NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1. Company Overview
Brownie’s
Marine Group, Inc., a Florida corporation (hereinafter referred to as” the “Company,” or “BWMG”), designs,
tests, manufactures and distributes recreational hookah diving, scuba and water safety products through its wholly owned subsidiary Trebor
Industries, Inc., a Florida corporation organized in 1981 (“Trebor”), and manufactures and sells high pressure air and industrial
compressor packages, yacht based scuba air compressor and nitrox generation systems through its wholly owned subsidiary Brownie’s
High Pressure Compressor Services, Inc., a Florida corporation organized in 2017 (“BHP”), doing business as LW Americas
(“LWA”). In addition, in December 2017, the Company formed BLU3, Inc., a Florida corporation (“BLU3”), to
develop and market portable battery powered surface supplied air dive systems. When used herein, the “Company” or “BWMG”
includes Brownie’s Marine Group, Inc., and our wholly-owned subsidiaries Trebor, BHP and BLU3.
Note
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis
of Presentation
The
following unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all the information and footnotes
required by accounting principles generally accepted in the United States (“GAAP”) for complete annual financial statements.
The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management,
necessary in order to make the financial statements not misleading. The balance sheet as of December 31, 2020 has been derived from the
Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include
all of the information and footnotes required for complete annual financial statements. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto which are included in our 2020 10-K for a broader discussion
of our business and the risks inherent in such business.
Principles
of Consolidation
The
consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor, BHP and BLU3. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash
and cash 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.
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 allowances for doubtful accounts totaled $45,426
and $16,872 at June 30, 2021 and December 31, 2020, respectively.
Inventory
Inventory
consists of the raw material, parts that make up the items that we manufacture, and finished goods. For the year ended December 31, 2020,
the Company recorded reserves for obsolete or slow-moving inventory of approximately $227,657.
No additional
reserve for obsolete or slow-moving inventory during the six months ended June 30, 2021.
Schedule
of Inventory
|
|
June
30, 2021
(unaudited)
|
|
|
December
31,
2020
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
508,094
|
|
|
$
|
408,841
|
|
Finished goods
|
|
|
476,637
|
|
|
|
454,950
|
|
Inventory, net
|
|
$
|
984,731
|
|
|
$
|
863,791
|
|
Revenue
Recognition
We
account for revenues in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with
Customers” and all the related amendments. This standards core principle is that a company should recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive.
We
recognize the sale of products under single performance obligations upon shipment of the units as that is when ownership is transferred
and our performance is completed. Revenues from repair and maintenance activities is recognized when the repairs are completed and the
units have been shipped.
Lease
Accounting
We
account for leases in accordance with ASC 842, “Leases”. The lease standard requires all leases to be reported on the balance
sheet as right-of-use assets and lease obligations.
We
categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those
leases that would allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance
leases are recorded in property and equipment, net. All other leases are categorized as operating leases. We did not have any finance
leases as of June 30, 2021. Our leases generally have terms that range from three years for equipment and five to twenty years
for property. We elected the accounting policy to include both the lease and non-lease components of our agreements as a single component
and account for them as a lease.
Lease
liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings
available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives,
plus any direct costs from executing the leases. Lease assets are tested for impairment in the same manner as long-lived assets used
in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease
term.
When
we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset,
and it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement
of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the
term of the lease.
For
the three and six months ended June 30, 2021 the lease expenses were approximately $32,900
and $65,700,
respectively, and approximately $43,000
and $78,000
for the three and six months ended June
30, 2020, respectively. Cash paid for operating liabilities for the six months ended June 30,
2021 was approximately $65,400
and approximately $64,000
for the six months ended June
30, 2020.
Supplemental
balance sheet information related to leases was as follows:
Schedule
of Supplemental Balance Sheet Information
Operating
Leases
|
|
June
30, 2021
|
|
Right-of-use assets
|
|
$
|
395,400
|
|
|
|
|
|
|
Current lease liabilities
|
|
$
|
112,771
|
|
Non-current lease liabilities
|
|
|
282,629
|
|
Total lease liabilities
|
|
$
|
395,400
|
|
Stock-Based
Compensation
We
account for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies
to measure the cost of employee and non-employee services received in exchange for an award of equity instruments, including stock options,
based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee and non-employee
are required to provide service in exchange for the award, usually the vesting period.
