and is personally guaranteed by Mr. Carmichael. The first payment was due on October 5, 2020. The
loan balance as of December 31, 2020 was $52,118.
|
|
|
Payment
Amortization
|
|
|
2021
|
|
$
|
11,168
|
|
|
2022
|
|
|
11,168
|
|
|
2023
|
|
|
11,168
|
|
|
2024
|
|
|
11,168
|
|
|
2025 and thereafter
|
|
|
7,446
|
|
|
Total note payments
|
|
$
|
52,118
|
|
|
Current portion
of note payable
|
|
|
(11,168
|
)
|
|
Non-Current Portion
of notes payable
|
|
$
|
40,950
|
|
PPP
Loan
On
May 12, 2020, we received an unsecured loan from Bank United in the principal amount of $159,600 (the “SBA Loan”),
under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief,
and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration. The intent and
purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses,
with a focus on payroll. As a qualifying business as defined by the SBA, we used the proceeds from this loan to primarily help
maintain our payroll and cover our rent and utilities as we navigated our business through the lockdowns associated with the COVID-19
pandemic until our return to normal operations earlier in 2020.
The
term of the note is two years, though it may be payable sooner in connection with an event of default under the note. The SBA
Loan carries a fixed interest rate of one percent per year, and a monthly payment of $8,983, with the first payment due seven
months from the date of initial cash receipt. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may
be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility
costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. We used
the SBA Loan for qualifying expenses and have applied for forgiveness of the SBA Loan in accordance with the terms of the CARES
Act. The loan balance as of December 31, 2020 was $159,600.
The
Company has applied for forgiveness through its lender, and the application has been processed. The Company expects the
entire balance of the loan to be forgiven under the parameters of the CARES Act. The lender has waived any payments on this loan,
until a decision on forgiveness is rendered by the U.S. Small Business Administration.
|
|
|
Payment
Amortization
|
|
|
2021
|
|
$
|
106,893
|
|
|
2022
|
|
|
52,737
|
|
|
Total loan payments
|
|
$
|
159,600
|
|
|
Current portion
of SBA Loan payable
|
|
|
(106,863
|
)
|
|
Non-Current Portion
of SBA Loan payable
|
|
$
|
52,737
|
|
Note
11. Shareholders’ Equity
Common
Stock
The
Company had 306,185,206 and 225,540,501 common shares outstanding at December 31, 2020 and December 31, 2019,
respectively.
In
December 2018, the Company issued 20,000,000 shares of common stock to Robert M. Carmichael as an incentive bonus with a fair
value of $200,000. As the shares are subject to continued employment by Mr. Carmichael through January 2, 2020, the Company has
treated the shares as issued but not as yet outstanding. Expense for the issuance is being recognized over the full vesting period,
and accordingly, the Company recognized stock compensation expense of $1,280 and $188,144 for the years ended December 31, 2020
and 2019 respectively.
In
January 2019, the Company entered into an investment banking and corporate advisory agreement. The term of the agreement was for one
year and provided for compensation of 2,700,000 common shares with a fair value of $29,700 plus related expenses. The shares were issued
in February, 2019 and March 2019. For the year ended December 31, 2019 the Company recorded $29,700 in stock based compensation
expense.
In
January 2019, the Company issued 1,000,000 common shares with a fair value of $12,500 to a consultant for general administrative
advisory services for the period from December 1, 2018 through April 30, 2019, of which $10,000 was expensed during year ended
December 31, 2019.
In
March 2019 the Company issued Mr. Hyatt a unit of the securities of the Company, with the unit consisting of 50,000,000 shares
of common stock and 50,000,000 18 month common stock purchase warrants exercisable at $0.01 per share in consideration of $500,000.
The Company did not pay any fees or commissions in connection with the sale of the unit.
During
the year ended December 31, 2019, the Company issued 1,332,885 shares of common stock valued at $19,391 an average of ($0.0145)
per share for services to an employee related to an employment agreement that provided $10 per hour to be paid in common stock.
In
May 2019, the Company engaged a consultant to provide certain specified services under the terms of a letter agreement. As compensation,
the Company issued 1,000,000 common shares with a fair value of $16,000 to a consultant which was expensed during the year ended
December 31, 2019.
On
July 17, 2019 the Company sold 2,500,000 shares of common stock for proceeds of $25,000 ($0.01 per share).
In
August 2019, the Company issued 318,747 common shares with a fair value of $5,000 to a consultant for general administrative advisory
services, which was expensed during the year ended December 31, 2019.
