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PART
I
Unless
specifically set forth to the contrary, when used in this report references to “BWMG,” the “Company,” “we,”
“our,” “us,” and similar terms refers to Brownie’s Marine Group, Inc., a Florida corporation, and our wholly
owned subsidiaries, Trebor Industries, Inc., a Florida corporation (“Trebor”) doing business as Brownie’s Third Lung,
Brownie’s High Pressure Compressor Services, Inc. a Florida corporation (“BHP”) doing business as LW America’s, BLU3, Inc., a Florida corporation (“BLU3”) and Submersible Systems, Inc., a Florida corporation (“SSI”), doing
business as Spare Air.
General
The
Company owns and operates a portfolio of companies with a concentration in the industrial, and recreational diving industry. The Company,
through its subsidiaries, designs, tests, manufactures, and distributes recreational hookah diving, yacht-based scuba air compressors
and nitrox generation systems, and scuba and water safety products in the United States and internationally.
The
Company has four subsidiaries focused on various sub-sectors of our industry:
| ● | Brownie’s
Third Lung | Surface Supplied Air (“SSA”) |
| ● | BLU3,
Inc. | Ultra-Portable Tankless Dive Systems |
| ● | LW
Americas | High Pressure Gas Systems |
| ● | Submersible
Systems, Inc. | Redundant Air Tank Systems |
Our
wholly owned subsidiaries do business under their respective trade names on both a wholesale and retail basis from our headquarters and
manufacturing facility in Pompano Beach, Florida, and a manufacturing facility in Huntington Beach, California.
The
Company, through its wholly owned subsidiaries, designs, tests, and manufactures tankless dive systems, rescue air systems and yacht-based
self-contained underwater breathing apparatus (“SCUBA”) air compressor and nitrox generation fill systems and acts as the
exclusive distributor for North and South America for Lenhardt & Wagner GmbH (“L&W”) compressors in the high-pressure
breathing air and industrial gas markets. The Company is also the exclusive United States and Caribbean distributor for Chrysalis
Trading CC, a South African manufacturer of fitness and dive equipment, doing business as Bright Weights (“Bright Weights”),
of a dive ballast system produced in South Africa. Our wholly owned subsidiaries and related product lines are as follows:
Surface
Supplied Air Products
Our
Brownie’s Third Lung systems have been a dominant figure in gasoline powered, high-performance, and more recently in the battery
powered SSA diving systems. Taking full advantage of the proprietary compressor system, a complete series of traditional “fixed
speed” electric compressors were developed for the built-in-boat market in 2005. In 2010, we introduced our variable-speed battery
powered hookah system which provides divers with gasoline-free all day shallow diving experiences. These systems provide performance
and runtimes for up to 3 hours by utilizing a variable speed technology that controls battery consumption based on diver demand.
In
2021 we continued to expand our dealer network and our marketing efforts with both the consumer and our network of dealers. The Company
continues to pursue dealers outside of the United States in order to diversify the seasonality as well as the geography risks. Additionally,
we continue to pursue more aggressively the boat builder market to offer our SSA systems as an option on newly built boats, expanding
our market beyond the traditional consumer markets for our products.
Our
SSA products include:
●
Tankless Dive Systems: The Company produces a line of tankless dive products, commonly called hookah or recreational SSA systems.
These systems allow one to four divers to enjoy the marine environment up to a depth of 45 feet without the bulk and weight of conventional
SCUBA gear. We believe that the removal of barriers to entry into the sport of diving and the reduction of complicated and bulky SCUBA
gear invites a broader range of the general public to participate more actively and enjoyably at their own pace and schedule. Our product
is designed to reduces the effort required for its transport and use while exploring, cruising or traveling.
A
line of land-based systems is available for light-duty commercial applications that demand portability and performance. In addition to
the gasoline-powered units and the variable speed battery powered units, a series of AC electric powered systems is also available for
light to commercial use. Powered by battery for portability or household current for unlimited dive duration, these units are used primarily
by businesses that work in aquatic maintenance and marine environments.
●
BIAS (Boat Integrated Air Systems): The Company developed several tankless products and complimentary accessories that
it believes makes boat diving easier. The BIAS battery powered tankless kit allows boat builders, dealers and end users to seamlessly
install a pre-packaged kit directly into the boat and our E-Reel, a level-winding battery powered hose reel system, provides compact
storage of up to 150 feet of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. In
addition to supplying air to divers, BIAS may be used for supporting air horns, inflating boat fenders/water toys and activating pneumatically
operated doors.
Ultra
Portable Tankless Dive Systems
Through
our wholly-owned subsidiary BLU3, we develop and market a next generation electric, surface supplied air shallow dive system that is
completely portable to the user. The BLU3 line currently consists of two models, NEMO and NOMAD, targeting specific performance levels
and price points.
NEMO
dive systems are currently sold in 9 countries through Amazon, and also through 54 dealers worldwide. NEMO, designed to be the world’s
smallest dive system is capable of taking a diver to 10 feet for 60 to 90 minutes on one charge of its lithium-ion battery. NEMO is portable
and its batteries are FAA compliant for airline travel.
NOMAD
dive system (“NOMAD”) began shipping in the third quarter, 2021 and is currently sold to consumers via our website,
Amazon and through our network of dealers worldwide. The NOMAD is highly portable and expands dive capability to up to 30 feet. NOMAD
has been marketed through BLU3’s internet presence and marketing campaigns as well as at industry and other trade shows across
the country.
We
believe the BLU3 product lines are changing the way that people get into the water and explore the next atmosphere. The units are ultra-portable
and can travel with the consumer to their adventures, wherever they may be.
High
Pressure Gas Systems
Through
our wholly-owned subsidiary LW America’s, we design, manufacture, sell and install SCUBA tank fill systems for on-board yacht use
under the brand “Yacht-Pro™”. Our systems provide complete diving solutions for yachts, including nitrox systems which
allow yacht owners to fill tanks with oxygen enriched air on board. The Yacht-Pro™ compressor systems offer a completely marine-prepared,
variable frequency drive(“VFD”) driven, automated alternative to other compressors on the market. We also design complete
dive lockers, mixed gas production and distribution systems, and the Nitrox Maker™. Nitrox is oxygen-enriched air, which reduces
the effects of nitrogen on divers and is the industry standard for dive professionals. The Nitrox Maker™ continuously generates
oxygen rich breathing gas directly from low-pressure air with no stored oxygen or other gases required onboard. Our light duty compressor,
the new Yacht Pro Essential is specifically designed as a turn-key kit for the boat builders and is optimized to integrate to onboard
power systems and withstand the marine environment with all components and hardware impervious to spray from the elements. The Yacht
Pro™ series contains models for both medium-duty applications, such as recreational divers and small groups, and heavy-duty use
as found on research vessels, commercial operations and live-aboard dive boats. All Yacht Pro™ models come with the variable speed
frequency drive reducing the initial start-up power demand typically associated with high pressure compressor systems.
In
August 2017, we entered into a five-year exclusive distribution agreement with L&W, which agreement renews for successive one-year
terms unless terminated as provided for in the agreement. 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. We are
conducting this business direct to end-users and establishing sales, distribution and service centers for high pressure air and industrial
gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries under the brand name “L&W Americas/LWA”.
We
are exclusively developing a sales, distribution and service capability to assist L&W with completing a worldwide network of L&W’s
agencies and service centers.
In
addition to breathing air compressors and related peripheral equipment, L&W also offers compressors, storage and purification systems
to meet the high-pressure requirements for natural gas filling stations, and high-pressure inert gases such as argon, helium and nitrogen
for industrial applications including welding and laser cutting, and for general laboratory use.
We
believe the product lines from L&W, will allow LW Americas to offer high quality, competitive products into the first responder and
industrial market that utilize compressed air. Our goal will be to build a network of jobbers, dealers, installers and high-pressure
compressor distributors by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and
core product original equipment manufacturer (“OEM”) integration relationships.
Redundant
Air Tank Systems
In
September 2021, the Company acquired SSI to further expand its product offerings and manufacturing capabilities. SSI has been manufacturing
redundant air systems for recreational divers, private companies and militaries throughout the world for more than 40 years. Their state-of-the-art
manufacturing facility in Huntington Beach, California is equipped to add to the machining and product development capabilities of the
Company.
The
SSI acquisition gives the Company access to a world-wide base of in excess of 400 dealers and distributors, GSA contracting capability,
as well as the direct source for the redundant air needs for our Brownie’s Third Lung and BLU3 diving equipment and expands warehousing
capabilities, reducing freight costs for both sets of customers.