Loss
per common share
Basic
earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed
using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using
the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent
shares are excluded from the computation if their effect is antidilutive. At June 30, 2021 and June 30, 2020, 205,855,020 and 202,389,986,
respectively, of potentially dilutive shares were not recognized as their inclusion would be anti-dilutive. These shares reflect shares
potentially issuable under convertible notes, outstanding warrants, outstanding stock options and the conversion of preferred stock.
Recent
accounting pronouncements
The
recent accounting standards that have been issued or proposed by the Financial Accounting Standards Board (FASB) or other standards-setting
bodies that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
Note
3. Going Concern
The
accompanying 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 consolidated financial statements. For the six months ended June 30, 2021, the Company incurred a net loss of $530,786,
of which $475,875 is
non-cash stock related compensation. At June 30, 2021, the Company has an accumulated deficit of $13,486,923.
Despite a working capital surplus of approximately $798,138
at June 30, 2021, the continued losses and
cash used in operations raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s
ability to continue as a going concern is dependent upon the Company’s ability to increase revenues, control expenses, raise capital,
and to continue to sustain adequate working capital to finance its operations. The failure to achieve the necessary levels of profitability
and cash flows would be detrimental to the Company. The condensed consolidated financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Note
4. Related Party Transactions
The
Company sells products to three entities, Brownies Southport Divers, Brownies Yacht Toys and Brownies Palm Beach Divers, owned by the
brother of Mr. Robert M. Carmichael, the Company’s President and Chief Financial Officer. Terms of sale are no more favorable
than those extended to any of the Company’s other customers with similar sales volumes. These entities accounted for 15.1%
and 14.9%
of the net revenues for the three months ended June 30 2021 and 2020, respectively, and 20.9% and 18.1% for the
six months ended June 30, 2021 and 2020 respectively. Accounts receivable from these entities totaled
$153,214 and
$44,323,
respectively, at June 30, 2021 and December 31, 2020.
The
Company sells products to Brownie’s Global Logistics, LLC. (“BGL”) and 940 Associates, Inc. (“940 A”),
entities wholly-owned by Mr. Carmichael. Terms of sale are more favorable than those extended to BWMG’s regular customers, but
no more favorable than those extended to Brownie’s strategic partners. Accounts receivable from the combined entities and Mr. Carmichael
totaled $23,431 and $23,321 at June 30, 2021 and December 31, 2020, respectively.
The
Company had accounts payable to related parties of $94,573
and $102,360
at June 30, 2021 and December 31, 2020, respectively.
The balance payable at June 30, 2021 is comprised of $5,000
due to Robert Carmichael, $9,639
due to 940 Associates
and $79,934
due to BGL. At December 31, 2020 this
account was comprised of $5,000
due to Robert Carmichael, and $97,360
due to BGL.
The
Company has Exclusive License Agreements with 940 A to license the trademark “Brownies Third Lung”, “Tankfill”,
“Brownies Public Safety” and various other related trademarks as listed in the agreement. This Exclusive License Agreement
provides that the Company will pay 940 A 2.5%
of gross revenues per quarter as a royalty. Total royalty expense for the three months ended June 30, 2021 and 2020 were $28,013
and $17,916,
respectively and
$39,606 and $22,766 for the six months ended June 30, 2021 and 2020, respectively. The accrued royalty for June
30, 2021 is $22,510 and
it is included in other liabilities.
On
March 25, 2021, the Company issued 27,500,000
shares of common stock to Mr. Charles F. Hyatt,
a member of our Board of Directors in consideration of $275,000.
As
of June 30, 2021, options to purchase 25,000,000
shares of common stock held by Mr. Carmichael
vested in accordance with Carmichael Option agreement as further discussed in Note 6 of these financial statements.