In
September 2019 the Company issued 1,250,000 shares of common stock valued at $20,375 ($0.016 per share) fair market value, pursuant
to an investor relations agreement.
In
October 2019, the Company issued 191,087 shares of common stock valued at $4,395, an average of $.023 per share for consulting
services for BLU3 operating manual.
Under
the STS Agreement, the Company paid an initial license fee in April 2018 through the issuance of 759,422 shares of common stock
with a fair value of $30,000 which is being amortized on a straight-line basis over its five year term. The Company issued 828,221
shares of common stock with a fair value of $18,635 in satisfaction of $13,500 for the first commercial sale in October, 2019.
In
January 2020 the Company issued 2,647,065 shares of common stock in exchange for $45,000 to an accredited investor and daughter
of Mr. Charles F. Hyatt, a member of our Board of Directors.
In
February 2020 the Company issued 12,500,000 shares of common stock related to the exercise of common stock purchase warrants at
an exercise price of $.01, for a total conversion price of $125,000. The shares were issued to Mr. Hyatt, a member of the Board
of Directors.
On
June 9, 2020 the Company issued an aggregate of 330,636 shares of common stock to an employee for services performed in December
2019 and the first five months of 2020. The fair value of these shares was $9,520.
On
April 2, 2020 the Company issued 10,000,000 shares of common stock related to the exercise of common stock purchase warrant at
an exercise price of $.01 per share. The Company received proceeds of $100,000 upon such exercise from Mr. Hyatt, a member of
our Board of Directors.
On
April 10, 2020 the Company sold an aggregate of 20,000,000 shares of its common stock at a purchase price $0.025 per share to
two accredited investors, including Mr. Hyatt, in a private transaction, resulting in proceeds to the Company of $500,000.
On
April 9, 2020, the Company issued to an investor relations consultant, 3,000,000 shares of common stock, with a fair market value
of $133,500.
On
April 9, 2020, the Company issued, to a corporate communications consultant 2,000,000 shares of its common stock with a fair market
value of $89,000.
On
April 28, 2020, the Company issued 1,333,333 shares of its common stock as incentives to two employees. The fair value of the
stock was $64,000.
On
May 21, 2020, the Company issued 3,658,633 shares of common stock with a fair market value of $160,980 to six individuals for
compensation related to the BLU3-VENT project. Of the shares issued, Mr. Carmichael received a total 725,087 shares with a fair
value of $31,904 and Blake Carmichael, CEO of BLU3, Inc. who is also Mr. Carmichael’s adult son, received a total of 849,305
shares with a fair value of $37,369. The balance of the shares were received by employees of the Company and independent contractors.
In
the third quarter of 2020 the Company issued 280,038 shares of its common stock to an employee for services performed from June
2020 to August 2020. The fair value of these shares was $5,890.
In
the third and fourth quarters of 2020 the Company issued 2,795,000 shares of its common stock to Christopher Constable
under the consulting agreement with Brandywine, LLC. The aggregate fair value of these shares was $45,659.
On
December 15, 2020, the Company issued 2,100,000 shares of its common stock with a fair value of $40,320 related
to an agreement with Newbridge Securities to provide investment banking and business advisory services.
Preferred
Stock
During
the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment
to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of blank check preferred stock.
The blank check preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and
relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions
of the Florida Business Corporation Act. In April 2011 the Board of Directors designated 425,000 shares of the blank check preferred
stock as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into a share
of the Company’s common stock at any time at the option of the holder at a conversion price of $18.23 per share. Holders
of shares of Series A Convertible Preferred Stock are entitled to 250 votes for each share held. The Company’s common stock
and Series A Convertible Preferred Stock vote together as on any matters submitted to our shareholders for a vote. As and December
31, 2020 and 2019, the 425,000 shares of Series A Convertible Preferred Stock are owned by Robert M. Carmichael.
Options
Effective
July 29, 2019 the Company issued options to purchase up to an aggregate of 12,457,142 shares of common stock to Mr. Pitzner. The
options were issued pursuant to a stock option grant agreements and are exercisable at $0.018 per share for a period of five years from
the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $52,280 using the
Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years,
iii) dividend yield of 0%, iv) expected volatility of 172%. In August 2019 8,304,761 options belonging to Mr. Pitzner were cancelled.
Stock option expense recognized during for the year ended December 31, 2019 was $17,429.
