Item
1. Financial Statements
Financial
Information
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
53,923
|
|
|
$
|
150,898
|
|
Accounts receivable, net of $9,200 and $16,848 allowance for doubtful accounts, respectively
|
|
|
33,526
|
|
|
|
4,494
|
|
Accounts receivable - related parties
|
|
|
57,073
|
|
|
|
55,681
|
|
Inventory
|
|
|
1,081,787
|
|
|
|
822,886
|
|
Prepaid expenses and other current assets
|
|
|
83,638
|
|
|
|
251,587
|
|
Total current assets
|
|
|
1,309,947
|
|
|
|
1,285,546
|
|
|
|
|
|
|
|
|
|
|
Property, equipment, and leasehold improvements, net
|
|
|
22,945
|
|
|
|
27,498
|
|
Deferred tax asset, net - non-current
|
|
|
2,520
|
|
|
|
2,520
|
|
Other assets
|
|
|
6,649
|
|
|
|
6,649
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,342,061
|
|
|
$
|
1,322,213
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
603,731
|
|
|
$
|
392,738
|
|
Customer deposits and unearned revenue
|
|
|
54,381
|
|
|
|
97,249
|
|
Royalties payable - related parties
|
|
|
3,776
|
|
|
|
—
|
|
Other liabilities
|
|
|
146,397
|
|
|
|
141,760
|
|
Convertible debentures, net
|
|
|
396,053
|
|
|
|
389,803
|
|
Total current liabilities
|
|
|
1,204,338
|
|
|
|
1,021,550
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,204,338
|
|
|
|
1,021,550
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding
|
|
|
425
|
|
|
|
425
|
|
Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 102,801,412 and 98,192,717 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
|
|
|
10,280
|
|
|
|
9,819
|
|
Common stock payable; $0.0001 par value; 138,941 and 138,941 shares, respectively
|
|
|
14
|
|
|
|
14
|
|
Additional paid-in capital
|
|
|
9,224,737
|
|
|
|
9,170,198
|
|
Accumulated deficit
|
|
|
(9,097,733
|
)
|
|
|
(8,879,793
|
)
|
Total stockholders’ equity
|
|
|
137,723
|
|
|
|
300,663
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,342,061
|
|
|
$
|
1,322,213
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
356,783
|
|
|
$
|
287,817
|
|
Net revenues - related parties
|
|
|
157,832
|
|
|
|
158,423
|
|
Total net revenues
|
|
|
514,615
|
|
|
|
446,240
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
378,156
|
|
|
|
203,411
|
|
Cost of net revenues-related parties
|
|
|
66,563
|
|
|
|
35,737
|
|
Royalties expense - related parties
|
|
|
9,927
|
|
|
|
10,873
|
|
Total cost of net revenues
|
|
|
454,646
|
|
|
|
250,021
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
59,969
|
|
|
|
196,219
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
255,109
|
|
|
|
151,334
|
|
Research and development costs
|
|
|
6,432
|
|
|
|
563
|
|
Total operating expenses
|
|
|
261,541
|
|
|
|
151,897
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(201,572
|
)
|
|
|
44,322
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
16,368
|
|
|
|
7,722
|
|
Total other expense, net
|
|
|
16,368
|
|
|
|
6,732
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before provision for income taxes
|
|
|
(217,940
|
)
|
|
|
37,590
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(217,940
|
)
|
|
$
|
37,590
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
—
|
|
|
$
|
—
|
|
Diluted income per common share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
102,134,746
|
|
|
|
70,435,275
|
|
Diluted weighted average common shares outstanding
|
|
|
102,134,746
|
|
|
|
105,912,878
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
|
|
Preferred stock
|
|
|
Common stock
|
|
|
Common
stock
payable
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
Equity’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2018
|
|
|
425,000
|
|
|
$
|
425
|
|
|
|
98,192,717
|
|
|
$
|
9,819
|
|
|
|
138,941
|
|
|
$
|
14
|
|
|
$
|
9,170,198
|
|
|
$
|
(8,879,793
|
)
|
|
$
|
300,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
|
__
|
|
|
|
__
|
|
|
2,000,000
|
|
|
|
200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,800
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit offering
|
|
|
|
|
|
|
|
|
|
|
2,608,695
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
29,739
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(217,940
|
)
|
|
|
(217,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31 , 2018
|
|
|
425,000
|
|
|
$
|
425
|
|
|
|
102,801,412
|
|
|
$
|
10,280
|
|
|
|
138,941
|
|
|
$
|
14
|
|
|
$
|
9,224,737
|
|
|
$
|
(9,097,733
|
)
|
|
$
|
137,723
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(217,940
|
)
|
|
$
|
37,590
|
|
Adjustments to reconcile net (loss) income to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,553
|
|
|
|
8,801
|
|
Shares issued for royalty debt resolution
|
|
|
—
|
|
|
|
63,303
|
|
Shares issued for services
|
|
|
25,000
|
|
|
|
—
|
|
Amortization of debt discount
|
|
|
6,250
|
|
|
|
—
|
|
Change in deferred tax asset, net
|
|
|
—
|
|
|
|
2,520
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Change in accounts receivable, net
|
|
|
(29,032
|
)
|
|
|
(11,116
|
)
|
Change in accounts receivable - related parties
|
|
|
(1,392
|
)
|
|
|
12,634
|
|
Change in inventory
|
|
|
(258,901
|
)
|
|
|
(88,931
|
)
|
Change in prepaid expenses and other current assets
|
|
|
167,949
|
|
|
|
42,982
|
|
Change in accounts payable and accrued liabilities
|
|
|
210,993
|
|
|
|
6,561
|
|
Change in customer deposits and unearned revenue
|
|
|
(42,868
|
)
|
|
|
(18,786
|
)
|
Change in other liabilities
|
|
|
(1,514
|
)
|
|
|
(2,980
|
)
|
Change in other liabilities and accrued interest - related parties
|
|
|
—
|
|
|
|
(627
|
)
|
Change in royalties payable - related parties
|
|
|
9,927
|
|
|
|
—
|
|
Net cash used in operating activities
|
|
|
(126,975
|
)
|
|
|
(11,352
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on notes payable
|
|
|
—
|
|
|
|
(1,543
|
)
|
Proceeds from unit offering
|
|
|
30,000
|
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
|
30,000
|
|
|
|
(1,543
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(96,975
|
)
|
|
|
(12,895
|
)
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
150,898
|
|
|
|
191,749
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
53,923
|
|
|
$
|
178,854
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of related party debt to stock
|
|
$
|
—
|
|
|
$
|
63,303
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
1.