Note
5. Convertible Debentures and Notes Payable
Convertible
Debentures
Convertible
debentures consisted of the following at June 30, 2021:
Schedule
of Convertible Debentures
Origination
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Origination
Principal
Balance
|
|
|
Original
Discount
Balance
|
|
|
Period
End
Principal
Balance
|
|
|
Period
End
Discount
Balance
|
|
|
Period
End
Balance,
Net
|
|
|
Accrued
Interest
Balance
|
|
|
Reg.
|
|
8/31/11
|
|
8/31/13
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
12/01/17
|
|
12/31/21
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
12/05/17
|
|
12/31/21
|
|
|
6
|
%
|
|
|
50,000
|
|
|
|
(12,500
|
)
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
9,331
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
|
$
|
—
|
|
|
$
|
50,000
|
|
|
$
|
9,331
|
|
|
|
|
|
(1)
|
The
Company borrowed $10,000 in exchange for a convertible debenture (the “Hoboken Convertible Note”). The holder at its
option may convert all or part of the note plus accrued interest into common stock at a price of 30% discount as determined from
the average four highest closing bid prices over the preceding five trading days. The Company valued the beneficial conversion feature
of the convertible debenture at $4,286, which was accreted to interest expense over the period of the note. On February 22, 2021,
this note and accrued interest of $4,777 were converted by the holder for 422,209 shares of common stock in accordance with the terms
of the note.
|
(2)
|
On
December 1, 2017, the Company entered into a $50,000 principal amount 6% secured convertible promissory note, initially due December
1, 2018, subject to extension. The note is secured with such assets of the Company equal to the principal and accrued interest, is
guaranteed by the Company’s wholly-owned subsidiaries, Trebor and BHP and the personal guarantee of Mr. Carmichael.
|
|
The
conversion price under the note initially ranged from $0.02 per share if converted in the first year to $0.125 per share if converted
in year five. The lender may convert at any time until the note plus accrued interest is paid in full. Various other fees and penalties
apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of
the outstanding common stock of the Company at any one time. In 2019, the maturity date of the note was extended for one additional
year to December 31, 2019 with a reduction in the conversion price to $0.01 per share. The Company recorded a loss on extinguishment
of debt of $32,000 upon the modification of conversion price. On June 10, 2021, this note and accrued interest of $10,554 were converted
by the holder for 6,055,358 shares of common stock in accordance with the terms of the note.
|
(3)
|
On
December 5, 2017, the Company entered into a $50,000 principal amount 6% secured convertible promissory note, initially due December
4, 2018, subject to extension. The note is secured with such assets of the Company equal to the principal and accrued interest, is
guaranteed by the Company’s wholly-owned subsidiaries, Trebor and BHP and the personal guarantee of Mr. Carmichael.
|
|
|
|
The
conversion price under the note initially ranged from $0.02 per share if converted in the first year to $0.125 per share if converted
in year five. The lender may convert at any time until the note plus accrued interest is paid in full. Various other fees and penalties
apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of
the outstanding common stock of the Company at any one time. In 2019, the note was extended for one additional year to December 31,
2019 with a reduction in the conversion price to $0.01 per share. The Company recorded a loss on extinguishment of debt of $99,000
upon the modification of conversion price. The maturity date was further extended to December 31, 2021.
|
Notes
Payable
Gonzales
Note
The
Company issued an unsecured, non-interest-bearing note of $200,000
with Mr. Tom Gonzales on July 1, 2013. The note
is payable upon demand. The Company made repayments totaling $25,000
during the six months ended June 30, 2021.
The note balance was $15,000
at June 30, 2021 and $40,000
December 31, 2020.
Hoboken
Note
The
Company issued an unsecured, non-interest-bearing note of $10,000 with Hoboken Street Association on October 15, 2016. The note was forgiven
as part of the conversion of the Hoboken Convertible Note on February 22, 2021 as described above. The note balance as of June 30, 2021
and December 31, 2020 was $0 and $10,000, respectively.
Loan
Payable
Marlin
Note
On
September 30, 2019 the Company, via its wholly owned subsidiary BLU3, executed an equipment finance agreement for the purchase of certain
plastic molding equipment through Marlin Capital Solutions. The initial principal balance was $96,725
payable over 36
equal monthly installments of $3,144
(the “Marlin Note”). The equipment finance agreement contains customary events of default. The loan
balance was $44,013
as of June 30, 2021
Schedule
of Future Amortization of Loans Payable
|
|
Payment
Amortization
|
|
2021 (6 months remaining)
|
|
|
16,918
|
|
2022
|
|
|
27,095
|
|
2023
|
|
|
|
|
2024
|
|
|
|
|
2025 and thereafter
|
|
|
|
|
Total Loan Payments
|
|
$
|
44,013
|
|
Current portion of Loan
payable
|
|
|
(34,745
|
)
|
Non-Current Portion
of Loan Payable
|
|
$
|
9,268
|
|
Mercedes
Benz Note
On
August 21, 2020, the Company executed an installment sales contract with Mercedes Benz Coconut Creek for the purchase of a 2019 Mercedes
Benz Sprinter delivery van. The installment agreement was for $55,841
with a zero
interest rate payable over 60
months with a monthly payment of $931
and is personally guaranteed by Mr. Carmichael.