Effective
July 29, 2019 the Company issued options to purchase up to an aggregate of 10,380,952 shares of common stock to Blake Carmichael. The
options were issued pursuant to a stock option grant agreements and are exercisable at $0.018 per share for a period of five years from
the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $43,582 using the Black-Scholes
option pricing model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend
yield of 0%, iv) expected volatility of 172%. Stock option expense recognized during for the years ended December 31, 2020 and 2019 was
$5,362 and $38,212, respectively.
Effective
July 29, 2019 the Company issued Robert M. Carmichael options to purchase up to 20,761,904 shares of common stock. The options were issued
pursuant to a Grant Agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to
vesting over a period of six months. The fair value of the options totaled $87,147 using the Black-Scholes option pricing model with
the following assumptions: i) risk free interest rate of 2.01%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected
volatility of 172%. Stock option expense recognized for the years ended December 31, 2020 and 2019 was $10,724 and
$76,423, respectively.
Effective
January 6, 2020 the Company issued options to purchase up to 2,000,000 shares of common stock to Mr. Jeffrey Guzy. The options
were issued pursuant to a stock option grant agreement and is exercisable at $0.0229 per share for a period of three years from the date
of issuance. The options were immediately vested. The fair value of the options on the date of the grant was $40,107 using the Black-Scholes
option pricing model with the following assumptions: i) risk free interest rate of 1.55%, ii) expected life of 1.5 years, iii) dividend
yield of 0%, iv) expected volatility of 250%. Stock option expense recognized during the year ended December 31, 2020 for this option
was $40,107.
Effective
January 11, 2020 the Company issued options to purchase up to 2,000,000 shares of common stock to BizLaunch Advisors, LLC. The
options were issued pursuant to a professional services agreement and are exercisable at $0.0229 per share for a period of three
years from the date of issuance. The options were immediately vested. The fair value of the options on the date of the grant was
$40,097 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 1.54%, ii)
expected life of 1.5 years, iii) dividend yield of 0%, iv) expected volatility of 250%. Stock option expense recognized during
the year ended December 31, 2020 for this option was $40,097.
On
April 14, 2020 the Company entered into a Non-Qualified Stock Option Agreement with Mr. Carmichael (the “Carmichael Option
Agreement”). Under the terms of the Carmichael Option Agreement, as additional compensation the Company granted Mr. Carmichael
an option (the “Carmichael Option”) to purchase up to an aggregate of 125,000,000 shares of the Company’s common
stock at an exercise price of $.045 per share, of which the right to purchase 75,000,000 shares of common stock is subject to
vesting upon the achievement of the net revenue milestones set forth below (the “Net Revenue Portion of the Option”)
and the right to purchase 50,000,000 shares of common stock is subject to vesting upon official notice of the listing of the Company’s
common stock on The Nasdaq Stock Market, the NYSE American LLC or similar stock exchange. The Net Revenue Portion of the Option
shall vest as follows:
|
|
●
|
the
right to purchase 25,000,000 shares of the Company’s common stock shall vest at such time as the Company reports cumulative
consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any
subsequent acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively,
“Net Revenues”), in excess of $3,500,000 in the aggregate over four consecutive fiscal quarters commencing May
1, 2020 and ending on April 30, 2023 (the “Net Revenue Period”);
|
|
|
●
|
the
right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative
Net Revenues in excess of $7,000,000 in the aggregate over four consecutive fiscal quarters during the Net Revenue Period;
and
|
|
|
|
|
|
|
●
|
the
right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative
Net Revenues in excess of $10,500,000 in the aggregate over four consecutive quarters during the Net Revenue Period.
|
The
Carmichael Option Agreement provides that the Carmichael Option is exercisable by Mr. Carmichael on a cashless basis. The Carmichael
Option is not transferrable by Mr. Carmichael, and he must remain an employee of the Company as an additional term of vesting.
Once a portion of the Carmichael Option vests, it is exercisable by Mr. Carmichael for 90 days. Any portion of the Carmichael
Option which does not vest during the Net Revenue Period lapses and Mr. Carmichael has no further rights thereto.
The
fair value of the Carmichael Option on the date of the grate was $4,370,109 using the Black-Scholes option pricing model with the following
assumptions: i) risk free interest rate of .26%, ii) expected life of 1.5 years, iii) dividend yield of 0%, iv) expected volatility of
320%. The Company analyzed the likelihood that the vesting qualifications would be met, and as of September 30, 2020 deemed that there
was a 10% chance that the options would vest. Therefore, stock option expense recognized during the year ended December 31, 2020 for
this option was $655,515.