|
Description of business and summary of significant accounting policies
|
Description of business
–Brownie’s
Marine Group, Inc., (hereinafter referred to as the “Company,” “our” or “BWMG”) designs, tests,
manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, scuba
and water safety products through its wholly owned subsidiary Trebor Industries, Inc. and manufactures and sells high pressure
air and industrial gas compressor packages through its wholly owned subsidiary Brownie’s High Pressure Compressor Services,
Inc. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility
in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc.
and Brownie’s High Pressure Compressor Services, Inc. The Company’s common stock is quoted on the OTC Markets (Pink)
under the symbol “BWMG”.
On August 7, 2017, Brownie’s Marine Group,
Inc. entered into an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“
L&W
”), a German-based
company engaged in the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under
the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product
line in North America and South America, including the Caribbean (the “
Territory
”). Pursuant to an intercompany
assignment, Brownie’s High Pressure Compressor Services, Inc., our newly-formed wholly-owned subsidiary (“
BHP
”),
is party to the agreement. Through BHP we expect to conduct business and build the brand name “L&W Americas/LWA”,
establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military,
scientific, recreational and aerospace industries. Our goal will be to build a network of jobbers, dealers, installers and high-pressure
compressor distributors throughout the Territory by leveraging our know-how, brand awareness, complimentary products and creating
sustainable distribution and core product OEM integration relationships.
In December 2017, the Company formed a new
wholly-owned subsidiary bLU3, Inc. The Company was formed to develop and market an innovation electric shallow dive system that
is completely portable to the user. As of March 31, 2018, there were as yet no operations, other than related research expenditures,
in the new company.
Basis of Presentation
– The financial
statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States
of America (“GAAP”) and the rules and regulations of the Security and Exchange Commission (the “SEC”).
In the opinion of management all normal recurring adjustments considered necessary to give a fair presentation of operating results
for the periods presented have been included. The condensed consolidated results of operations for the three months ended March 31,
2018 are not necessarily indicative of the results to be expected for the entire year.
The condensed consolidated balance sheet as
of December 31, 2017 has been derived from the Company’s audited financial statements for the year ended December 31, 2017.
While management of the Company believes that the disclosures presented are adequate to make the information not misleading, these
condensed consolidated financial statements should be read in conjunction with our audited financial statements and the footnotes
thereto for the fiscal year ended December 31, 2017 as filed with the Securities and Exchange Commission as part of the Company’s
Form 10-K which was filed on April 17, 2018.
Definition of fiscal year
– The
Company’s fiscal year end is December 31.
Principles of Consolidation
–The
condensed consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor Industries,
Inc., Brownie’s High Pressure Compressor Services, Inc. and bLU3, Inc. All significant intercompany transactions and balances
have been eliminated in consolidation.
Use of estimates
– The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
– Certain reclassifications
may have been made to the 2017 financial statement amounts and disclosures to conform to the 2018 financial statement presentation.
Cash and equivalents
– Only highly
liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated
at cost, which approximates market value.
Going Concern
– The accompanying
unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern,
which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month
period following the date of these financial statements. Although profitable for the three years ended December 31, 2016, we incurred
a loss of $248,744 for the year ended December 31, 2017 and a loss of $217,940 for the three months ended March 31, 2018. The Company
had an accumulated deficit of $9,097,733 and $8,879,793 at March 31, 2018 and December 31, 2017, respectively.
Because the Company believes that existing
operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability
to continue as a going concern. Therefore, the Company will continue to raise additional funds as needed and is currently exploring
alternative sources of financing. The Company has issued a number of common shares and convertible debentures as an interim measure
to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or other
securities or obtaining short term loans.
If BWMG fails to raise additional funds when
needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets
and possibly seek bankruptcy protection. The accompanying condensed consolidated financial statements do not include any adjustments
that may result from the outcome of these uncertainties.
Accounts receivable
– Accounts
receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for doubtful
accounts is estimated based on historical customer experience and industry knowledge. The allowance for doubtful accounts totaled
$9,200 and $16,848 at March 31, 2018 and December 31, 2017, respectively.
Inventory
– Inventory is stated
at the lower of cost or net realizable value. Cost is principally determined by using the average cost method that approximates
the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods
held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation
adjustments when indicated.
Property, equipment and leasehold improvements
– Property, equipment and leasehold improvements are stated at cost less accumulated depreciation or amortization. Depreciation
and amortization is provided principally on the straight-line method over the estimated useful lives of the assets or term of the
lease, which are primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for
property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether
events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining
balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash
flows over the remaining life of the fixed assets in measuring their recoverability.
Revenue recognition
– Revenues
from product sales are recognized when the Company’s products are shipped or when service is rendered. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, when applicable, measured by the percentage of cost incurred to
date to estimated total cost of each contract. This method is used because management considers the percentage of cost incurred
to date to estimated total cost to be the best available measure of progress on the contracts. As of March 31, 2018 and 2017,
there were no ongoing contracts being accounted for using the percentage of completion method.
Contract costs include all direct material
and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and
depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Change in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Revenue and costs incurred for time and material projects are recognized as the work is performed.
Product development costs
– Product
development expenditures are charged to expenses as incurred.
Advertising and marketing costs
–
The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the
costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show
expense incurred for the three months ended March 31, 2018 and 2017, totaled $16,249 and $1,157, 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 three
month periods ending March 31, 2018 and 2017 the Company incurred research and development costs of $6,432 and $563, respectively.
Customer deposits and returns policy
– The Company typically takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building
the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision
for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns
of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice. The Company provides our customers
with an industry standard one year warranty on systems sold. Historically, the cost of our warranty policy has been immaterial
and no reserve has been established. Customer deposits and unearned revenue totaled $54,381 and $97,249 at March 31, 2018 and December
31, 2017, respectively.
Income taxes
-On December 22, 2017,
the Tax Cuts and Jobs Act of 2017 (the “Jobs Act”) was signed into law making significant changes to the Internal Revenue
Code. Changes include, but are not limited to, a United States corporate tax rate decrease from 35% to 21% effective for tax years
beginning after December 31, 2017.
Management is in the process of reviewing the
Jobs Act, but has not completed its analysis at the statement date.
The Company accounts for its income taxes under
the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences
of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined
based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities
is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets
to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company
considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred
tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize
deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation
allowance which would reduce the provision for income taxes.
The Company follows the accounting guidance
which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position
will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical
merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially
and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
Comprehensive income
– The Company
has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods presented.
Stock-based compensation
– The
Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation
cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually
the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued
to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance
with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The
fair value is determined through use of the quoted stock price.
Beneficial conversion features on convertible
debentures
– A beneficial conversion feature arises when the conversion price of a convertible instrument is below the
per share value of the underlying stock into which it is convertible. The fair value of the stock upon which to base the beneficial
conversion feature (BCF) computation has been determined through use of the quoted stock price.
Fair value of financial instruments
– Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets that
are accessible at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices for similar assets
and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active;
and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Unobservable inputs that are supported
by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities
include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques,
as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Inputs are used in applying the various valuation
techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions
about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment
by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant
market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does
not necessarily correspond to the Company’s perceived risk of that investment.
At March 31, 2018, and December 31, 2017,
the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue,
royalties payable – related parties, other liabilities, and accounts payable and accrued liabilities approximate fair value
because of the short maturity of these instruments.
Earnings per common share
– Basic
earnings per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings per share are computed
using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed
using the weighted average number of common and dilutive and common stock equivalent shares outstanding during the period. Common
stock equivalent shares are excluded from the computation if their effect is antidilutive. Potentially dilutive shares included
in dilutive earnings per share totaled 62,164,296 and 35,477,603 for the three month periods ended March 31, 2018 and 2017,
respectively.
New accounting pronouncements
In March 2018, the FASB issued ASU 2018-05
,
“Income Taxes” (Topic 740)
amending previous guidance on accounting and disclosures for income taxes addressing
changes under the Tax Cuts and Jobs Act (the “Act”). This standard addresses the recognition of taxes payable or refundable
in the current year and the recognition of deferred tax liabilities and deferred tax assets following passage of the Act. We do
not believe this ASU will have an impact on our results of operation, cash flows or financial condition.
In April 2016, the FASB issued ASU No. 2016-15,
“Classification of Certain Cash Receipts and Cash Payments.”
ASU 2016 provides guidance regarding the classification
of certain items within the statement of cash flows. ASU 2016-15 became effective for annual periods beginning after December 15,
2017 with early adoption permitted. The adoption of ASC 2016-15 did not have a material effect on our condensed consolidated financial
statements.
In April 2016, the FASB issued ASU 2016–10
Revenue from Contract with Customers (Topic 606)
: identifying Performance Obligations and Licensing. The amendments in this
Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following
two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related
principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services
in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with
either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the
entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to render more
detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. The
adoption of ASU 2016-10 became effective for reporting periods beginning after December 15, 2017. The adoption of ASC 2016-15 did
not have a material effect on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s
obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is
an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02
does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align,
where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. We are currently reviewing the provisions of this
ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In July 2015, the Financial Accounting Standards
Board issued Accounting Standards Update (ASU) No. 2015-11,
Inventory
(Topic 330), Simplifying the Measurement of Inventory.
ASU No. 2015-11 does not apply to inventory measurement using the last-in, last-out (LIFO) or retail methods. ASU No. 2015-11 applies
to all other inventory measurement methods, which includes first-in, first-out (FIFO) or average cost. Previously, inventory valuation
was at the lower of cost or fair market value. This ASU changes the valuation to lower of cost or net realizable value. Net realizable
value is defined as the estimated selling prices in the ordinary course of the business, less reasonably predictable costs of completion,
disposal, and transportation. ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those
fiscal years. ASU 2015-11 should be applied prospectively with earlier application permitted. The Company opted for early adoption
of ASU 2015-11 with no impact to financial condition, results of operations, or cash flows. The Company updated its consolidated
financial statements to reflect inventory valuation at the lower of cost or net realizable value.
The Company believes there was no other new
accounting guidance adopted, but not yet effective that either has not already been disclosed in prior reporting periods or is
relevant to the readers of our financial statements.
Inventory consists of the following as of:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
764,621
|
|
|
$
|
614,541
|
|
Work in process
|
|
|
—
|
|
|
|
—
|
|
Finished goods
|
|
|
317,166
|
|
|
|
208,345
|
|
|
|
$
|
1,081,787
|
|
|
$
|
822,886
|
|
3.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Prepaid inventory
|
|
$
|
8,591
|
|
|
$
|
27,715
|
|
Prepaid insurance
|
|
|
17,950
|
|
|
|
7,453
|
|
Prepaid other current assets
|
|
|
57,097
|
|
|
|
216,419
|
|
|
|
$
|
83,638
|
|
|
$
|
251,587
|
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment consists of the following as of:
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Tooling and equipment
|
|
$
|
125,832
|
|
|
$
|
125,832
|
|
Computer equipment and software
|
|
|
27,469
|
|
|
|
27,469
|
|
Vehicles
|
|
|
44,160
|
|
|
|
44,160
|
|
Leasehold improvements
|
|
|
43,779
|
|
|
|
43,779
|
|
|
|
|
241,240
|
|
|
|
241,240
|
|
Less: accumulated depreciation and amortization
|
|
|
(218,295
|
)
|
|
|
(213,742
|
)
|
|
|
$
|
22,945
|
|
|
$
|
27,498
|
|
Depreciation and amortization expense totaled
$4,553 and $8,801 for the three month periods ending March 31, 2018 and 2017, respectively.
Other assets of $6,649 at March 31, 2018
and December 31, 2017, respectively, consisted solely of refundable deposits.