The first payment was due on October
5, 2020. The loan balance as of June 30, 2021
is $47,156.
Schedule
of Future Amortization of Loans Payable
|
|
Payment
Amortization
|
|
2021 (6 months remaining)
|
|
$
|
5,584
|
|
2022
|
|
$
|
11,168
|
|
2023
|
|
$
|
11,168
|
|
2024
|
|
$
|
11,168
|
|
2025 and thereafter
|
|
$
|
8,068
|
|
Total note payments
|
|
$
|
47,156
|
|
Current portion of note
payable
|
|
$
|
(11,168
|
)
|
Non-Current Portion
of notes payable
|
|
$
|
35,988
|
|
Navitas
Note
On
May 19, 2021 the Company, via its wholly owned subsidiary BLU3, executed an equipment finance agreement financed for the purchase of
certain plastic molding equipment through Navitas Credit Corp. (“Navitas”). The amount financed is $79,309
payable over 60
equal monthly installments of $1,611
(the “Navitas Note”). The equipment finance agreement contains customary events of default. The agreement was
not fully funded as of June 30, 2021. Navitas has funded $37,098
for the down payment of an equipment purchase and the balance of the note is $36,021
as of June 30, 2021.
Schedule
of Future Amortization of Loans Payable
|
|
Payment
Amortization
|
|
2021 (6 months remaining)
|
|
|
8,070
|
|
2022
|
|
|
17,464
|
|
2023
|
|
|
10,487
|
|
Total
Note Payments
|
|
$
|
36,021
|
|
Current
portion of Note payable
|
|
|
(19,335
|
)
|
Non-Current
Portion of Note Payable
|
|
$
|
16,686
|
|
PPP
Loan
On
May 12, 2020, we received an unsecured loan from South Atlantic Bank in the principal amount of $159,600 (the “SBA Loan”),
under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief,
and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration. The intent and purpose
of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a
focus on payroll. As a qualifying business as defined by the SBA, we used the proceeds from this loan to primarily help maintain our
payroll and cover our rent and utilities as we navigated our business through the lockdowns associated with the COVID-19 pandemic until
our return to normal operations earlier in 2020.
The
term of the note is two years, though it may be payable sooner in connection with an event of default under the note. The SBA
Loan carries a fixed interest rate of one percent per year, and a monthly payment of $8,983,
with the first payment due seven
months from
the date of initial cash receipt. Under the CARES
Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible
purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the
maintenance of employment and compensation levels. We used the SBA Loan for qualifying expenses and have applied for forgiveness of
the SBA Loan in accordance with the terms of the CARES Act. On April 28, 2021, the Company was notified by South Atlantic Bank that
the SBA Loan was forgiven in full under the terms of the CARES Act. The company recorded the forgiveness as a gain on the
forgiveness of the PPP loan on our condensed consolidated income statement.
The
note balance as of June 30, 2021 and December 31, 2020 was $0 and $159,600, respectively.
Note
6. Shareholders’ Equity
Common
Stock
On
February 22, 2021, the Company issued 422,209 shares of common stock related to the conversion of a convertible debenture and accrued
interest of $14,777.
On
March 1, 2021, the Company issued a consultant 3,000,000 shares of its common stock related to investor relation services at a fair value
of $120,000.
On
March 25, 2021, the Company issued 27,500,000
shares of common stock to Mr. Charles F. Hyatt,
a member of our Board of Directors, in consideration of $275,000.
On
February 25, 2021, the Company issued 116,279 shares of common stock to a consultant with a fair value of $5,000 for professional business
services.
On
June 10 2021, the Company issued 6,055,358
shares of common stock related to the conversion
of a convertible debenture and accrued interest of $60,554.