SSI
continues to innovate their technologies to meet changing military and commercial needs and is in development of the next generation
of their Helicopter Emergency Egress Device (“HEED”) product line, specifically designed for aircraft and military vehicle
use. Additionally, SSI has found use for their products in the medical field and continues to develop customer relationships in that
area to grow revenue and diversify its product and customer portfolio.
Diving
and Snorkeling Industry
The
Sports, Fitness Industry Association (“SFIA”) estimated there were 2.6 million participants in the U.S. scuba diving market
in 2020. According to a report published by the Dive Equipment Manufacturing Association (“DEMA”) in first quarter 2021,
there were approximately 87,000 new participants in U.S. diving market in 2020 as compared to approximately 151,000 in 2019. DEMA attributes
the drop in new open water certifications in 2020 primarily to the pandemic.
In
contrast, the SFIA study indicated that participation in snorkeling increased by nearly 1% in 2020 as compared to 2019 with estimated
participation of 7.7 million in the U.S.
The
Company intends to enter the tourist market via a guided tour program that is currently intended to be launched in the second quarter
of 2022. The Company sees the guided tour model as an important building block in introducing its battery powered diving products to
the consumer market. Additionally, this model will not only give consumers the opportunity to “try before you buy”, but also
provide experiential training for the consumer to increase enjoyment and safety of our diving products.
Yachting
Industry
The
global luxury yacht market is estimated to reach $6.5 billion and is poised to grow at a compound annual growth rate (“CAGR”)
of 11% from 2020 to 2024, according to Technavio, a market research firm, in their industry report dated November 2020. The Company’s
BIAS systems have been designed with this industry in mind. The Company markets directly to the yachting industry, by leveraging its
relationships with large yacht servicing companies, yacht builders and yacht brokerages.
The
recreational sailing and boating market and yachting industries also continue to grow. Allied Market Research estimates that the recreational
boating market is growing at a CAGR of 5.1% through 2027 reaching total revenues of $35.4 billion.
High
Pressure Compressor Line
According
to Allied Market Research report published in February 2018, the North American high pressure compressor market is $880 million growing
at an estimated CAGR of 3%.
The
Company expects to continue to distribute L&W compressors through its YachtPro, and BIAS systems, while continuing to focus on the
expansion of its distribution into non-marine related distribution channels that the Company believe should positively impact its market
reach.
Intellectual
Property
Trade
Names
The
Company either owns or has licensed from entities in which Robert Carmichael, our Chief Executive Officer, has an ownership interest,
the following registered and unregistered trade names, trademarks and service marks: Brownie’s Third Lung™, browniedive.com,
Brownie’s, Brownie’s Third Lung oval symbol, browniedive, YachtPro, NitroxMaker™, BLU3, diveBLU3.com, BLU3 Nemo, BLU3-Vent,
Submersible Systems, Spare Air, HEED 3, Snorkelator, easy dive, spareair.com, HELO, RES, fast float rescue harness, tankfill.com, browniestankfill,
browniestankfill.com, browniespublicsafety.com, browniespublicsafety, Peleton Hose System, Twin-Trim, and Kayak Diving Hose Kit.
The
Company owns the following patents:
Patent
number |
|
Description |
|
Issued
Date |
|
Expiration
Date |
|
Owned
by |
10,758,246 |
|
Abdominal
Aortic Tourniquet |
|
9/1/2020 |
|
3/17/2034 |
|
Trebor
Industries, Inc. |
9,782,182 |
|
Abdominal
Aortic Tourniquet |
|
10/10/2021 |
|
10/26/2033 |
|
Trebor
Industries, Inc. |
9,351,737 |
|
Abdominal
Aortic Tourniquet |
|
5/31/2016 |
|
3/2/2034 |
|
Trebor
Industries, Inc. |
11,265,625 |
|
Automated
Self-Contained Hooka system with unobtrusive aquatic data recording |
|
3/1/2022 |
|
10/30/2039 |
|
BLU3,
Inc. |
11,077,924 |
|
System
for adjusting pressure limits based on depth of diver(s) |
|
8/3/2021 |
|
3/20/2039 |
|
Brownie’s
Marine Group, Inc. |
Application
number |
|
Description |
|
Filed
Date |
|
Owned
by |
17/683,502 |
|
Automated
Self-Contained Hooka system with unobtrusive aquatic data recording |
|
3/1/2022 |
|
BLU3,
Inc. |
17/389,648 |
|
System
for adjusting pressure limits based on depth of diver(s) |
|
7/30/2021 |
|
Brownie’s
Marine Group, Inc. |
License
Agreements
On
April 6, 2018, the Company entered into a patent license agreement (the “STS Agreement”) with Setaysha Technical Solutions,
LLC (“STS”) pursuant to which the Company licensed certain intellectual property, including patent rights, non-patent rights
and know how from STS for use in our ultra-portable tankless dive system products. Under the STS Agreement, the Company paid an initial
license fee in April 2018 through the issuance of 759,422 shares of common stock with a fair value of $30,000 which is being amortized
on a straight-line basis over its five-year term. The STS Agreement further provides for royalties to be paid based on annual net revenues
achieved. On December 31, 2019, the Company entered into Addendum No. 1 to the Patent License Agreement (“Addendum No. 1”)
which amended the payments due upon the first commercial sale of Nemo. Upon entering into Addendum No. 1, $8,250 was paid to STS in cash
and $8,250 which was accrued and paid on January 10, 2020. On February 6, 2020, the Company issued 828,221 shares of its common stock
with a fair value of $18,635 in satisfaction of $13,500 for the first commercial sale. On June 30, 2020, the Company entered into Amendment
No. 2 to the STS Agreement which set forth STS’s assistance related to designing and commercializing certain diving products, and
provides for a minimum yearly royalty of $60,000, or $15,000 per fiscal quarter, beginning in December 2019 and increasing by 2.15% per
year. With the introduction of the NOMAD in the last quarter of 2021, the Company is obligated to pay an additional annual minimum
royalty of $60,000 per year for the years 2022, 2023 and 2024, also increasing the quarterly minimum royalty by $15,000 per quarter.
Marketing
Print
Literature, Public Relations, and Advertising
We
have in-house graphic design capability to create and maintain product support literature, catalogs, mailings, web-based advertising,
newsletters, editorials, advertorials, and press releases. We also, from time-to-time, target specific markets by selectively advertising
in journals and magazines that we believe reach our potential customers. In addition, we strive to issue press releases, newsletters,
and social media postings periodically to keep the public informed of our latest products and related endeavors.
Tradeshows
In
2021, the Company was represented directly or indirectly at The Palm Beach Boat Show, The Annapolis Motor and Sailing Shows, The Fort
Lauderdale Boat show, Diving Equipment and Manufacturing show. In 2022, the Company currently intends to expand its marketing reach via
tradeshows by attending all shows attended in 2021, The Seattle Boat Show, The Dubai Boat Show, and the HAI Heli-Expo, along with various
other trade and industry shows.
Websites
We
sell our products online through our and our subsidiaries websites and many of our products are marketed on some of our customers’
websites. In addition to these websites, numerous other websites have quick links to the Company’s website. Our products are available
both domestically and internationally. Internet sales and inquiries are also supported by the Company.
Product
Research and Development
Research
and development costs for the year ended December 31,2021 and December 31, 2020, were $75,439 and $115,156, respectively, none of which
cost is borne directly by customers.
Government
Regulation
The
SCUBA industry is self-regulating; therefore, the Company is not subject to government industry specific regulation. However, SSI, our
tank manufacturing company is subject to Department of Transportation (“DOT”) regulation and testing of each of their tanks.
The Company strives to be a leader in promoting safe diving practices within the industry and believes it is at the forefront of self-regulation
through responsible diving practices. The Company is subject to all regulations applicable to “for profit” companies as well
as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its
facility have been obtained.
Distribution/Customers
The
Company has historically been predominantly a wholesale distributor to retail dive stores, marine stores, boat dealers builders, and
the US and international militaries. Currently, the Company generates a significant amount of direct to consumer sales via its websites
and its relationship with Amazon via BLU3, BTL and SSI. Our retail sales customers include boat owners, recreational divers, commercial
divers, and pilots. The Company sells products to three entities owned by the brother of Robert Carmichael, the Company’s Chief
Executive Officer, and three companies owned by Mr. Carmichael. Combined sales to these six entities for 2021 and 2020, represented 17.9%
and 18.4%, respectively, of total net revenues.