6.
|
CUSTOMER CREDIT CONCENTRATIONS
|
The Company sells to three (3) entities owned
by the brother of Robert Carmichael, the Company’s Chief Executive Officer, and three (3) companies owned by the Chief Executive
Officer as further discussed in Note 7 - RELATED PARTIES TRANSACTIONS. Combined sales to these six (6) entities for the three month
periods ended March 31, 2018 and 2017, represented 30.67% and 35.50% respectively, of total net revenues.
7.
|
RELATED PARTIES TRANSACTIONS
|
Net revenues and accounts receivable –
related parties
– The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers,
and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more
favorable than those extended to any of the Company’s other customers with similar sales volume. Combined net revenues from
these entities for three months ended March 31, 2018 and 2017, was $157,832 and $158,423, respectively. Accounts receivable
from Brownie’s Southport Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys totaled $20,421,
$2,196 and $15,564 at March 31, 2018, respectively. Accounts receivable from Brownie’s Southport Diver’s, Inc.,
Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys totaled $27,381, $10,763, and $13,227, at December 31, 2017,
respectively.
The Company sells products to Brownie’s
Global Logistics, LLC. (“BGL”), 940 Associates, Inc. and 3D Buoy, LLC affiliated with the Company’s Chief Executive
Officer. Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those
extended to Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms
are consistent with those extended to Brownie’s strategic partners. Strategic partner terms on a per order basis include
promotion of BWMG’s technologies and “Brownie’s” brand, offered only on product or services not offered
for resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services. BGL
is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and “Brownie’s”
brand in the yachting and exploration community world-wide through its operations. Combined net revenues from these entities for
three month periods ended March 31, 2018 and 2017, were $0 and $506, respectively. Combined accounts receivable from BGL,
940 Associates and 3D Buoy totaled $5,040 and $4,043 at March 31, 2018 and December 31, 2017, respectively.
Royalties expense – related parties
– The Company has an Exclusive License Agreement with 940 Associates, Inc. (hereinafter referred to as “940A”),
an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”,
“Brownies Public Safety” and various other related trademarks as listed in the agreement. This license agreement calls
for the Company to pay 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three months
and ended March 31, 2018 and 2017, totaled $9,927 and $10,873, respectively.
In November 2016, the Company entered into
a conversion agreement under which the Company issued 10,000,000 shares of restricted common stock in satisfaction of $88,850 past
due and payable to 940A. As of the date of the conversion agreement, the Company was more than 31 months in arrears on its royalty
payments totaling approximately $151,000. In addition, 940A has agreed to forebear on any default under the License Agreement due
to the Company’s remaining past due amount for a period of three months from the effective date of the conversion agreement.
The shares issued were valued at $0.008885 per share, the closing price of the stock on the effective date of the conversion agreement.
No default notice had been received prior to the conversion agreement.
On March 1, 2017, the Company and 940A entered
into an additional conversion agreement. Under the agreement the Company issued 940A 4,587,190 shares of restricted common stock
in satisfaction of $63,303, which represented all past due and payable amounts to 940A under the Exclusive License Agreement as
of March 1, 2017. As of the date of the agreement the Company was more than 3 months in arrears on royalty payments due under the
Exclusive License Agreement. The shares were issued at a price per share of $0.0138, which exceeded the closing price of the Company’s
common stock as reported on the OTC Markets on the date immediately preceding the closing. No default notice had been received
prior to the conversion agreements.
Stock options outstanding from patent purchase
– Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive
Officer of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued
patents. In exchange for the Intellectual Property, the Company issued Mr. Carmichael 234 stock options at a $1,350 exercise
price expiring ten years from the effective date of grant, or March 2, 2019. None of the options have been exercised to-date.
8.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable and accrued liabilities consists
of the following as of:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Accounts payable trade and other
|
|
$
|
329,865
|
|
|
$
|
143,347
|
|
Accrued payroll & fringe benefits
|
|
|
41,761
|
|
|
|
29,023
|
|
Accrued payroll taxes & withholding
|
|
|
10,308
|
|
|
|
8,689
|
|
Accrued interest
|
|
|
221,797
|
|
|
|
211,679
|
|
|
|
$
|
603,731
|
|
|
$
|
392,738
|
|
Balances due certain vendors are in arrears
to varying degrees. The Company is handling all delinquent accounts on a case-by-case basis.
Other liabilities consist of the following
as of
:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Short-term loans
|
|
$
|
126,572
|
|
|
$
|
126,572
|
(*)
|
Asset purchase agreement payable
|
|
|
12,857
|
|
|
|
12,857
|
|
On-line training liability
|
|
|
2,226
|
|
|
|
2,331
|
|
Other
|
|
|
4,742
|
|
|
|
—
|
|
|
|
$
|
146,397
|
|
|
$
|
141,760
|
|
(*) Initial balance of $200,000 non-convertible
note dated July 7, 2013. The note carries a 0% interest rate and is due on demand.
10.
|
CONVERTIBLE DEBENTURES
|
Convertible debentures consist of the following
at March 31, 2018:
Origination
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Origination
Principal
Balance
|
|
|
Original
Discount
Balance
|
|
|
Period End
Principal
Balance
|
|
|
Period End
Discount
Balance
|
|
|
Period End
Balance,
Net
|
|
|
Accrued
Interest
Balance
|
|
|
Reg.
|
|
5/3/2011
|
|
5/5/2012
|
|
|
10
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
207,500
|
|
|
|
(1
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
3,316
|
|
|
|
(2
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
5,324
|
|
|
|
(3
|
)
|
12/01/17
|
|
12/01/18
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
(8,345
|
)
|
|
|
41,655
|
|
|
|
1,000
|
|
|
|
(4
|
)
|
12/05/17
|
|
12/04/18
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
(8,345
|
)
|
|
|
41,655
|
|
|
|
967
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
412,743
|
|
|
$
|
(16,690
|
)
|
|
$
|
396,053
|
|
|
$
|
218,107
|
|
|
|
|
|
Convertible debentures consist of the following
at December 31, 2017:
Origination
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Origination
Principal
Balance
|
|
|
Original
Discount
Balance
|
|
|
Period End
Principal
Balance
|
|
|
Period End
Discount
Balance
|
|
|
Period End
Balance,
Net
|
|
|
Accrued
Interest
Balance
|
|
|
Reg.
|
|
5/3/2011
|
|
5/5/2012
|
|
|
10
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
200,000
|
|
|
|
(1
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
3,191
|
|
|
|
(2
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
4,331
|
|
|
|
(3
|
)
|
12/01/17
|
|
12/01/18
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
(11,470
|
)
|
|
|
38,530
|
|
|
|
250
|
|
|
|
(4
|
)
|
12/05/17
|
|
12/04/18
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
(11,470
|
)
|
|
|
38,530
|
|
|
|
217
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
412,743
|
|
|
$
|
(22,940
|
)
|
|
$
|
389,803
|
|
|
$
|
207,989
|
|
|
|
|
|
Reference numbers in right hand column of table
entitled Ref. refer to paragraphs with corresponding numbers that immediately follow this paragraph.
(1)
|
On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 300,000 and 600,000 warrants at $337.50 and $472.50 per share, respectively. As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $206,832, which was recorded as a discount against the debenture. The Company accreted the discount to interest expense. The Company recognized the FMV of the related warrants as $45,000 using the Black-Scholes valuation model.
|
|
|
(2)
|
The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the beneficial conversion feature of the convertible debenture at $4,286, which was accreted to interest expense over the period of the note.
|
|
|
(3)
|
The Company entered into three new debenture agreements upon sale/assignment of the original lenders. Because the stated terms of the new debenture agreement and principal amounts were significantly different from the original debenture, including analysis of value of the beneficial conversion feature at the assignment/purchase date, the transactions are treated as extinguishment of the old debentures and recorded as new for accounting purposes.
|
|
|
|
The conversion price under the debentures is
$0.37125 and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and
penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion
of 4.99% of the outstanding Common Stock of the Company at any one time.
|
(4)
|
The Company entered into a 6% Secured Convertible Promissory Note, due December 1, 2018, subject to extension. The note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor Industries, Inc. and BHP and the personal guarantee of Robert M. Carmichael, the Company’s Chief Executive Officer.
|
|
The conversion price under the note range from $0.02 per share if converted in the first year to $0.125 if converted in year five. The lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of the outstanding Common Stock of the Company at any one time.
|
(5)
|
The Company entered into a 6% Secured Convertible Promissory Note, due December 4, 2018, subject to extension. The note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor Industries, Inc. and BHP and the personal guarantee of Robert M. Carmichael, the Company’s Chief Executive Officer.
|
|
|
|
The conversion price under the Note range from $0.02 per share if converted in the first year to $0.125 if converted in year five. The lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of the outstanding Common Stock of the Company at any one time.
|
11.
|
COMMITMENTS AND CONTINGENCIES
|
From time to time the Company is subject to
legal proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability
claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability
insurance, which provided coverage for each claim up to $1,000,000. During the third quarter of 2014, the Company did not renew
its product liability insurance since the renewal policy amount was cost prohibitive. As of August 15, 2017, the Company has obtained
Product Liability Insurance, although prior claims are not covered under the new policy. The policy is prepaid and will remain
in effect until its renewal date of August 14, 2018.
As previously disclosed, the Company, Trebor
and other third parties, are each named as a co-defendants under an action filed in March 2015 in the Circuit Court of Broward
County under Case No. CACE15-03238 by the Estate of Ernesto Rodriguez, claiming wrongful death and products liability resulting
in the decedent’s drowning death while using a Brownie’s Third Lung product. This claim falls outside the Company’s
period of insurance coverage. Plaintiff has claimed damages exceeding $1,000,000. A default judgment was entered against Trebor
in 2015 due to its failure to timely respond to the complaint. The Company has obtained different legal representation in this
matter and attempted to have the default set aside. On November 2, 2016, the court granted plaintiff’s motion for sanctions
against our company for frivolous litigation relating to our attempt to have the matter dismissed and granted the plaintiff’s
motion to strike our motion for summary judgment due to our initial default. The Company believes the claim to be a Workers Compensation
claim relating exclusively against other non-affiliated defendants and without merit, and will aggressively defend this action
and appeal the default judgment. In the event Trebor is unable to overturn the default judgment and the defendants are determined
to be at fault, we would seek to allocate damages among all of the other parties, including the plaintiff. At this time, the amount
of any loss, or range of loss, cannot be reasonably estimated due to the undetermined validity of any claim or claims made by plaintiff
and the mitigating factors among the parties. Therefore, the Company has not recorded reserves and contingent liabilities related
to this matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or
reserve for these matters.
On August 14, 2014, the Company entered into
a new lease commitment. Terms of the new lease include thirty-seven-month term commencing on September 1, 2014; payment of $5,367
security deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76%
of annual operating expenses (i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment.
On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the
term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a
3% annual escalation throughout the amended term. We believe that the facilities are suitable for their intended purpose, are being
efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.
Base rent expense, attributable to the
Company’s headquarters facility totaled approximately $13,878 and $12,000 for the three month periods ended March 31,
2018 and 2017, respectively.
The following is an estimate of future minimum
rental payments required under our lease agreement on August 14, 2014 and as amended December 1, 2016:
|
|
Operating lease
|
|
year 1
|
|
$
|
56,345
|
|
year 2
|
|
|
58,038
|
|
year 3
|
|
|
59,778
|
|
year 4
|
|
|
61,572
|
|
year 5 and thereafter
|
|
|
161,887
|
|
|
|
$
|
397,620
|
|
On August 7, 2017 the Company entered into
an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”), a German-based company engaged in
the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive
Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and
South America, including the Caribbean (the “Territory”). Pursuant to an intercompany assignment, Brownie’s High
Pressure Compressor Services, Inc., our newly-formed wholly-owned subsidiary (“BHP”), is party to the agreement. Through
BHP we expect to conduct business and build the brand name “L&W Americas/LWA”, establishing sales, distribution
and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational
and aerospace industries. Under the terms of the agreement, we were granted a non-exclusive, non-transferrable and irrevocable
right to use certain of L&W’s trademarks in connection with the marketing, use, sale and service of the products in the
Territory. The agreement is for an initial term of five years, and will automatically renew for one additional five year term unless
terminated by either party upon one year written notice prior to the expiration of the then current term. Either party may terminate
the agreement without cause upon one year prior written notice to the other party. In addition, L&W may terminate the agreement
for cause upon 120 days prior notice to us, subject to certain cure periods.
12.
|
EQUITY AND EQUITY INCENTIVE PLAN
|
Common Stock
The Company had 102,801,412 and 98,192,717
common shares outstanding at March 31, 2018 and December 31, 2017, respectively.
On January 6, 2018 the Company issued 217,391
Units consisting of 869,565 common shares and 217,391 common stock purchase warrants exercisable at $0.0115 per share. The warrants
are exercisable at any time for a period of two years from date of issuance.
In January 2018, the Company issued 2,000,000
common shares to Mr. Dana Allan for his services for serving on our board of directors. The grant date fair value of the shares
issued was $25,000.
On February 2, 2018 the Company issued 434,783
Units consisting of 1,739,130 common shares and 434,783 common stock purchase warrants exercisable at $0.0115 per share. The warrants
are exercisable at any time for a period of two years from date of issuance.
Preferred Stock
During the second quarter of 2010, the holder
of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles
of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has such voting
powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors
of the Company from time to time in accordance with the provisions of the Florida Business Corporation Act. Before modification,
the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized the
preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment authorizing
the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate
and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any
or all of which may be greater than the rights of the common stock. As of March 31, 2018 and December 31, 2017, the 425,000
shares of preferred stock are owned by the Company’s Chief Executive Officer. The preferred shares have 250 to 1 voting rights
over the common stock, and are convertible into 31,481 shares of common stock. The preferred stock votes with the Company’s
common stock, except as otherwise required under Florida law.
Equity Incentive Plan
On August 22, 2007, the Company adopted an
Equity Incentive Plan (the “Plan”). Under the Plan, Stock Options may be granted to Employees, Directors, and Consultants
in the form of Incentive Stock Options or Nonstatutory Stock Options. In addition, Stock Purchase Rights, time vested and/performance
invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan. The maximum
number of shares that may be issued under the Plan shall be 297 shares, and no more than 75 Shares of Common Stock may be granted
to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year
period. Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company.
The term of the Plan shall be ten years. The Plan expired on August 22, 2017. All 297 options issued under the Plan remain outstanding.
16.
SUBSEQUENT EVENTS
On April 4, 2018, the Company issued 142,857
common stock shares to an employee of the Company with a value of $0.0125 per share totaling $1,786 which was charged to stock
based compensation.
In May 2018, the Company issued 200,000 common
shares to two consultants with a value of $0.03 per share totaling $6,000 which was charged to consulting fees expense.
|
Item 2.
|
Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
|
Introductory Statements
Information included or
incorporated by reference in this filing may contain forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different
from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements,
which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the
words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project” or the negative of these words or other variations on these
words or comparable terminology.
Overview
Brownie’s Marine
Group, Inc., a Florida corporation (referred to herein as “the Company”, “we”, or “BWMG”),
designs, tests, manufactures and distributes recreational diving, yacht based scuba air compressor and nitrox generations systems,
and water safety products through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida
corporation. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing
facility located in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor
Industries, Inc. In August 2017, the Company organized Brownie’s High Pressure Compressor Services, Inc., a wholly-owned
subsidiary (“BHP”). Through BHP we are party to an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH
(“
L&W
”), a German-based company engaged in the development, manufacturing and sales of high pressure air
and industrial gas compressor packages. Through this agreement we intend to establish sales, distribution and service centers for
high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries.
The Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”. The Company’s website
is
www.Browniesmarinegroup.com.
Information on the website is not a part of this report.
In December 2017, the Company
formed a new wholly-owned subsidiary bLU3, Inc. The Company was formed to develop and market an innovation electric shallow dive
system that is completely portable to the user. As of December 31, 2017 there were as yet no operations, other than research expenditures,
in the new company.
Results of Operations for the Three Months
Ended March 31, 2018, as Compared to the Three Months Ended March 31, 2017
Net revenues
. For the three months ended
March 31, 2018, we had net revenues of $514,615, a 15% increase over the first quarter 2017. The bulk of this increase was attributable
to sales in our BHP subsidiary formed in August 2017. This subsidiary was formed to commercialize our exclusive distribution agreement
with L&W. Under this agreement, the Company has exclusive distribution rights for North America, South America and the Caribbean.
While there can be no assurance, the Company expects revenues to increase in the future. Related party revenues remained relatively
constant between periods.
In December 2017, the Company formed a new
wholly-owned subsidiary, bLU3, Inc. The Company was formed to develop and market an innovative electric shallow dive system that
is completely portable to the user. As of March 31, 2018, there were as yet no revenues recognized in the new company as we are
in the development stage, however, the Company has been incurring engineering and development costs.
Cost of net revenues
. Cost of net revenues
increased during the first quarter 2018 to $454,646, an 81% increase over the same period in the prior. This increase was due in
part to the 15% increase in revenues. The cost of revenues as a percentage of revenues increased sharply from 56% to 88% in the
first quarter 2018. This increase was due in large part to the Company lowering its margins to maintain targeted sales levels in
response to an unseasonably cold first quarter. Due to the nature of a large portion of our business being dependent on recreational
boating and diving, sales are seasonal and often dependent on weather conditions. However, given the formation BHP LWA in the third
quarter 2017, the Company believes that as our operations under the L&W agreement target industrial applications, we will be
less susceptible to weather or other seasonal fluctuations.
Operating expenses.
Operating expenses,
consisting of selling, general and administrative expenses and research and development costs increased sharply between the periods.
Selling, general and administrative expenses totaled $255,109 for the three months ended March 31, 2018, an increase of $103,775
or 69% over the prior year. The large bulk of this increase was due to an increase in seven employees between the periods with
an associated increase in salaries and benefits in excess of $100,000. Employees were added in large part due to the formation
of LWA including two sales managers, two engineers, a director of marketing and an additional sales person.
While there can be no assurance, the Company
believes that the near term costs of “ramping up” its high pressure business, through LWA, will prove successful as
revenues in this area increase.
Other expense, net.
Other expense, consisting
of interest expense, increased for the first quarter 2018 by $8,646. This increase was attributable to an increase in the amortization
of beneficial conversion features totaling $6,250 on two notes issued in the fourth quarter 2017 and related interest recognized
on these notes.
Net (income) loss.
For the three months
ended March 31, 2018, we recognized a net loss of $217,940 as compared to net income of $37,590 for the first quarter 2017. This
decline in earnings was primarily attributable to a reduction in sales pricing to maintain sales levels in response to unseasonable
cold weather during the quarter and increased staffing related to our newly formed subsidiary LWA.
Liquidity and Capital Resources
As of December 31, 2017,
the Company had current assets (primarily consisting of inventory and prepaid expenses) of $1,285,546 and current liabilities of
$1,021,550 or a current ratio of 1.3 to 1, representing a working capital balance of $263,996. At December 31, 2016, the Company
had current assets of $1,017,870 and current liabilities of $914,885, or a current ratio of 1.1 to 1.
The consolidated financial
statements included herein have been prepared assuming the Company will continue as a going concern, which contemplates realization
of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of
these financial statements. Although profitable for the year ended December 31, 2016, we incurred a loss for the year ended December
31, 2017 of $248,744. The Company had an accumulated deficit as of December 31, 2017 of $8,879,793.
Liquidity and Capital Resources
As of March 31, 2018, the
Company had current assets (primarily consisting of inventory and prepaid expenses) of $1,309,947 and current liabilities of $1,204,338
or a current ratio of 1.09 to 1, representing a working capital balance of $105,609. At December 31, 2017, the Company had current
assets of $1,285,546 and current liabilities of $1,021,550, or a current ratio of 1.3 to 1.
The condensed consolidated
financial statements included herein have been prepared assuming the Company will continue as a going concern, which contemplates
realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following
the date of these financial statements. We have incurred losses of $217,940 for the three months ended March 31, 2018. The Company
had an accumulated deficit as of March 31, 2018 of $9,097,733.
Because the Company believes
that existing operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial doubt
about our ability to continue as a going concern. Therefore, the Company will continue to raise additional funds as needed and
is currently exploring alternative sources of financing. The Company has issued a number of convertible debentures as an interim
measure to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or
other securities or obtaining short term loans.
If the Company fails to
raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease
operations, liquidate assets and possibly seek bankruptcy protection. The accompanying condensed consolidated financial statements
do not include any adjustments that may result from the outcome of these uncertainties.
Net cash used in operating activities totaled
$126,975 for the three months ended March 31, 2018. The cash used in operations was primarily the result of a net loss from operations
of $217,940, coupled with an increase in inventory levels of $258,901 attributable to our newly formed subsidiary BHP and increased
inventory levels associated with the commencement of their operations. These uses of cash were offset by a reduction in prepaid
expenses of $167,949 and a reduction in accounts payable of $210,994 during the quarter. As with the increase in inventory levels,
the reduction in prepaid expenses and accounts payable reflect the “ramping up” of LWA’s operations as of December
31, 2017 with associated prepayments and inventory being paid or used in the first quarter 2018.
Net cash used in operating activities for the
three months ended March 31, 2017 totaled $11,352. This use of cash reflects an increase in inventory levels of $88,931, a reduction
in customer deposits of $18,786 and an increase in accounts receivable – related parties of $11,116. These uses were offset
by the decline in royalties’ payable – related parties totaling $63,303 through the issuance of 4,587,190 shares of
restricted common stock in March 2017, which did not require cash and a reduction in prepaid expenses of $42,982.
Net cash provided by (used in) financing activities
totaled $30,000 and ($1,543) at March 31, 2018 and 2017, respectively. During the first quarter 2018, the Company sold 652,174
Units consisting of 2,608,695 common shares and 652,174 common stock purchase warrants, exercisable at $0.0115 per share, for $30,000.
There was no similar transaction during the first quarter 2017. During the first quarter 2017, the company made principle payments
on notes totaling $1,543 with no such reductions in 2018.
Certain Business Risks
The Company is subject
to various risks, which may materially harm its business, financial condition and results of operations. These may not be the only
risks and uncertainties that the Company faces. You should carefully consider the risks and uncertainties described below and the
other information in this report before deciding to purchase the Company’s common stock. These are not the only risks and
uncertainties that the Company faces. If any of these risks or uncertainties actually occurs, the Company’s business, financial
condition or operating results could be materially harmed. In that case, the trading price of the Company’s common stock
could decline and you could lose all or part of your investment.
Our ability to continue as a going concern
is in substantial doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.
The Company recorded a
loss for the three months ended March 31, 2018 and year ended December 31, 2017 of $217,940 and $248,744, respectively and had
an accumulated deficit of $9,097,733 at March 31, 2018. The Company is behind on payments due for matured convertible debentures,
notes payable, and certain vendor payables. The Company is working out all matters of delinquency on a case by case basis. However,
there can be no assurance that cooperation the Company has received thus far will continue. Our continued existence is dependent
upon generating working capital and obtaining adequate new debt or equity financing. Because of our historical losses, we may not
have working capital to permit us to remain in business through the end of the year, without improvements in our cash flow from
operations or new financing. Working capital limitations continue to impinge on our day-to-day operations.
The optional conversion features of a
series of convertible debentures issued by the Company could require the Company to issue a substantial number of shares of common
stock, which will cause dilution to the Company’s stockholders and a potentially negative effect on our stock price.
During 2011 and 2012, the
Company issued convertible debentures to several lenders and other third parties which remain outstanding and are past due. In
December 2017, the Company issued an additional two secured convertible debentures for $50,000 each. At March 31, 2018 the outstanding
principal balance of these debentures, net of related unamortized debt discount, was $396,053. The debentures convert under various
conversion formulas, which may be at a significant discount to market price of our common stock. The conversion of any of the debentures
will result in the issuance of a significant number of shares of our common stock which will cause dilution to our existing shareholders.
Furthermore, the conversion at a significant discount to the market price of our common stock may have a negative effect on our
stock price.
In December 2017 we secured
convertible notes in the aggregate principal amount of $100,000 outstanding which mature in December 2018, unless extended at the
discretion of the lenders, and we may not have available capital to satisfy such notes when they becomes due.
The secured
notes are collateralized by all of our assets and guarantees by our operating subsidiaries and chief executive officer. We currently
do not have sufficient cash to satisfy the notes when it becomes due and there are no assurances we will be able to raise the funds
if necessary.
Our common stock may be affected by limited
trading volume and may fluctuate significantly.
Our common stock is traded
on the Over-the-Counter Markets. There is a limited public market for our common stock and there can be no assurance that an active
trading market for our common stock will develop. As a result, this could adversely affect our shareholders’ ability to sell
our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded
in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and
volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance.
In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy
or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.
Our company is a voluntary filer with
the Securities and Exchange Commission and in the event that we cease reporting under the Exchange Act, investors would have limited
information available to them about the company.
While we are subject to
Section 15(d) of the Exchange Act, we do not have a class of securities registered under Section 12(g) of the Exchange Act. To
the extent that our duty to file Exchange Act reports has automatically suspended under Section 15(d) of the Exchange Act, as a
voluntary filer, we may elect to cease reporting under the Exchange Act at such time, which would limit the information available
to investors and shareholders about the company.
Our common stock is deemed to be “penny
stock,” which may make it more difficult for investors to sell their shares due to suitability requirements
Our common stock is deemed
to be “penny stock” as that term is defined under the Securities Exchange Act of 1934. Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted
on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided
by the exchange or system). Our common stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers
who sell such securities to persons other than established customers and accredited investors, which are generally institutions
with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000
or $300,000 jointly with their spouse.
Broker/dealers dealing
in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers
are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements
may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult
for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price
to decline.
We depend on the services of our Chief
Executive Officer
Our success largely depends
on the efforts and abilities of Robert M. Carmichael, our President and Chief Executive Officer. Mr. Carmichael has been instrumental
in securing our existing financing arrangements. Mr. Carmichael is primarily responsible for the development of our technology
and the design of our products. The loss of the services of Mr. Carmichael could materially harm our business because of the
cost and time necessary to recruit and train a replacement. Such a loss would also divert management attention away from operational
issues. We do not presently maintain a key-man life insurance policy on Mr. Carmichael.
We require additional personnel and could
fail to attract or retain key personnel
In addition, our continued
growth depends on our ability to attract and retain a Chief Financial Officer, a Chief Operations Officer, and additional skilled
associates. We are currently utilizing the services of professional consultants in the absence of a Chief Financial Officer and
Chief Operations Officer. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial
Officer or Chief Operations Officer 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 intellectual property
and enforce protection would have a material adverse effect on our business
Our success depends in
part on our ability, and the ability of our patent and trademark licensors, entities owned and controlled by Robert M. Carmichael,
our President and Chief Executive Officer, to obtain and defend our intellectual property, including patent protection for our
products and processes, preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing
the proprietary rights of third parties, both in the United States and in other countries. Despite our efforts to protect our intellectual
proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection.
Our industry is characterized
by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. Although we
are not aware of any intellectual property claims against us, we may be a party to litigation in the future.
We may be unable to manage growth
Successful implementation
of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management and financial
resources. If we fail to manage our growth effectively, our business, financial condition or operating results could be materially
harmed, and our stock price may decline.
Reliance on vendors and manufacturers
We deal with suppliers
on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued supply or pricing.
In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production facility
capacity. Historically, we have purchased enough inventories of products or their substitutes to satisfy demand. However, unanticipated
failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us
to curtail or cease operations.
Dependence on consumer spending
The success of the our
business depends largely upon a number of factors related to consumer spending, including current and future economic conditions
affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In times of economic
uncertainty, consumers tend to defer expenditures for discretionary items, which affect 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
beyond current levels, 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 operations.
Government regulations may impact us
The SCUBA industry is self-regulating;
therefore, Brownie’s is not subject to government industry specific regulation. Nevertheless, Brownie’s strives to
be a leader in promoting safe diving practices within the industry and is at the forefront of self-regulation through responsible
diving practices. Brownie’s is subject to all regulations applicable to “for profit” companies as well as all
trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its
facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive regulations
in the future, which could force us to curtail or cease operations.
Bad weather conditions could have an
adverse effect on operating results
Our business is significantly
impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably rough surf, may decrease
boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may not be indicative
of results of any future period.
Investors should not rely on an investment
in our stock for the payment of cash dividends
We have not paid any cash
dividends on our capital stock and we do not anticipate paying cash dividends in the future. Investors should not make an investment
in our common stock if they require dividend income. Any return on an investment in our common stock will be as a result of any
appreciation, if any, in our stock price.
The manufacture and distribution of recreational
diving equipment could result in product liability claims and we currently lack product liability insurance
We, like any other retailer,
distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure
to product liability claims in the event that the use of our products results in injury. Such claims may include, among other things,
that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or
side effects, if any. We do not anticipate obtaining contractual indemnification from parties-supplying raw materials, manufacturing
our products or marketing our products. In any event, any such indemnification if obtained will be limited by our terms and, as
a practical matter, to the credit worthiness of the indemnifying party. While we currently have product liability insurance, we
are subject to a claim that arose during a period that the Company did not have product liability coverage. In the event that we
do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a
material adverse effect on our operations and financial conditions, which could force us to curtail or cease our business operations.
If we fail to maintain an effective system
of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current
and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price
of our stock
.
Our management has previously
determined that we did not maintain effective internal controls over financial reporting. For a detailed description of these material
weaknesses and our remediation efforts and plans, see “Part II — Item 9A — Controls and Procedures.” If
the result of our remediation of the identified material weaknesses is not successful, or if additional material weaknesses are
identified in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness
of our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further
implement expensive and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness
of our financial reports which could have an adverse effect on our stock price and potentially subject us to litigation.
Our Chief Executive Officer beneficially
owns approximately 18% of the combined voting power of our Common Stock and Series A Convertible Preferred Stock and is able to
significantly influence voting issues and actions that may not be beneficial or desired by minority shareholders.
As of April 17, 2018, Robert
Carmichael, our only executive officer, beneficially owns approximately 18% of the combined voting power of the Common Stock and
Series A Convertible Preferred Stock, voting as a single class and could significantly influence the outcome of any corporate transaction
or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially
all of our assets, and also the power to prevent or cause a change in control.