Preferred
Stock
During
the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment
to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of blank check preferred stock. The blank
check preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights
as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business
Corporation Act. In April 2011 the Board of Directors designated 425,000 shares of the blank check preferred stock as Series A Convertible
Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into a share of the Company’s common stock at
any time at the option of the holder at a conversion price of $18.23 per share. Holders of shares of Series A Convertible Preferred Stock
are entitled to 250 votes for each share held. The Company’s common stock and Series A Convertible Preferred Stock vote together
as on any matters submitted to our shareholders for a vote. As of June 30, 2021, and December 31, 2020, the 425,000 shares of Series
A Convertible Preferred Stock are owned by Mr. Carmichael.
Equity
Incentive Plan
On
May 26, 2021 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 Non-statutory Stock Options, Stock Purchase Rights, time vested
and/performance invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan.
The maximum number of shares that may be issued under the Plan shall be 25,000,000
shares. 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.
Equity
Compensation Plan Information as of June 30, 2021:
Schedule
of Equity Compensation Plan Information
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants and rights (a)
|
|
|
Weighted
– average exercise price of outstanding options, warrants and rights (b)
|
|
|
Number
of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column
(a) (c)
|
|
Equity Compensation Plans Approved
by Security Holders
|
|
|
1,125,000
|
|
|
$
|
.036
|
|
|
|
23,875,000
|
|
Equity Compensation
Plans Not Approved by Security Holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
1,125,000
|
|
|
$
|
.036
|
|
|
|
23,875,000
|
|
Options
Effective
July 29, 2019 the Company issued options to purchase up to an aggregate of 10,380,952 shares of common stock to Mr. Blake Carmichael.
The options were issued pursuant to a stock option grant agreement and are exercisable at $0.018 per share for a period of five years
from the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $43,575 using the Black-Scholes
option pricing model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend
yield of 0%, iv) expected volatility of 172%. These stock options were fully expensed as of December 31, 2020.
Effective
July 29, 2019, the Company issued Mr. Carmichael options to purchase up to 20,761,904 shares of common stock. The options were issued
pursuant to a Grant Agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to
vesting over a period of six months. The fair value of the options totaled $87,147 using the Black-Scholes option pricing model with
the following assumptions: i) risk free interest rate of 2.01%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected
volatility of 172%. These stock options were fully expenses during the year ending December 31, 2020.
Effective
January 6, 2020, the Company issued options to purchase up to 2,000,000 shares of common stock to Mr. Jeffrey Guzy, then a member of
the Board of Directors of the Company. The options were issued pursuant to a stock option grant agreement and is exercisable at $0.0229
per share for a period of three years from the date of issuance. The options were immediately vested. The fair value of the options on
the date of the grant was $40,107 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest
rate of 1.55%, ii) expected life of 1.5 years, iii) dividend yield of 0%, iv) expected volatility of 250%. These stock options were fully
expenses during the year ending December 31, 2020.
Effective
January 11, 2020, the Company issued options to purchase up to 2,000,000 shares of common stock to BizLaunch Advisors, LLC. The options
were issued pursuant to a professional services agreement and are exercisable at $0.0229 per share for a period of three years from the
date of issuance. The options were immediately vested. The fair value of the options on the date of the grant was $40,097 using the Black-Scholes
option pricing model with the following assumptions: i) risk free interest rate of 1.54%, ii) expected life of 1.5 years, iii) dividend
yield of 0%, iv) expected volatility of 250%. These stock options were fully expenses during the year ending December 31, 2020.
On
April 14, 2020, the Company entered into a Non-Qualified Stock Option Agreement with Mr. Carmichael (the “Carmichael Option Agreement”).
Under the terms of the Carmichael Option Agreement, as additional compensation the Company granted Mr. Carmichael an option (the “Carmichael
Option”) to purchase up to an aggregate of 125,000,000 shares of the Company’s common stock at an exercise price of $.045
per share, of which the right to purchase 75,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue
milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase 50,000,000 shares of common
stock is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE
American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
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the
right to purchase 25,000,000 shares of the Company’s common stock shall vest at such time as the Company reports cumulative
consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any subsequent
acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively, “Net
Revenues”), in excess of $3,500,000 in the aggregate over four consecutive fiscal quarters commencing May 1, 2020 and ending
on April 30, 2023 (the “Net Revenue Period”);
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the
right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues
in excess of $7,000,000 in the aggregate over four consecutive fiscal quarters during the Net Revenue Period; and
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the
right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues
in excess of $10,500,000 in the aggregate over four consecutive quarters during the Net Revenue Period.