The
majority of L&W high pressure compressors and NitroxMaker™ systems have been sold to commercial dive stores, dive operators
(resorts and liveaboard dive boats), yacht builders, yacht owners and high pressure compressor distribution partners.
Sales
of YachtPro™ compressor systems have been split between retail sales directly to consumers and wholesale sales to OEM boat builders/resellers/brokers.
Suppliers/Raw
Materials
Principal
raw materials for our business include machined parts such as rods; pistons; bearings; hoses; regulators; compressors; engines; high-pressure
valves and fittings; sewn goods; and various plastic parts including pans, covers, intake staffs, and quick release connections which
are typically purchased on a per order basis. Most materials are readily available from multiple vendors. Some materials require greater
lead times than other materials. Accordingly, we strive to avoid out of stock situations through careful monitoring of these inventory
lead times, and through avoiding single source vendors whenever possible. Principle suppliers include Lenhardt & Wagner GmbH, Xometry,
Inc., Burgess Manufacturing Corp, Bix International, Inc., Carrol Stream Motor Company, Zhejiang Xiangyang Gear Electormechan, Co, Xiamen
Feipeng Insdustry Co. Ltd. and Catalina Cylinders, Inc.
Competition
We
consider the most significant competitive factors in our business to be innovation, lifestyle, fair prices, shopping convenience, the
variety of available products, knowledgeable and prompt customer service, rapid and accurate fulfillment of orders. We currently recognize
one significant competitor Airline by JSink, Inc.in gasoline powered hookah sales and a variety of competitors, including Aqua Lung America,
Colti America and Bauer Compressors, Inc. in our redundant air tank systems and high-pressure compressor systems sales. Currently, we
believe there is limited competition for our BLU3, Sea Lion and BIAS systems products.
Overall,
we are operating in a moderately competitive environment. The price structure for all the products we distribute compares favorably with
the majority of our competitors based on quality and available features. We believe that our key competitive advantage is our ability
to create new products and in some cases, new markets.
Employees
We
currently have four full-time employees. Our subsidiaries have 31 full-time and 1 part-time employee, in the aggregate.
Seasonality
Our
product lines have historically been seasonal in nature in the United States. The peak season for Legacy Products and Redundant Air Tank
Systems is the second and third quarters of the year. The peak season for High Pressure products is typically the fourth and first quarters
of the year. The BLU3 product line is emerging as a less seasonally influenced enterprise due to the global appeal. The Company continues
to address the seasonality of the business by expanding its reach beyond the traditional markets in the U.S. and reaching to other areas
of the world that may somewhat offset the seasonality.
Investing
in our common stock involves risks. In addition to the other information contained in this report, you should carefully consider the
following risks before deciding to purchase our common stock. The occurrence of any of the following risks might cause you to lose all
or a part of your investment, and certain of these risks may be further exacerbated by the continuing impact of the COVID-19 pandemic
on the Company and our industry. Some statements in this report, including statements in the following risk factors, constitute forward-looking
statements. Please refer to “Cautionary Statement Regarding Forward-Looking Statements” for more information regarding forward-looking
statements.
FINANCIAL
RISKS
We
have a history of losses.
We
incurred net losses of $1,588,467 and $1,351,619, respectively, for the year ended December 31, 2021 and 2020. At December 31,
2021 we had an accumulated deficit of $14,544,604. While our revenues increased 36.7% for the year ended December 31, 2021 from
2020, our gross profit margin decreased from 32.1% in 2020 to 30.3% in 2021, our gross profit is not sufficient to cover
our operating expenses in the year ended December 31, 2021 and 2020 of $3,742,262 and $2,797,449, respectively, which includes
non-cash stock compensation expenses of $1,154,801 and $858,695 for the years ending December 31, 2021 and 2020,
respectively. In the year ended December 31, 2021, our selling, general and administrative expenses, increased 33.8% from 2020.
There are no assurances that we will be able to increase our revenues to a level which supports profitable operations and provides sufficient
capital to pay our operating expenses and other obligations as they become due.
Our
auditors have raised substantial doubts as to our ability to continue as a going concern.
Our
independent registered public accounting firm has included an explanatory paragraph expressing substantial doubt relating to our ability
to continue as a going concern in its report on our audited consolidated financial statements for the year ended December 31, 2021 We
have sustained recurring losses from operations and have used approximately $769,500 in net cash in our operation in the year
ended December 31, 2021 as compared to approximately $556,000 in 2020. These factors, among others, raise substantial doubt about
our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty. Our principal sources of liquidity are sales of equity and debt securities. We do not have any firm
commitments to raise additional working capital. As we are a small company who stock is quoted on the OTC Markets, we expect to encounter
difficulty in raising working capital upon terms and conditions satisfactory to us, if at all. If we are unable to obtain sufficient
funding or generate sufficient revenues, our business and results of operations will be adversely affected and we may be unable to continue
as a going concern.
We
rely on revenues from related parties.
We
generate revenues from sales to related parties, which accounted for 17.9% of our net revenues in 2021 and 18.4% of our net revenues
in 2020. The loss of revenues from these related parties would have a material adverse impact on our business, results of operations
and financial condition in future periods.
We
depend on licenses with Robert Carmichael, our Chief Executive Officer’s ownership interests in much of our intellectual property.
The
Company either owns or has licensed from entities in which Robert Carmichael, our Chairman, has an ownership interest, the following
registered and unregistered trade names, trademarks and service marks: Brownie’s Third Lung™, browniedive.com, Brownie’s,
Brownie’s Third Lung oval symbol, browniedive, YachtPro.
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 of this Annual Report.
If the result of our remediation of the identified material weaknesses is not successful, or if additional material weaknesses are identified
in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our internal
control over financial reporting and/or our disclosure controls and procedures, and we could be required to further implement expensive
and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness of our financial reports
which could have an adverse effect on our stock price and potentially subject us to litigation.
BUSINESS
AND OPERATIONAL RISKS
We
are dependent upon certain key members of management and qualified employees and consultants.
Our
success depends to a significant degree on the abilities and efforts of our senior management. and on our ability to attract, retain
and motivate highly qualified marketing, technical, engineering and sales personnel and consultants. These people are in high demand
and often have competing employment opportunities. The labor market for skilled employees is highly competitive and we may lose key employees
or be forced to increase their compensation to retain these people. Employee turnover could significantly increase our recruitment, training
and other related employee costs. The loss of key personnel, or the failure to attract qualified personnel, could result in delays in
development or fulfillment of any current strategic and operational plans and have a material adverse effect on our business, financial
condition or results of operations.
Our
failure to obtain and enforce intellectual property protection may have a material adverse effect on our business.
Our
success depends in part on our ability, and the ability of our patent and trademark licensors, and entities owned and controlled by Robert
Carmichael to obtain and defend our intellectual property, including patent protection for our products and processes, preserve our trade
secrets, defend and enforce our rights against infringement and operate without infringing the proprietary rights of third parties, both
in the United States and in other countries. Despite our efforts to protect our intellectual proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection.
Our
industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property
rights. Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future.
We
rely on third party vendors and manufacturers.
We
deal with suppliers on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued
supply or pricing. In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production
facility capacity. Historically, we have purchased enough inventories of products or their substitutes to satisfy demand. However, unanticipated
failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us to curtail
or cease operations. Certain of our product components are manufactured in China. Due to Covid, and the logistics challenges existing
currently, we have experienced delays and may experience continued delays in our supply chain, including component products, which are
manufactured in China. Our senior management will continue to monitor our situation on a daily basis, however, we expect that these factors
and others we have yet to experience may materially adversely impact our company, its business and operations for the foreseeable future.
We
dependent on consumer discretionary spending.
The
success of our business depends largely upon a number of factors related to consumer spending, including current and future economic
conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In times of economic
uncertainty, consumers tend to defer expenditures for discretionary items, which effects demand for our products. Any significant deterioration
in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect
our financial results. The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher fuel prices; declines
in the value of investments and residential real estate; and increases in federal and state taxation can all negatively affect our results.
There can be no assurance that in this type of environment consumer spending will not decline, thereby adversely affecting our growth,
net sales and profitability or that our business will not be adversely affected by continuing or future downturns in the economy, boating
industry, or dive industry. If declines in consumer spending on recreational marine accessories and dive gear are other than temporary,
we could be forced to curtail or cease operations.