On
November 5, 2020 the company entered into a Non-Qualified Stock Option agreement with Christopher Constable the “Constable
Option Agreement” as part of his employment agreement. Under the terms of the option agreement, the Company granted Mr.
Constable a 5 year option to purchase 5,434,783 shares of the Company’s common stock at an exercise price of $.0184, the
“Compensation Options”. The Compensation Options were immediately vested. The fair value of the options on the date
of the grant was $106,199 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest
rate of .16%, ii) expected life of 2.5 years, iii) dividend yield of 0%, iv) expected volatility of 341%. Stock
option expense recognized during the year ended December 31, 2020 for this option was $106,890.
As
part of the Constable Option Agreement the company also granted Mr. Constable an option (the “Bonus Option”) to purchase
up to an aggregate of 30,000,000 shares of the Company’s common stock at an exercise price of $.0184 per share, of which
the right to purchase 10,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue milestones
set forth below (the “Net Revenue Portion of the Option”) and the right to purchase 20,000,000 shares of common stock
is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the
NYSE American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
|
|
●
|
the
right to purchase 2,000,000 shares of the Company’s common stock shall vest at such time as the Company reports cumulative
consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any
subsequent acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively,
“Net Revenues”), in excess of $5,000,000 in the aggregate over four consecutive fiscal quarters commencing January
1, 2021 and ending on April 30, 2023 (the “Net Revenue Period”);
|
|
|
●
|
the
right to purchase an additional 3,000,000 shares of common stock shall vest at such time as the Company reports cumulative
Net Revenues in excess of $7,500,000 in the aggregate over four consecutive fiscal quarters during the Net Revenue Period;
and
|
|
|
|
|
|
|
●
|
the
right to purchase an additional 5,000,000 shares of common stock shall vest at such time as the Company reports cumulative
Net Revenues in excess of $10,000,000 in the aggregate over four consecutive quarters during the Net Revenue Period.
|
The
Constable Option Agreement provides that the Compensation Options and Bonus Options are exercisable by Mr. Constable on a cashless
basis. The Carmichael Option is not transferrable by Mr. Carmichael, and he must remain an employee of the Company as an additional
term of vesting. Once a portion of the Carmichael Option vests, it is exercisable by Mr. Constable 4 years.
The
fair value of the Bonus Options on the date of the grant was $578,082 using the Black-Scholes option pricing model with
the following assumptions: i) risk free interest rate of .14%, ii) expected life of 2.0 years, iii) dividend yield of 0%, iv)
expected volatility of 312.2%. The Company analyzed the likelihood that the vesting qualifications would be met, and as of December 31,
2020 deemed that there was a 0% chance that the options would vest, as the measurement period does not begin until January 1, 2021. Therefore,
stock option expense recognized during the year ended December 31, 2020 for this option was $0.
A
summary of the Company’s stock option as of December 31, 2020 and 2019, and changes during the years ended December
31, 2020 and 2019 is presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Life in Years
|
|
|
Value
|
|
|
Outstanding at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
43,599,998
|
|
|
|
0.018
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(8,304,761
|
)
|
|
|
0.018
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2019
|
|
|
35,295,237
|
|
|
$
|
0.018
|
|
|
|
4.58
|
|
|
|
|
|
|
Exercisable – December 31, 2019
|
|
|
24,914,285
|
|
|
$
|
0.018
|
|
|
|
4.58
|
|
|
$
|
112,114
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
|
Life
in Years
|
|
|
Value
|
|
|
Outstanding at December 31, 2019
|
|
|
35,295,237
|
|
|
$
|
0.018
|
|
|
|
4.58
|
|
|
|
|
|
|
Granted
|
|
|
164,434,783
|
|
|
|
0.0354
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2020
|
|
|
199,730,020
|
|
|
$
|
0.0323
|
|
|
|
2.84
|
|
|
|
|
|
|
Exercisable – December 31, 2020
|
|
|
44,730,020
|
|
|
$
|
0.0185
|
|
|
|
3.59
|
|
|
$
|
168,892
|
|
Warrants
A
summary of the Company’s warrants as of December 31, 2020 and 2019, and changes during the years ended December 31,
2020 and 2019 is presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Life in Years
|
|
|
Value
|
|
|
Outstanding at December 31, 2018
|
|
|
6,783,551
|
|
|
$
|
0.0115
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
50,000,000
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(4,174,826
|
)
|
|
|
0.0115
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2019
|
|
|
52,608,725
|
|
|
$
|
0.01
|
|
|
|
0.66
|
|
|
|
|
|
|
Exercisable – December 31, 2019
|
|
|
52,608,725
|
|
|
$
|
0.01
|
|
|
|
0.66
|
|
|
$
|
610,000
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Life in Years
|
|
|
Value
|
|
|
Outstanding at December 31, 2019
|
|
|
52,608,725
|
|
|
$
|
0.01
|
|
|
|
4.58
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(22,500,000
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(30,108,725
|
)
|
|
|
0.0115
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Exercisable – December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
On
February 25, 2020, Mr. Hyatt, a member of the Company’s Board of Directors, partially exercised a warrant for the acquisition
of 12,500,000 shares at $.01 per share for proceeds to the Company of $125,000.
On
April 2, 2020 Mr. Hyatt purchased 10,000,000 shares related to the exercise of an outstanding common stock purchase warrant at
an exercise price of $.01 per share. The Company received proceeds of $100,000 upon such exercise. On September 7, 2020 the balance
of 27,500,000 in common stock purchase warrant owned by Mr. Hyatt, expired.
In
the first quarter of 2020 warrants to purchase 2,608,725 shares of common stock held by two investors expired.
Note
12. Income Taxes
The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While
the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.
The
components of the provision for income tax expense are as follows for the years ended:
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Current taxes
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
Current taxes
|
|
|
—
|
|
|
|
—
|
|
|
Change in deferred taxes
|
|
|
38,600
|
|
|
|
239,300
|
|
|
Change in
valuation allowance
|
|
|
(38,600
|
)
|
|
|
(239,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income tax expense
|
|
$
|
—
|
|
|
$
|
-
|
|
The
following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31,
2020 and 2019:
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Equity
based compensation
|
|
$
|
154,400
|
|
|
$
|
154,400
|
|
|
Allowance for
doubtful accounts
|
|
|
4,300
|
|
|
|
4,500
|
|
|
Reserves for
slow moving inventory
|
|
|
46,500
|
|
|
|
33,400
|
|
|
Depreciation
|
|
|
2,900
|
|
|
|
-
|
|
|
Net
operating loss carryforward
|
|
|
1,336,300
|
|
|
|
1,390,700
|
|
|
Total deferred tax assets
|
|
|
1,544,400
|
|
|
|
1,583,000
|
|
|
Valuation
allowance
|
|
|
(1,544,400
|
)
|
|
|
(1,583,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
assets net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
The
effective tax rate used for calculation of the deferred taxes as of December 31, 2020 was 25.35%. The Company has established
a 100% valuation allowance against deferred tax assets of $1,544,400, due to the uncertainty regarding realization
reserve against the deferred tax assets. The change in valuation allowance was an increase of $38,600. The Company
has approximately $3,465,000 of net loss carryforward that expire through 2037 and $1,807,000 that carryforward
indefinitely, but is limited to 80% of taxable income in any one year.
The
effective tax rate used for calculation of the deferred taxes as of December 31, 2019 was 25.35%. The Company has established
a 100% valuation allowance against deferred tax assets of $1,583,000 due to the uncertainty regarding
realization reserve against the deferred tax assets. The change in valuation allowance
was an increase of $239,300.
The
significant differences between the statutory tax rate and the effective tax rates for the Company for the years ended are as
follows:
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Statutory tax rate
|
|
|
(21.00
|
)%
|
|
|
(21.00
|
)%
|
|
State tax, net of Federal benefits
|
|
|
(4.35
|
)%
|
|
|
(4.35
|
)%
|
|
Permanent differences
|
|
|
28.21
|
%
|
|
|
8.51
|
%
|
|
Change in valuation
allowance
|
|
|
(2.86)
|
%
|
|
|
16.84
|
%
|
|
Effective tax
rate
|
|
|
—
|
%
|
|
|
-
|
%
|
Note
13. Commitments and Contingencies
On
August 14, 2014, the Company entered into a thirty-seven-month term lease for its initial facilities in Pompano Beach, Florida,
commencing on September 1, 2014. Terms included 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 was approximately $2,000 per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to
the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring
September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term.
On
November 11, 2018, the Company entered a new lease agreement for approximately 8,025 square feet adjoining its existing facility
in Pompano Beach, Florida. Terms of the new lease include a sixty-nine month term commencing on January 1, 2019, or the date the
Company took possession of the premises, if earlier; a $6,527 security deposit; initial base rent of approximately $4,848 per
month escalating at 3% per year during the term of the lease plus Florida state sales tax and payment of 10.11% of the buildings
annual operating expenses (i.e. common area maintenance) which is approximately $1,679 per month subject to adjustment as provided
in the lease.
The
Company, Trebor and other third parties, were each named as a co-defendants under actions initially filed in March 2015 in the
Circuit Court of Broward County under Case No. CACE-15-03238 and CACE -16-0000242 by the Estate of Ernesto Rodriguez, claiming
wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung
product. This claim was settled in June 2020 for $50,000, and further modified into a lump sum payment of $44,200 (88.4% of the
original settlement amount) which was paid in full on August 25, 2020.
In
April 2018 the Company entered into a Patent License Agreement (the “STS Agreement”) with Setaysha Technical Solutions,
LLC (“STS”) pursuant to which the Company licensed certain intellectual property, including patent rights, non-patent
rights and know how from STS for use in our Ultra-Portable Tankless Dive system products.
Effective December 31, 2019, the Company entered into Addendum No. 1 to the STS Agreement (“Addendum No. 1”)
to amend the payment due upon the first commercial sale of NEMO. In accordance with Addendum No. 1, $8,250 was paid in cash and
$8,250 was accrued as of December 31, 2019, and paid during the year ended December 31, 2020. The Company issued 828,221
shares of common stock in satisfaction of $13,500 for the first commercial sale of NEMO with a fair value of $19,635. Effective
June 30, 2020, the Company entered into Addendum No.2 to the Patent License Agreement (“Addendum No.2”) This addendum
is to set limits and expectations of the assistance from STS rated to designing and commercializing NextGen diving products, and
that STS receive deferred consideration for uncompensated services. Addendum No. 2 also states that if the Company terminate the
STS Agreement before December 31, 2024, then the Company will pay STS $180,000 , less cumulative royalties paid in excess of $334,961
for years 2019, 2020, 2021, 2022, 2023 and 2024.
On
June 30, 2020, the Company entered into Amendment No. 2 to the STS Agreement.
The amendment set certain limits and expectations of the assistance from STS related to designing and commercializing certain
diving products, and revised the royalty payments due to STS as consideration for uncompensated services. The Company is obligated
to pay STS a minimum yearly royalty of $60,000, or $15,000 per fiscal quarter, beginning in December 2019 and increasing by 2.15%
per year. The minimum royalty was temporarily increased to $60,000 for fiscal years 2022, 2023 and 2024, with a fourth quarter
true up against earned royalties. In addition, if the Company should terminate the agreements with STS prior to December 31, 2023,
then the Company is obligated to pay STS $180,000, less cumulative royalties paid in excess of $334,961 for the years 2019 through
2024. Royalty recorded in relation to this agreement totaled $53,929 and $48,963 for the years ended December
31, 2020 and 2019, respectively.
On
April 9, 2020 the Company entered into an Investor Relations Consulting Agreement with HIR Holdings, LLC pursuant to which the
Company engaged the firm to provide investor relations services. The term of the agreement is for a minimum guaranteed period
of six months, and thereafter is cancellable by either party upon 30 days’ notice to the other party. As compensation the
Company issued the consultant 3,000,000 shares of its common stock, valued at $133,500, and is responsible for reimbursement of
certain pre-approved expenses.
On
April 9, 2020 the Company also entered into a Corporate Communications Consulting Agreement with Impact IR Inc. pursuant to which
the Company also engaged this firm to provide investor relations services. The term of the agreement is six months. As compensation
the Company issued the consultant 2,000,000 shares of its common stock valued at $89,000.
On
June 9, 2020 the Company entered into an advertising and marketing agreement with Figment Design. The term of the agreement is
for one year, and thereafter renew or cancel the agreement in writing 60 days before the final date. The Company will be billed
$5,275 for June and July 2020 and $8,840 from August 2020 to July 2021.
On
August 1, 2020, BLU3 entered into an advertising and marketing agreement with Figment Design. The term of the agreement is for
one year beginning August 1, 2020, and thereafter renew or cancel the agreement in writing 60 days before the final date. Figment
Design will bill BLU3 $3,500 per month as retainer and $1,500 to $2,000 for monthly ad spend.
On
August 1, 2020, BLU3 entered into a marketing agreement with This Way Media PTY, Ltd. The term of this agreement is for 11 months
and can be cancelled with 30 days notice during the first 90 days of the agreement. After the first 90 days, the agreement can
be cancelled with 60 days’ notice after the completion of the term of the agreement. BLU3 will pay This Way Media PTY, LTD
$500 per month, and 5% of each affiliate sale.
On
August 10, 2020, the Company engaged Brandywine, LLC to provide certain accounting advisory and consulting services to it under
the terms of a letter agreement. As compensation for the services, we agreed to pay Brandywine, LLC an hourly rate of $125.00
and issue it 10,000 shares of our common stock for each hour billed, which such shares are issuable to a designee of Brandywine,
LLC in its discretion, and reimburse it for pre-approved expenses. The agreement may be terminated by either party upon 15 days’
notice, and contains customary indemnification provisions. This agreement was terminated on November 5, 2020 upon entering into
an employment agreement as detailed below, a total number of 2,795,000 shares were issued under this agreement as of December
31, 2020. On November 5, 2020 the Company and Christopher H. Constable entered into a three year employment agreement (the
“Constable Employment Agreement”) pursuant to which the Mr. Constable shall serve as Chief Executive Officer of the
Company. Previously, Mr. Constable had provided advisory services to the Company through the agreement with Brandywine LLC. In
consideration for his services, Mr. Constable shall receive (i) an annual base salary of $200,000, payable in accordance with
the customary payroll practices of the Company, and (ii) issuable upon execution of the Employment Agreement and on each anniversary
of the date of the agreement during the term, a non-qualified immediately exercisable five-year stock option to purchase that
number of shares equal to $100,000 of the value of the Company’s common stock at an exercise price equal to the market price
of the Common Stock on the date of issuance. Therefore, the Executive shall receive an initial stock option grant to purchase
5,434,783 shares of the Corporation’s common stock at an exercise price of $0.0184 per share pursuant to an option award
agreement (the “Option Award Agreement”).
In
addition, Mr. Constable shall be entitled to receive four-year stock options to purchase shares of common stock at an exercise
price equal to $0.0184 per share in the amounts listed below based upon the following performance milestones during the term of
the Constable Employment Agreement: (i) 2,000,000 shares - if the Company’s total net revenues, as reported in its statement
of operations in its financial statements in its filings with the SEC, including as a result of a stock or asset acquisition of
a third party (“Net Revenues”) are in excess of $5,000,000, in the aggregate, for four consecutive fiscal quarters;
(ii) 3,000,000 shares - if the Company’s Net Revenues are in excess of $7,500,000, in the aggregate, for four consecutive
fiscal quarters; (iii) 5,000,000 shares - if the Company’s Net Revenues are in excess of $10,000,000, in the aggregate,
for four consecutive fiscal quarters; and (iv) 20,000,000 shares - if the Company’s common stock is listed on the on NASDAQ
or New York Stock Exchange.
Mr.
Constable is also entitled to participate in all benefit programs the Company offers to its executives, reimbursement for business
expenses and three weeks of annual paid vacation.
The
agreement may be terminated for cause, upon his death or disability, or by the Company without cause. Furthermore, Mr. Constable
may terminate the agreement for “good reason” as defined in the agreement. If the Company terminates the Constable
Employment Agreement for cause, or if it terminates upon Mr. Constable’s death or disability, or if he voluntarily terminates
the agreement, neither Mr. Constable nor his estate (as the case may be) is entitled to any severance or other benefits following
the date of termination. If the Company should terminate the Constable Employment Agreement without cause or if Mr. Constable
terminates for good reason, the Company is obligated to continue to pay him his base salary for a period of six months. The Constable
Employment Agreement also contains customary confidentiality, non-disclosure and indemnification provisions.
Pursuant
to the Constable Employment Agreement, Mr. Constable also agreed to serve on the Company’s Board of Directors and the Company
agreed to nominate him to serve on the Board during the term of the Constable Employment Agreement.
On
December 15, 2020 the Company engaged Newbridge Securities Corporation to provide Investment Banking and Corporate Advisory services.
The term of this agreement is for twelve months and can be terminated by either party with 14 day written notice. As compensation
for this agreement the Company issued 2,100,000 shares of common stock with a fair market value of $40,320.
Note
14. Segments
The
Company has three operating segments as described below:
1.
Legacy SSA Products, which sells recreational hookah diving systems.
2.
High Pressure Gas Systems, which sells high pressure air and industrial gas compressor packages.
3.
Ultra Portable Tankless Dive Systems, which sells next generation electric surface supply air diving systems and electric shallow
dive system that are battery operated and completely portable to the user.
|
|
|
Years
Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
Legacy SSA Products
|
|
$
|
2,721,753
|
|
|
$
|
2,073,300
|
|
|
High Pressure Gas Systems
|
|
|
489,590
|
|
|
|
700,654
|
|
|
Ultra Portable
Tankless Dive Systems
|
|
|
1,344,630
|
|
|
|
193,724
|
|
|
Total
net revenues
|
|
$
|
4,555,973
|
|
|
$
|
2,967,678
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
Legacy SSA Products
|
|
$
|
1,783,857
|
|
|
$
|
1,795,737
|
|
|
High Pressure Gas Systems
|
|
|
310,527
|
|
|
|
474,338
|
|
|
Ultra Portable
Tankless Dive Systems
|
|
|
997,200
|
|
|
|
249,176
|
|
|
Total
cost of revenues
|
|
$
|
3,091,584
|
|
|
$
|
2,519,251
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit(loss):
|
|
|
|
|
|
|
|
|
|
Legacy SSA Products
|
|
$
|
937,896
|
|
|
$
|
277,564
|
|
|
High Pressure Gas Systems
|
|
|
179,063
|
|
|
|
226,315
|
|
|
Ultra Portable
Tankless Dive Systems
|
|
|
347,430
|
|
|
|
(55,542
|
)
|
|
Total
gross profit(loss)
|
|
$
|
1,464,389
|
|
|
$
|
448,427
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Depreciation:
|
|
|
|
|
|
|
|
|
|
Legacy SSA Products
|
|
$
|
8,916
|
|
|
$
|
5,252
|
|
|
High Pressure Gas Systems
|
|
|
-
|
|
|
|
-
|
|
|
Ultra Portable
Tankless Dive Systems
|
|
|
12,089
|
|
|
|
4,030
|
|
|
Total
segment depreciation
|
|
$
|
21,005
|
|
|
$
|
9,282
|
|
|
|
|
Years
Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Segment (loss) from Operations:
|
|
|
|
|
|
|
|
|
|
Legacy SSA Products
|
|
$
|
(1,063,871
|
)
|
|
$
|
(826,455
|
)
|
|
High Pressure Gas Systems
|
|
|
(30,876
|
)
|
|
|
(89,108
|
)
|
|
Ultra Portable
Tankless Dive Systems
|
|
|
(238,313
|
)
|
|
|
(368,103
|
)
|
|
Total
segment (loss) from operations
|
|
$
|
(1,333,060
|
)
|
|
$
|
(1,283,666
|
)
|
|
|
|
December
31,
2020
|
|
|
December
31,
2019
|
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
Legacy SSA Products
|
|
$
|
1,327,465
|
|
|
$
|
1,183829
|
|
|
High Pressure Gas Systems
|
|
|
245,572
|
|
|
|
265,361
|
|
|
Ultra Portable
Tankless Dive Systems
|
|
|
500,043
|
|
|
|
217.375
|
|
|
Total
Assets
|
|
$
|
2,073,080
|
|
|
$
|
1,666,565
|
|
Note
15. Subsequent Events
On
February 22, 2021 the holder of the convertible promissory note in the principal amount of $10,000 issued a notice
of conversion. The note in the principal amount and interest of $14,777 was converted at a conversion price of $.035 for
a total 422,209 shares of common stock. Further, the conversion notice stated that this conversions satisfied all of debt
due to the lender, which would include an additional note of $10,000 that was not convertible and unsecured.
On
March 1, 2021 the Company entered into an Investor Relations Consulting Agreement with BGM Equity Partners, LLC pursuant to which
the Company engaged the firm to provide investor relations services. The term of the agreement is for a minimum guaranteed period
of six months, and thereafter is cancellable by either party upon 30 days notice to the other party. As compensation the Company
issued the consultant 3,000,000 shares of its common stock, valued at $120,000, and is responsible for reimbursement of certain
pre-approved expenses.
On
March 25, 2021 Charles F. Hyatt, a member of the board of directors, purchased 27,500,000 shares of common stock
at a purchase price of $0.01 per shares for aggregate proceeds of $275,000. The Company did not pay any commissions
or finders fees and is using the proceeds for working capital.