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The
Carmichael Option Agreement provides that the Carmichael Option is exercisable by Mr. Carmichael on a cashless basis. The Carmichael
Option is not transferrable by Mr. Carmichael, and he must remain an employee of the Company as an additional term of vesting. Once a
portion of the Carmichael Option vests, it is exercisable by Mr. Carmichael for 90 days. Any portion of the Carmichael Option which does
not vest during the Net Revenue Period lapses and Mr. Carmichael has no further rights thereto.
The
fair value of the Carmichael Option on the date of the grant was $4,370,109
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of .26%,
ii) expected life of 1.5
years, iii) dividend yield of 0%,
iv) expected volatility of 320%.
The Company analyzed the likelihood that the vesting qualifications would be met. As of June 30, 2021, 25,000,000
of options were vested as the targeted net revenues
were reached and fully expensed. The second net revenue target was 25% reached. Therefore, stock option expense recognized during the
six months ended June 30, 2021 for this option was $437,011.
On
November 5, 2020, the Company entered into a Non-Qualified Stock Option agreement with Christopher Constable the “Constable
Option Agreement” as part of his employment agreement. Under the terms of the option agreement, the Company granted Mr.
Constable a 5 year
option to purchase 5,434,783 shares
of the Company’s common stock at an exercise price of $.0184, (the
“Compensation Options”). The Compensation Options were immediately vested. The fair value of the options on the date
of the grant was $106,199 using
the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of .16%,
ii) expected life of 2.5 years,
iii) dividend yield of 0%,
iv) expected volatility of 341%.
These stock options were fully expensed as of December 31, 2020.
As
part of the Constable Option Agreement the Company also granted Mr. Constable an option (the “Bonus Option”) to purchase
up to an aggregate of 30,000,000 shares of the Company’s common stock at an exercise price of $.0184 per share, of which the right
to purchase 10,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below
(the “Net Revenue Portion of the Option”) and the right to purchase 20,000,000 shares of common stock is subject to vesting
upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE American LLC or similar
stock exchange. The Net Revenue Portion of the Option shall vest as follows:
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the
right to purchase 2,000,000 shares of the Company’s common stock shall vest at such time as the Company reports cumulative
consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any subsequent
acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively, “Net
Revenues”), in excess of $5,000,000 in the aggregate over four consecutive fiscal quarters commencing January 1, 2021 and ending
on April 30, 2023 (the “Net Revenue Period”);
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the
right to purchase an additional 3,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues
in excess of $7,500,000 in the aggregate over four consecutive fiscal quarters during the Net Revenue Period; and
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the
right to purchase an additional 5,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues
in excess of $10,000,000 in the aggregate over four consecutive quarters during the Net Revenue Period.
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The
Constable Option Agreement provides that the Compensation Options and Bonus Options are exercisable by Mr. Constable on a cashless basis.
The Constable Option is not transferrable by Mr. Constable, and he must remain an employee of the Company as an additional
term of vesting. Once a portion of the Constable Option vests, it is exercisable by Mr. Constable for four
years.
The
fair value of the Bonus Options on the date of the grant was $578,082 using the Black-Scholes option pricing model with the following
assumptions: i) risk free interest rate of .14%, ii) expected life of 2.0 years, iii) dividend yield of 0%, iv) expected volatility of
312.2%. The Company analyzed the likelihood that the vesting qualifications would be met, and as of June 30, 2021, deemed that there
was a 5.8% chance that the options would vest. Therefore, stock option expense recognized during the six months ended June 30, 2021 for
this option was $34,067.
Effective
June 14, 2021 the Company issued options to purchase up to an aggregate of 1,125,000
shares of common stock to various employees under
the Plan. The options were issued pursuant to a stock option grant agreements and are exercisable at $0.036
per share for a period of four
years from the date of issuance, with 12.5%
of the options vesting each fiscal quarter over a period of two
years. The fair value of the options totaled
$38,369
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of .21%,
ii) expected life of 2
years, iii) dividend yield of 0%,
iv) expected volatility of 304.77%.
The stock options expense recognized for the six months ended June 30, 2021 was $4,797.
A
summary of the Company’s outstanding stock options as of December 31, 2020, and changes during the six months ended
June 30, 2021 is presented below: