Notes
to Condensed Consolidated Financial Statements
JUNE
30, 2018
(Unaudited)
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 June 30, 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 and six month periods ended June 30, 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 periods. 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. The Company incurred a loss of $248,744
for the year ended December 31, 2017 and losses of $109,203 and $327,143 for the three and six month periods ended
June 30, 2018. The Company had an accumulated deficit of $9,206,936 and $8,879,793 at June 30, 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 common stock 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
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.
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 June 30, 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 June 30, 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 June 30, 2018 and 2017, totaled $12,714 and $11,970,
respectively. Advertising and trade show expense incurred for the six months ended June 30, 2018 and 2017, totaled $28,963 and
$13,127, 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 June 30, 2018 and 2017 the Company incurred research and development costs of $36,744 and
$642, respectively. During the six month periods ending June 30, 2018 and 2017 the Company incurred research and development costs
of $43,176 and $1,205, 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 $70,664 and $97,249
at June 30, 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
June 30, 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 excluded from dilutive earnings per share totaled 62,164,296 and 50,807,948 for the six month periods
ended June 30, 2018 and 2017, respectively as the effect was anti-dilutive.
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:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
654,176
|
|
|
$
|
614,541
|
|
Work
in process
|
|
|
—
|
|
|
|
—
|
|
Finished
goods
|
|
|
371,697
|
|
|
|
208,345
|
|
|
|
$
|
1,025,873
|
|
|
$
|
822,886
|
|
3.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
|
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Prepaid
inventory
|
|
$
|
7,790
|
|
|
$
|
27,715
|
|
Prepaid
insurance
|
|
|
13,735
|
|
|
|
7,453
|
|
Prepaid
other current assets
|
|
|
23,396
|
|
|
|
216,419
|
|
|
|
$
|
44,921
|
|
|
$
|
251,587
|
|
4.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment consists of the following as of:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Tooling
and equipment
|
|
$
|
153,632
|
|
|
$
|
125,832
|
|
Computer
equipment and software
|
|
|
27,469
|
|
|
|
27,469
|
|
Vehicles
|
|
|
44,160
|
|
|
|
44,160
|
|
Leasehold
improvements
|
|
|
43,779
|
|
|
|
43,779
|
|
|
|
|
269,040
|
|
|
|
241,240
|
|
Less:
accumulated depreciation and amortization
|
|
|
(222,398
|
)
|
|
|
(213,742
|
)
|
|
|
$
|
46,642
|
|
|
$
|
27,498
|
|
Depreciation
and amortization expense totaled $4,103 and $8,656 for the three and six month periods ending June 30, 2018, and $9,041 and $17,842
for the three and six month periods ending June 30, 2017, respectively.
Other
assets at June 30, 2018 consisted of the non-current portion of a licensing fee of $22,500 and $6,649 in refundable deposits.
At December 31, 2017, the balance of $6,649 consisted solely of refundable deposits.
In
April, 2018, the Company entered into an exclusive Patent License Agreement (“License Agreement”) relating to intellectual
property to be utilized in underwater breathing systems supplying breathing air to divers at low pressure.
Under
the License Agreement, the Company paid an initial license fee through the issuance of 759,422 common shares with a fair value
of $30,000. The License Agreement further provides for royalties to be paid based on annual net revenues achieved utilizing the
contracted technology.
As
the Company’s product intended to utilize the contracted technology is still in the development stage and no sales are anticipated
at least through calendar 2018, no contingent liability has been recognized.
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 months ended June 30, 2018 and 2017, represented 20.10% and 41.88% respectively,
of total net revenues. Combined sales to these six (6) entities for the six months ended June 30, 2018 and 2017, represented 24.61%
and 38.85% 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 June 30, 2018 and 2017, was $138,581 and $206,963, respectively.
Combined net revenues from these entities for six months ended June 30, 2018 and 2017, was $296,413 and $365,386, respectively.
Accounts receivable from Brownie’s Southport Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s
Yacht Toys totaled $60,212 at June 30, 2018 and $51,638 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 these terms are 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 June 30, 2018 and 2017, were $0 and $2,732, respectively.
Combined net revenues from these entities for six month periods ended June 30, 2018 and 2017, were $0 and $3,067, respectively.
Combined accounts receivable from BGL, 940 Associates and 3D Buoy totaled $1,966 and $4,043 at June 30, 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 June 30, 2018 and 2017, totaled $13,468 and $18,613, respectively, and
for the six months ended June 30, 2018 and 2017 totaled $23,395 and $29,486, 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:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Accounts
payable trade and other
|
|
$
|
383,282
|
|
|
$
|
143,347
|
|
Accrued
payroll & fringe benefits
|
|
|
35,112
|
|
|
|
29,023
|
|
Accrued
payroll taxes & withholding
|
|
|
7,928
|
|
|
|
8,689
|
|
Accrued
interest
|
|
|
221,909
|
|
|
|
211,679
|
|
|
|
$
|
648,231
|
|
|
$
|
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
:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
126,572
|
|
|
$
|
126,572
|
(*)
|
Asset
purchase agreement payable
|
|
|
9,596
|
|
|
|
12,857
|
|
On-line
training liability
|
|
|
2,226
|
|
|
|
2,331
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
138,394
|
|
|
$
|
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 June 30, 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
|
|
|
|
215,000
|
|
|
|
(1
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
3,442
|
|
|
|
(2
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
12/01/17
|
|
12/01/18
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
(5,220
|
)
|
|
|
44,780
|
|
|
|
1,750
|
|
|
|
(4
|
)
|
12/05/17
|
|
12/04/18
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
(5,220
|
)
|
|
|
44,780
|
|
|
|
1,717
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
412,743
|
|
|
$
|
(10,440
|
)
|
|
$
|
399,560
|
|
|
$
|
221,909
|
|
|
|
|
|
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 was $0.37125 and the lender could convert at any
time until the debenture plus accrued interest is paid in full. Various other fees and
penalties applied if payments or conversions were not done timely by the Company. The
lender was limited to maximum conversion of 4.99% of the outstanding Common Stock of
the Company at any one time.
On
June 15, 2018, the Company entered into a Note Satisfaction, Settlement and General Release Agreement (Satisfaction Agreement)
with the lender. Under the terms of the Satisfaction Agreement, the lender released and discharged the Company from any
further obligation due the lender with no further consideration. The Company recognized income of $2,743 in principal
and $5,393 in related accrued interest.
|
(4)
|
The
Company entered into a 6% Secured Convertible Promissory Note, due December 1, 2018, subject to extension. The note is secured
with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned
subsidiaries, Trebor Industries, Inc. and 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 initial term of the policy was through August 14, 2018 and was renewed through August 14, 2019.
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 $23,000 for the three
month periods ended June 30, 2018 and 2017, and $27,756 and $35,000 for the six month periods ending June 30, 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
|
|
$
|
56,763
|
|
year
2
|
|
|
58,467
|
|
year
3
|
|
|
60,219
|
|
year
4
|
|
|
62,028
|
|
year
5 and thereafter
|
|
|
146,265
|
|
|
|
$
|
383,742
|
|
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 103,903,691 and 98,192,717 common shares outstanding at June 30, 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.
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.
On
April 6, 2018, the Company entered into a Patent and License Agreement issuing 759,422 common shares with a fair value of $0.0395
per share totaling $30,000.
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.
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 June 30, 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.
13.
SUBSEQUENT EVENTS
In
July 2018, the Company issued an aggregate of 722,160 shares of common stock to sixteen employees under a one-time
employee stock incentive grant. The shares were fair valued at $0.022 per share based on market value at the time of the
grant, with a total value recognized of $16,000.