Government
regulations may impact us.
The
SCUBA industry is self-regulating, therefore, from an industry perspective the Company is not subject to government industry specific
regulation. However, our tank manufacturing operation is required to comply with DOT, as well as being approved to sell in various countries
outside of the United States. The Company 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. The Company is subject to all regulations applicable to “for
profit” companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses,
and bonds to operate its facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive
regulations in the future, which could force us to curtail or cease operations.
Our
failure to adequately protect personal information that is collected on our website and our third-party payment platforms could have
a material adverse effect on our business.
A
wide variety of local, state, national, and international laws, directives and regulations apply to the collection, use, retention, protection,
disclosure, transfer, and other processing of personal data (including with respect to the European Union’s General Data Protection
Regulation and U.S. state laws such as the California Consumer Privacy Act). These data protection and privacy-related laws and regulations
continue to evolve and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions
and increased costs of compliance. Our failure to comply with applicable laws and regulations, or to protect such data, could result
in enforcement actions against us, including fines, imprisonment of company officials and public censure, claims for damages by end-customers
and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing end-customers and prospective
end-customers), any of which could have a material adverse effect on our operations, financial performance, and business. Changing definitions
of personal data and personal information, within the European Union, the United States, and elsewhere may limit or inhibit our ability
to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. The evolving data
protection regulatory environment may require significant management attention and financial resources to analyze and modify our information
technology infrastructure to meet these changing requirements all of which could reduce our operating margins and impact our operating
results and financial condition.
Bad
weather could have an adverse effect on operating results.
Our
business is significantly impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably
rough surf, may decrease boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may
not be indicative of results of any future period.
The
manufacture and distribution of recreational diving equipment could result in product liability claims.
We,
like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent
risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among
other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use
and/or side effects, if any. We do not obtain indemnification from parties supplying raw materials, manufacturing our products
or marketing our products. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating
to defective products could have a material adverse effect on our operations and financial conditions, which could force us to curtail
or cease our business operations.
The
worldwide impact from the COVID-19 pandemic may negatively impact our business.
While
we have been relatively successful in navigating such impact to date, we have previously been affected by temporary manufacturing closures,
and employment and compensation adjustments. There are also ongoing related risks to our business depending on the progression of the
pandemic, and recent trends in certain regions have indicated potential returns to limited or closed government functions, business activities
and person-to-person interactions. Global trade conditions and consumer trends may further adversely impact us and our industries. For
example, pandemic-related issues have exacerbated port congestion and intermittent supplier shutdowns and delays, resulting in additional
expenses to expedite delivery of critical parts. Similarly, increased demand for personal electronics has created a shortfall of microchip
supply, and it is yet unknown how we may be impacted. We cannot predict the duration or direction of current global trends from this
pandemic, the sustained impact of which is largely unknown, is rapidly evolving and has varied across geographic regions. Ultimately,
we continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will
have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly.
SHAREHOLDER
RISKS
The
issuance of shares of our common stock upon exercise of our outstanding options, warrants, convertible debt and Series A Convertible
Preferred Stock may cause immediate and substantial dilution to our existing shareholders.
We
presently have vested and unvested options, warrants, convertible debt and Series A Convertible Preferred Stock that if exercised would
result in the issuance of an additional 254,577,924 shares of our common stock. The issuance of shares upon exercise of options
will result in dilution to the interests of other shareholders.
Our
common stock may be affected by limited trading volume and may fluctuate significantly.
Our
common stock is quoted on the OTCQB tier of the OTC Markets. There is a limited public market for our common stock and there can be no
assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’
ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common
stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price
and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance.
In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the
condition of the financial markets could cause the price of our common stock to fluctuate substantially.
Our
company is a voluntary filer with the SEC and in the event that we cease reporting under the Exchange Act, investors would have limited
information available to them about the company.
While
we are voluntarily file reports with the SEC under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), we do not have a class of securities registered under Section 12(g) of the Exchange Act. To the extent that our duty to
file Exchange Act reports has automatically suspended under Section 15(d) of the Exchange Act, as a voluntary filer, we may elect to
cease reporting under the Exchange Act at such time which would limit the information available to investors and shareholders about the
company.
Our
common stock is deemed to be “penny stock,” which may make it more difficult for investors to sell their shares due to suitability
requirements.
Our
common stock is deemed to be “penny stock” as that term is defined under the Exchange Act. Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges. Our common stock
is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other
than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals
with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.
Broker/dealers
dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers
are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements
may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for
investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
Our
officers and directors are able to control the Company.
Our
officers and directors and their affiliates own or have the right to vote a majority of the common stock of our company. As a result,
they have significant influence over the management and affairs of the Company and control over matters requiring stockholder approval,
including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets.
Their interests may differ from the interests of other shareholders and thus result in corporate decisions that are disadvantageous to
other shareholders. This concentration of ownership and influence in management and board decision-making could also harm the price of
our capital stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our capital stock (whether
by making a tender offer or otherwise) or otherwise attempting to obtain control of our company.
Item
1B. |
Unresolved
Staff Comments |
Not
applicable to smaller reporting companies.
Pompano
Beach, FL
Our
Pompano Beach, Florida facilities are comprised of two adjoining properties totaling approximately 16,566 square feet of leased space
the bulk of which is factory and warehouse space. The initial 37-month lease covering approximately 8,541 square feet commenced on September
1, 2014. The lease provided for payment of a $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 for common areas maintenance, subject to periodic adjustment.
On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, which extended the term
of the lease for an additional 84 months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual
escalation throughout the amended term.
On
November 11, 2018, the Company entered a new 69-month lease agreement for an additional 8,025 square feet adjoining its existing facility
in Pompano Beach, Florida. The new lease provided for a $6,527 security deposit, an initial base rent of approximately $4,848 per month
escalating at 3% per year during the term of the lease plus Florida state sales tax and payment of 10.11% of the building’s annual
operating expenses for common area maintenance, subject to adjustment as provided in the lease.
Huntington
Beach, California
Our
Huntington Beach, California facility is comprised of a leased 13,000 square foot free standing building of which the bulk of the square
footage is warehouse and manufacturing space. The initial lease, signed in January, 2013 was for five years with a base rent of $7,410.
On
January 4, 2018, the Company entered into a sixty-one month term lease renewal for its facility in Huntington Beach, California, commencing
on February 1, 2018. Base rent is approximately $9,300 per month for the first 12 months with a 2.5% annual escalation throughout the
term. The Company paid a security deposit of $8,450 with the initial lease that the landlord continues to hold.
We
believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to
meet demand for the foreseeable future.
Item
3. |
Legal
Proceedings. |
There
are no pending legal proceedings to which we are a party or in which any director, officer or affiliate of ours, any owner of record
or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material
interest adverse to us.
Item
4. |
Mine
Safety Disclosure. |
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Description of business and summary of significant account policies
Description
of business – Brownie’s Marine Group, Inc., a Florida corporation (hereinafter referred to as” the “Company,”
or “BWMG”), (1) 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” or “BTL”),
(2) 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”)and (3) develops and markets portable battery powered surface
supplied air dive systems through its wholly owned subsidiary BLU3, Inc., a Florida corporation (“BLU3”). On September 3,
2021, the Company, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Submersible
Acquisition, Inc., a Florida corporation and wholly owned subsidiary of the Company (“Acquisition Sub”), Submersible Systems,
Inc., a Florida corporation (“Submersible” or “SSI”), and Summit Holdings V, LLC, a Florida limited liability
company (“Summit”) and Tierra Vista Group, LLC, a Florida limited liability company (“Tierra Vista” and, together
with Summit, the “Sellers”), the owners of all of the capital stock of Submersible organized in 2017, pursuant to which Acquisition
Sub merged with and into Submersible (the “Merger”), and Submersible, the surviving corporation, became a wholly owned subsidiary
of the Company.
Submersible
is a manufacturer of high pressure tanks and redundant air systems for the military and recreational diving industries, based in Huntington
Beach, California and sells its products to governments, militaries, private companies and the dive industry throughout the world.
Basis
of Presentation – The consolidated financial statements of the Company have been prepared in accordance with the accounting
principles generally accepted in the United States of America (“GAAP”).
Definition
of fiscal year – The Company’s fiscal year end is December 31.
Principles
of Consolidation -The consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor, BHP,
BLU3 and SSI. All significant intercompany transactions and balances have been eliminated in consolidation.
Use
of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Going
Concern – The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the
satisfaction of liabilities in the normal course of business for the twelve-month period following the date of issuance of these financial
statements. We incurred net losses for the years ended December 31, 2021 and 2020 of $1,588,467
and $1,351,619,
respectively. The Company had an accumulated deficit as of December 31, 2021 of $14,544,604.
On
March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic.
While
we are not able to estimate the ultimate impact of the COVID-19 pandemic on our financial condition and future results of operations.
The extent to which the coronavirus impacts our results and financial condition, however, will depend on future developments, which are
highly uncertain and cannot be predicted, including new information that may emerge and the actions to contain and treat its impacts,
among others.
The
Company believes that existing operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial
doubt about our ability to continue as a going concern. Therefore, the Company will seek to continue to raise additional funds as needed
and is currently exploring alternative sources of financing including commercial banks and other lending institutions. The Company has
issued common stock and has historically issued convertible notes to finance working capital needs and may continue to seek to raise
additional capital through sale of restricted common stock or other securities or obtaining short term loans. The Company has no firm
commitment for any additional capital and there are no assurances it will be successful in obtaining additional funds.
If
BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back
or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do
not include any adjustments that may result from the outcome of these uncertainties.
Cash
and equivalents – Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents.
Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation (“FDIC”) up to $250,000
per EIN. At December 31, 2021 and 2020, the Company had approximately $205,500
and $0 in
excess of the FDIC insured limit.
Accounts
receivable – Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers.
The allowance for doubtful accounts are estimates that are developed by using standard quantitative measures based on historical losses,
adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment
of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company
considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any
specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.
The allowances for doubtful accounts totaled $46,555 and $16,872 at December 31, 2021 and 2020, respectively.
Inventory
– The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value.
Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future
demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory
reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the
Company. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels
or competitive conditions could have a favorable or unfavorable effect on required reserve balances.
Property
and equipment and leasehold improvements – Property and equipment and leasehold improvement is stated at cost less accumulated
depreciation or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated useful
lives of the assets or term of the lease, which are primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense
as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset,
cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The
Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives
of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate
of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Revenue
Recognition
We
account for our revenues in accordance with the Accounting Standard Codification topic 606, “Revenue from Contracts with Customers”
and all the related amendments. This standards core principal is that a company should recognize revenue when it transfers promised goods
or services to customers in an amount that reflects the consideration to which the company expects to receive.
We
recognize the sale of products under single performance obligations upon shipment of the units as that is when ownership is transferred
and our performance is completed. Revenues from repair and maintenance activities is recognized when the repairs are completed and the
units have been shipped.
Lease
Accounting
We
account for leases in accordance with ASC 842.
The
lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected the practical
expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs
for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts entered into prior to adoption
are leases or contain leases.
We
categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those
leases that would allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance
leases are recorded in property and equipment, net. All other leases are categorized as operating leases. We did not have any finance
leases as of December 31, 2021 and 2020. Our leases generally have terms that range from three years for equipment and three to
six years for property. We elected the accounting policy to include both the lease and non-lease components of our agreements as a single
component and account for them as a lease.
Lease
liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings
available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives,
plus any direct costs from executing the leases. Leasehold improvements are capitalized at cost and amortized over the lesser of their
expected useful life or the lease term.
When
we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset,
and it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement
of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the
term of the lease.
Supplemental
balance sheet information related to leases was as follows:
Schedule
of Supplemental Balance Sheet Information
Operating
Leases | |
Classification | |
December
31, 2021 | | |
December
31, 2020 | |
Right-of-use
assets | |
Operating
lease assets | |
$ | 454,475 | | |
$ | 446,981 | |
| |
| |
| | | |
| | |
Current
lease liabilities | |
Current
operating lease liabilities | |
$ | 232,283 | | |
$ | 107,691 | |
Non-current
lease liabilities | |
Long-term
operating lease liabilities | |
| 222,899 | | |
| 339,290 | |
Total
lease liabilities | |
| |
$ | 455,182 | | |
$ | 446,981 | |
Lease
term and discount rate were as follows:
Schedule
of Operating Lease Liabilities
| |
December
31, 2021 | | |
December
31, 2020 | |
Weighted
average remaining lease term (years) | |
| 2.34 | | |
| 3.69 | |
Weighted average
discount rate | |
| 6.11 | % | |
| 5.91 | % |
The
components of lease costs were as follows:
Schedule
of Lease Cost
| |
December
31, 2021 | | |
December
31, 2020 | |
Operating
lease cost | |
$ | 171,292 | | |
$ | 127,650 | |
Variable
lease cost | |
| 2,125 | | |
| 5,729 | |
Total
lease costs | |
$ | 173,417 | | |
$ | 133,379 | |
Supplemental
disclosures of cash flow information related to leases were as follows:
Schedule
of Cash Flow Information Related to Leases
| |
December
31, 2021 | | |
December
31, 2020 | |
Cash
paid for operating lease liabilities | |
$ | 171,272 | | |
$ | 127,654 | |
Operating
right of use assets obtained in exchange for operating lease liabilities | |
$ | 160,182 | | |
$ | - | |
Maturities
of lease liabilities were as follows as of December 31, 2021:
Schedule
of Maturities of Operating Lease Liabilities
| |
Trebor
Industries Office Lease | | |
BMG
Office Lease | | |
Submersible
Systems Lease | | |
Copier | | |
Total
lease payments | |
2022 | |
| 62,953 | | |
| 63,576 | | |
| 122,935 | | |
| 2,796 | | |
| 252,260 | |
2023 | |
| 64,842 | | |
| 65,484 | | |
| 10,265 | | |
| 422 | | |
| 141,013 | |
2024 | |
| 49,717 | | |
| 50,586 | | |
| - | | |
| - | | |
| 100,303 | |
2025 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total | |
| 177,512 | | |
| 179,646 | | |
| 133,200 | | |
| 3,218 | | |
| 493,576 | |
Less:
Imputed interest | |
| (14,213 | ) | |
| (14,384 | ) | |
| (9,342 | ) | |
| (455 | ) | |
| (38,394 | ) |
Present
value of lease liabilities | |
$ | 163,299 | | |
$ | 165,262 | | |
| 123,858 | | |
$ | 2,763 | | |
$ | 455,182 | |
Product
development costs – Product development expenditures are charged to expenses as incurred.
Advertising
and marketing costs – The Company expenses
the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements
and participating in trade shows in the period in which they occur. Advertising and trade show expense incurred for the years ended December
31, 2021 and 2020, totaled $343,232
and $154,642
respectively.
Research
and development costs – The Company accounts for research and development costs in accordance with the Accounting Standards
Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development
costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party
research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. During
the years ended December 31, 2021 and 2020, the Company incurred research and development costs of $75,439 and $115,156, respectively.
Customer
deposits and unearned revenue and returns policy – The Company typically takes a minimum 50% deposit against custom and large
tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation
of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered
product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice. Customer
deposits and unearned revenue totaled $143,938 and $20,353 at December 31, 2021 and 2020, respectively.
Warranty
policy – Under the provisions of the Financial Accounting Standards Board (“FASB”) ASC 460, Guarantor’s
Guarantees, the Company accrues a liability for estimated warranty policy costs based on standard quantitative measures based on
criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation
of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs
associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product
quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.
The Company provides our customers with an industry standard one year warranty on systems sold and recognizes a warranty reserve based
on gross sales multiplied by the historical warranty expense return rate. The warranty reserve charged to cost of net revenues and is
included in accrued expenses and is deemed sufficient to absorb any material or labor costs that might be incurred on sales recorded
during the period. The Company recorded a reserve for warranty work of $13,680 and $13,680 at December 31, 2021 and 2020 respectively.
Income
taxes – The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred
tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method,
deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The
Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making
such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance
is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine
that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an
adjustment to the valuation allowance which would reduce the provision for income taxes.
The
Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is
more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective
date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
Stock-based
compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method
whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which
is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants
issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance
with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair
value is determined through use of the quoted stock price.
During
the years ended December 31, 2021 and 2020, the Company recognized share based compensation with a fair value of $201,952
and $550,149,
respectively.
Fair
value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level
1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level
2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities
in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable
in active markets.
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant
management judgment or estimation.
Inputs
are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation
decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level
of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable”
requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly
distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved
in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment
and does not necessarily correspond to the Company’s perceived risk of that investment.
At
December 31, 2021, and 2020, the carrying amount of cash, accounts receivable, accounts receivable – related parties,
accounts payable and accrued liabilities, accounts payable-related parties, customer deposits and unearned revenue, other liabilities,
loans payable and convertible debentures, approximate fair value because of the short maturity of these instruments.
Loss
per common share – Basic loss per share excludes
any dilutive effects of options, warrants and convertible securities. Basic loss per share is computed using the weighted-average number
of outstanding common shares during the applicable period. Diluted loss per share is computed using the weighted average number of common
and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation
if their effect is antidilutive. At December 31, 2021 and December 31, 2020, 254,577,924
and 210,500,305,
respectively, potentially dilutive shares were not recognized as their inclusion would be anti-dilutive. These shares reflect shares
potentially issuable under convertible note agreements, outstanding warrants, outstanding stock options and the conversion of preferred
stock.
New
accounting pronouncements
ASU 2019-12 Income Taxes (Topic
740)
In December 2019, the FASB issued ASU
No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to
simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in
Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company determined
that the standard has no impact on its consolidated financial statements and related disclosures.
Note
2. Inventory
Inventory
consists of the following as of:
Schedule
of Inventory
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
In-Transit Inventory | |
| 130,000 | | |
| - | |
Raw materials | |
| 1,144,190 | | |
| 408,841 | |
Work In Process | |
| 99,858 | | |
| - | |
Finished goods | |
| 521,212 | | |
| 454,950 | |
Total Inventory, net | |
$ | 1,895,260 | | |
$ | 863,791 | |
As
of December 31, 2021 and 2020, the Company recorded reserves for obsolete or slow moving inventory of approximately $308,133
and $227,657
respectively.
Note
3. Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following:
Schedule of Prepaid Expenses and Other Current Assets
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Prepaid inventory | |
$ | 166,951 | | |
$ | 85,028 | |
Prepaid expenses and other current assets | |
| 60,507 | | |
| 26,136 | |
Total prepaid expenses and other current assets | |
$ | 227,458 | | |
$ | 111,164 | |
Note
4. Property and Equipment, Net
Property
and equipment consist of the following as of:
Schedule of Property and Equipment
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Tooling and equipment | |
$ | 427,044 | | |
$ | 233,839 | |
Computer equipment and software | |
| 54,056 | | |
| 27,469 | |
Vehicles | |
| 79,557 | | |
| 79,557 | |
Leasehold improvements | |
| 68,560 | | |
| 43,779 | |
Total property and equipment | |
| 629,217 | | |
| 384,644 | |
Less: accumulated depreciation and amortization | |
| (359,152 | ) | |
| (241,231 | ) |
Total property and equipment, net | |
$ | 270,065 | | |
$ | 143,413 | |
Depreciation
and amortization expense totaled $32,377
and $21,005
for the years ended December 31, 2021 and
2020, respectively. Included in the depreciation and amortization expense for the year ending December 31, 2021 is $24,095 for amortization
of intangible assets.
Note
5. Other Assets
Other
assets at December 31, 2021 of $14,098 consisted
of refundable deposits of $14,098.
Other assets at December 31, 2020 of $13,649 consisted
of refundable deposits of $6,649 and
an unamortized license fee of $7,000.
Note
6. Customer Credit and Vendor Concentrations
The
Company sells to three entities owned by the brother of Robert M. Carmichael and three companies owned by Robert M. Carmichael as further
discussed in note 7 - Related Parties Transactions. Combined sales to these six entities for the years ended December 31, 2021 and 2020,
represented 17.9%
and 18.4%,
respectively, of total net revenues.
Brownie’s Southport Divers, Inc.
represented concentration in outstanding accounts receivable of 25.3%
of total outstanding accounts receivable as of December 31, 2021 and 19.8%
as of December 31, 2020. Brownie's Global Logistics, LLC represented concentration in outstanding accounts receivable of less than
10% of total outstanding accounts receivable as of December 31, 2021 and 12.8% as of December 31, 2020.
Additionally, the Company has a non-related party customer A that represented 10.6%
of total outstanding accounts receivable as of December 31, 2021. The Company
has a non-related party customers B that represented 10.6% of total outstanding accounts receivable as of December 31, 2020.
The company had no customers that consisted of more than 10% of total
revenue for the years ended December 31, 2021 and 2020.
In
excess of 90%
of our total net revenues are made up of product sales to customers within the state of Florida.
The Company has no vendor concentrations beyond 10% of total purchases
as of December 31, 2021 and 2020.
Note
7. Related Party Transactions
We
sell products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, companies
owned by the brother of Robert Carmichael. Combined net revenues from these entities for the years December 31, 2021 and 2020, totaled
$1,116,085 and $821,474, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach
Divers, and Brownie’s Yacht Toys at December 31, 2021, were $50,818, $7,195 and $17,779, respectively. Accounts receivable from
Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys December 31, 2020, was
$29,443, $6,643, and $8,237, respectively.
We
also sell products to Brownie’s Global Logistics, LLC (“BGL”) and 940 Associates, Inc. (“940 A”), entities
wholly-owned by Robert Carmichael. Combined net revenues from these three entities for the years ended December 31, 2021 and 2020 were
$245 and $16,943, respectively. In addition, from time to time Mr. Carmichael purchases products from us for his personal use. Accounts receivable
from BGL, 940 A and Mr. Carmichael totaled $897 at December 31, 2021 and $23,321, respectively, at December 31, 2020.
We
owed BGL $32,267 and
$102,360 at
December 31, 2021 and 2020, respectively, which represents purchase of inventory including batteries for Sea Lion (battery operated unit)
and Honda engines for our regular gasoline powered units. As of December 31, 2021, the Company also had an amount due of $5,000 to
Mr. Carmichael for an advance to BLU3,Inc.
We
are a party to an exclusive license agreement, dated February 22, 2005, with 940 A to license the trademark “Brownies Third Lung”,
“Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. The agreement
provides for a royalty to be paid equal to the greater of 2.5%
on all sales of Trebor or $15,000
per quarter. Total royalty fees paid to 940 A in the years
ended December 31, 2021 and 2020 totaled $75,161
and $67,808,
respectively. The Company had accrued royalties of $7,735 and $4,280 for the years ended December 31, 2021 and 2020, respectively.
As of December 31, 2021 Christopher Constable had an open accounts
receivable balance of $428.
As of December 31, 2021, two employees had open accounts receivable
balances totaling $184.
Effective
July 29, 2019 the Company agreed to pay the members of the Company’s Board of Directors, including Mr. Carmichael, a management
director, an annual fee of $18,000 for serving on the Company’s Board of Directors for the year ending December 31, 2019. As of
December 31, 2020, the Company has accrued $85,500 in Board of Directors’ fees. On August 21, 2020 the Company’s Board of
Directors approved the continuation of the 2019 Board compensation policy for the year ending December 31, 2020. As of December 31, 2021,
the Company accrued an additional $36,000 in Board of Directors’ fees for a total of $121,500 in accrued fees.
In
December 2018, the Company issued 20,000,000
shares of common stock to Robert M. Carmichael
as an incentive bonus. As the vesting of the shares was subject to continued employment by Mr. Carmichael through January 2, 2020, for
the years ended December 31, 2020, the Company treated the shares as issued but not as yet outstanding for the year ended December 31,
2019. Expense for the issuance is being recognized over the full vesting period, and accordingly, the Company recognized stock compensation
expense of $1,280
during the year ended December 31, 2020 and was
fully expensed. See note 13.
Effective
July 29, 2019 the Company issued options to purchase up to an aggregate of 10,380,952
shares of common stock to Blake Carmichael. The
options were issued pursuant to a stock option grant agreements and are exercisable at $0.018
per share for a period of five
years from the date of issuance, subject to vesting
over a period of six months. The fair value of the options totaled $43,582
using the Black-Scholes option pricing model
with the following assumptions: (i) risk free interest rate of 2.10%,
(ii) expected life of 5
years, (iii) dividend yield of 0%,
(iv) expected volatility of 172%.
Stock option expense recognized for the year ended December 31, 2020 was $5,362
and was fully expensed. See Note 13.
Effective
July 29, 2019 the Company issued Robert M. Carmichael options to purchase up to 20,761,904
shares of common stock. The options were issued
pursuant to a Grant Agreement and are exercisable at $0.018
per share for a period of five
years from the date of issuance, subject to vesting
over a period of six months. The fair value of the options totaled $87,147
using the Black-Scholes option pricing model
with the following assumptions:(i) risk free interest rate of 2.10%,
(ii) expected life of 5
years, (iii) dividend yield of 0%,
(iv) expected volatility of 172%.
Stock option expense of $10,274
was recognized for the year ended December 31,
2020 and was fully expensed. See Note 13
In
January 2020 the Company issued 2,647,065 shares of common stock in exchange for $45,000 to an accredited investor and daughter of Mr.
Charles F. Hyatt, a member of our Board of Directors.
In
February 2020 the Company issued 12,500,000 shares of common stock related to the exercise of common stock purchase warrants at an exercise
price of $.01, for a total conversion price of $125,000. The shares were issued to Mr. Hyatt, a member of the Board of Directors.
In
April, 2020 the Company issued 10,000,000 shares of common stock related to the exercise of common stock purchase warrant at an exercise
price of $.01 per share. The Company received proceeds of $100,000 upon such exercise from Mr. Hyatt.
Also,
in April 2020 the Company sold an aggregate of 10,000,000
shares of its common stock at a purchase
price $0.025
per share to Mr. Hyatt, resulting in proceeds
to the Company of $250,000.
On
April 14, 2020 the Company entered into a Non-Qualified Stock Option Agreement with Mr. Carmichael. Under the terms of the option agreement,
as additional compensation the Company granted Mr. Carmichael an option to purchase up to an aggregate of 125,000,000
shares of the Company’s common stock at
an exercise price of $.045
per share. This option is further detailed in
Note 11. During the years ended December 31, 2021 and December 31, 2020 the Company expensed $874,021
and $655,515
in relation to this option agreement, respectively.
See Note 13
On
May 21, 2020, the Company issued to Mr. Carmichael a total 725,087
shares with a fair value of $31,904
for his work on the BLU3-VENT project. See
Note 13
On
August 31, 2020, September 30, 2020 and October 31, 2020 the Company issued and aggregate of 2,795,000
shares with a fair market value of $45,292
to Christopher Constable on behalf of Brandywine,
LLC in accordance with a consulting contract dated August 10, 2020. This consulting agreement was terminated upon the execution of Mr.
Constable’s employment agreement. See Note 13
On
November 5, 2020 the Company entered into a Non-Qualified Stock Option agreement with Christopher Constable as part of his employment
agreement as the Company’s Chief Executive Officer. Under the terms of the option agreement, the Company granted Mr. Constable
a 5-year option to purchase 5,434,783
shares of the Company’s common stock at
an exercise price of $.0184,
the “Compensation Options”. The Compensation Options were immediately vested. The fair value of the options on the date of
the grant was $106,199
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of .16%,
ii) expected life of 2.5
years, iii) dividend yield of 0%,
iv) expected volatility of 341%.
Stock option expense recognized during the year ended December 31, 2020 for this option was $106,890.
See Note 13.
Also,
on November 5, 2020 the Company entered into a Non-Qualified Option Agreement with Mr. Constable. Under the terms of this option agreement,
as additional compensations, the Company granted an option (the “Bonus Option”) to purchase up to an aggregate of 30,000,000
shares of the Company’s common stock at
an exercise price of $.0184
per share. This option is further detailed in
Note 13. During the year ended December 31, 2021, the company expensed $82,734
and $0, respectively.
On
March 25, 2021, the Company issued 27,500,000 shares of common stock to Charles. Hyatt, a member of our Board of Directors in consideration
of $275,000.
As
of December 31, 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 13 of these financial statements.
On
August 1, 2021 as part of the Blake Carmichael Agreement (see Note 14) the Company entered into a Non-Qualified Stock Option
agreement with Blake Carmichael. Under the terms of the Blake Carmichael agreement, Blake Carmichael is entitled to (i) a five-year
option to purchase 3,759,400
shares of the Company’s common stock at
an exercise price of $0.0399
(the “BC Compensation Options”),
33.3%
of the shares subject to the Option vest upon the execution of the agreement, 33% at the first anniversary date and 33% upon the second
anniversary date and (ii)(ii) a 5-year
option to purchase up to 18,000,000
shares to vest annually on a contract year basis,
based upon the achievement of certain financial metrics tied to revenue and EBITDA. For the year ended December 31, 2021
the company expensed a total of $21,810.
On
September 1, 2021, the Company issued Charles Hyatt, a member of our Board of Directors, 10,000,000 units of the securities of the Company,
with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025 per share in
consideration of $250,000.
On
September 1, 2021, the Company issued Grace Hyatt, the adult child of a member of our Board of Directors, 600,000 units of the securities
of the Company, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025
per share in consideration of $15,000.
Note
8. Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consists of the following as of:
Schedule of Accounts Payable and Accrued Liabilities
| |
December 31, 2020 | | |
December 31, 2020 | |
| |
| | |
| |
Accounts payable trade and other | |
$ | 516,957 | | |
$ | 244,626 | |
Accrued payroll and fringe benefits | |
| 165,969 | | |
| 96,241 | |
Accrued warranty expense | |
| 13,680 | | |
| 13,680 | |
Accrued payroll taxes and withholding | |
| 9,106 | | |
| 9,268 | |
Accrued Sales Tax | |
| 29,339 | | |
| - | |
Accrued interest | |
| 9,332 | | |
| 23,162 | |
Total | |
$ | 744,383 | | |
$ | 386,977 | |
Balances
due certain vendors are in arrears to varying degrees. The Company is handling all delinquent accounts on a case-by-case basis.
Note
9. Other Liabilities
Other
liabilities consist of the following as of:
Schedule
of Other Liabilities
| |
December 31, 2021 | | |
December 31, 2020 | |
| |
| | |
| |
Asset purchase agreement payable | |
$ | - | | |
$ | 12,857 | |
Accrued expenses | |
| 66,424 | | |
| 2,460 | |
Accrued Board of Directors fees | |
| 121,500 | | |
| 85,500 | |
Total | |
$ | 187,924 | | |
$ | 100,817 | |
Note
10. Convertible Debentures, and Loans Payable
Convertible
Debentures
Convertible
debentures consist of the following at December 31, 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 | ) | |
| | | |
| - | | |
| | | |
| | | |
| (3 | ) |
9/03/21 | |
| 9/03/24 | | |
| 8 | % | |
| 346,500 | | |
| (12,355 | ) | |
| 346,500 | | |
| (10,639 | ) | |
| 335,861 | | |
| 9,240 | | |
| (4 | ) |
9/03/21 | |
| 9/03/24 | | |
| 8 | % | |
| 3,500 | | |
| (125 | ) | |
| 3,500 | | |
| (107 | ) | |
| 3,393 | | |
| 92 | | |
| (5 | ) |
| |
| | | |
| | | |
| | | |
| | | |
$ | 350,000 | | |
$ | (10,746 | ) | |
$ | 339,254 | | |
$ | 9,332 | | |
| | |
Convertible
debentures consist of the following at December 31, 2020:
Origination Date | |
Maturity Date | | |
Interest Rate | | |
Origination Principal Balance | | |
Original Discount Balance | | |
Period End Principal Balance | | |
Period End Discount Balance | | |
Period End Balance, Net | | |
Accrued Interest Balance | | |
Reg. | |
8/31/2011 | |
| 8/31/2013 | | |
| 5 | % | |
| 10,000 | | |
| (4,286 | ) | |
| 10,000 | | |
| — | | |
| 10,000 | | |
| 4,694 | | |
| (1 | ) |
12/01/17 | |
| 12/31/20 | | |
| 6 | % | |
| 50,000 | | |
| (12,500 | ) | |
| 50,000 | | |
| — | | |
| 50,000 | | |
| 9,250 | | |
| (2 | ) |
12/05/17 | |
| 12/31/20 | | |
| 6 | % | |
| 50,000 | | |
| (12,500 | ) | |
| 50,000 | | |
| — | | |
| 50,000 | | |
| 9,218 | | |
| (3 | ) |
| |
| | | |
| | | |
| | | |
| | | |
$ | 110,000 | | |
$ | — | | |
$ | 110,000 | | |
$ | 23,162 | | |
| | |
(1) |
The
Company borrowed $10,000
in exchange for a convertible
note (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 issued 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 issued 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. On August 18, 2021, this
note and accrued interest of $11,145 were converted by the holder for 6,114,516 shares of common stock in accordance with the terms
of the note. |
|
|
(4) |
On
September 3, 2021, the Company issued a $346,500
note payable to Summit
Holding V, LLC as part of the acquisition of SSI. The note carries 8%
unsecured convertible
promissory note, due September 3, 2024. Payments on the note are to be equivalent to 50%
of the adjusted net profit
of Submersible Systems, Inc., payable calendar quarterly commencing on December 31, 2021. Interest is payable in company
stock at the conversion price of $.051272
and shall be paid quarterly.
The note holder may convert any outstanding principal and unpaid interest at a conversion rate of $.051272
at any time up to the
maturity date of the note. The Company recorded $12,355
for the beneficial conversion
feature. |
|
|
(5) |
On
September 3, 2021, the Company issued a three-year 8%
unsecured convertible
promissory note for $3,500
to Tierra Vista Partners,
LLC as part of the acquisition of SSI. Payments on the note are to be equivalent to 50%
of the adjusted net profit
of SSI, payable calendar quarterly commencing on December 31, 2021. Interest is payable quarterly in common
stock of the Company at the conversion price of $.051272
per share.
The note holder may convert any outstanding principal and unpaid interest at a conversion rate of $.051272
at any time up to the
maturity date of the note. The Company recorded $125
for the beneficial conversion
feature. |
Loans
Payable
Gonzales
Note
The
Company entered into a non-interest-bearing loan agreement of $200,000 with Tom Gonzales on July 1, 2013.The loan is payable upon demand.
During the years ended December 31, 2020 and 2020, the Company repaid $40,000 and $60,000 respectively. The loan balance was $0 and $40,000
as of December 31, 2021 and 2020, respectively.
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 Company
recorded a gain on settlement of debt of $10,000.
The note balance as of December 31, 2021 and December 31, 2020 was $0
and $10,000,
respectively
Marlin
Note
On
September 30, 2019, BLU3 financed the purchase of certain plastic molding equipment through Marlin Capital Solutions (“Marlin
Capital”). The loan amount at inception was $96,725. The
Company entered into an Equipment Finance Agreement with Marlin Capital pursuant to which it agreed to make 36 equal
monthly installments of $3,143.80.
The Equipment Finance Agreement contains customary events of default. The loan balance was $25,079
as of December 31, 2021 and $60,070
as of December 31, 2020.
Schedule
of Future Amortization of Loans Payable
| |
Payment Amortization | |
2022 | |
| 25,079 | |
2023 | |
| | |
2024 | |
| | |
2025 | |
| | |
2025 and thereafter | |
| | |
Balance | |
| | |
Total Loan Payments | |
$ | 25,079 | |
Current portion of Loan payable | |
| (25,079 | ) |
Non-Current Portion of Loan Payable | |
$ | - | |
Mercedes
Benz Note
On
August 21, 2020, the Company executed an installment sales contract with Mercedes Benz Coconut Creek for the purchase of a 2019 Mercedes
Benz Sprinter delivery van. The installment agreement is for $55,841
with a zero interest rate payable over 60
months with a monthly payment of $931
and is personally guaranteed by Mr. Carmichael.
The loan balance as of December 31, 2021 was $43,122
and $52,118 as of December 31, 2020.
Schedule
of Future Amortization of Loans Payable
| |
Payment Amortization | |
2022 | |
| 11,168 | |
2023 | |
| 11,168 | |
2024 | |
| 11,168 | |
2025 and thereafter | |
| 9,618 | |
Total note payments | |
$ | 43,122 | |
Current portion of note payable | |
| (11,168 | ) |
Non-Current Portion of notes payable | |
$ | 31,954 | |
Navitas
Note
On
May 19, 2021, the Company, through its wholly owned subsidiary BLU3, executed an equipment finance agreement to finance the purchase
of certain plastic molding equipment through Navitas Credit Corp. (“Navitas”). The amount financed is $75,764
payable over 60
equal monthly installments of $1,611
(the “Navitas Note”). The equipment
finance agreement contains customary events of default. The agreement was fully funded as of December 31, 2021.
Schedule of Future Amortization of Loans Payable
| |
Payment Amortization | |
2022 | |
| 14,155 | |
2023 | |
| 15,342 | |
2024 | |
| 16,629 | |
2025 | |
| 18,024 | |
Balance | |
| 6,007 | |
Total Note Payments | |
$ | 70,157 | |
Current portion of Note payable | |
| (14,155 | ) |
Non-Current Portion of Note Payable | |
$ | 56,002 | |
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 of $159,600 on our consolidated income statement.
The
note balance as of December 31, 2021 and December 31, 2020 was $0
and $159,600,
respectively.
PPP
Loan – Submersible Systems, Inc.
On
May 12, 2020, SSI received an unsecured loan from City National Bank in the principal amount of $116,160 (the “Submersible SBA
Loan”), under the CARES Act.
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 Submersible
SBA Loan carries a fixed interest rate of one percent per year, and a monthly payment of $6,925, with the first payment due seven months
from the date of initial cash receipt. As part of the forgiveness application and directly related to the acquisition of SSI by the Company,
SSI was required to place $121,953 in an escrow account until forgiveness is determined and City National Bank has been paid in full
by the SBA. On October 15, 2021, the Company was notified by City National Bank that the Submersible SBA Loan was forgiven in full under
the terms of the CARES Act. The restricted cash in escrow was released in full by the bank as a result of this forgiveness on November
8, 2021.
The
note balance as of December 31, 2021 and December 31, 2020 was $0
and $116,160
respectively.
Note
11. Merger
with Submersible Systems, Inc.
On
September 3, 2021, the Company completed its merger with Submersible Systems, Inc. Under the terms of the Merger Agreement, the
Company paid $1.79
million in consideration consisting of the issuance
of 27,305,442
shares of its common stock (valued at $1.4
million), the issuance of $350,000
in 8%
unsecured convertible promissory notes in exchange for all of the equity of Submersible. The 27,305,442
shares of the Company’s common stock issued
for the $1.44
million in consideration are subject to leak
out agreements whereby the shareholders are unable to sell or transfer based upon the following:
Summary
of Holding Period and Shares Eligible to be Sold
Holding Period from Closing Date | |
| Percentage of shares eligible to be sold or transferred | |
6 months | |
| Up to 12.5% | |
9 months | |
| Up to 25.0% | |
24 months | |
| Up to 75.0% | |
36 months | |
| Up to 100.0% | |
The
Leak-Out provision may be waived by the Company, upon written request by the holder of the common stock, if the Company is trading on
either the NYSE American or Nasdaq, and has a rolling 30-day average trading volume of 50,000
shares per day; provided, however, that
(i) only up to 5% of the previous days total volume can be sold in one day by a holder; and (ii) the holder can only sell
through executing trades “On the Offer.”
The
transaction costs associated with the Merger were $65,000 in legal fees paid $40,000 in cash, and 1,190,476 shares of the Company’s
common stock with a fair value of $55,952.
Fair
Value of Consideration Transferred and Recording of Assets Acquired
The
following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired, and liabilities assumed
including an amount for goodwill:
Schedule of Recognized Identified Assets Acquired and Liabilities Assumed
| |
| | |
| |
$ | 1,449,919 | |
Common stock, 27,305,442 shares at fair market value | |
$ | 1,449,919 | |
8% Unsecured, Convertible promissory note payable to seller | |
| 350,000 | |
Total purchase price | |
$ | 1,799,919 | |
| |
| | |
Tangible assets acquired | |
$ | 1,101,604 | |
Liabilities assumed | |
| (294,671 | ) |
Net tangible assets acquired | |
| 806,933 | |
| |
| | |
Identified Intangible Assets | |
| | |
Customer Relationships | |
$ | 600,000 | |
Trademarks | |
| 121,000 | |
Non-compete agreements | |
| 22,000 | |
Total Intangible Assets | |
| 743,000 | |
| |
| | |
Goodwill | |
$ | 249,986 | |
| |
| | |
Total purchase price | |
$ | 1,799,919 | |
In
determining the number of shares of the common stock issued, the Company considered the value of the stock as defined the Merger Agreement
to be the calculated based on the volume weighted average price of a share of the Company’s common stock on the OTC Markets (“VWAP”)
for (i) 180 days prior to the date of the parties’ execution and delivery of the binding term sheet for the Merger or (ii) 180
days prior to the closing date of the Merger, whichever results in a lower VWAP. Based on this calculation, the Company utilized calculation
(i) resulting in a conversion price of $.051271831. This conversion price resulted in the issuance of 27,305,442 shares of common stock
with a fair value of $1,449,919 on the closing date.
Inventory
was assessed at the time of closing as to its fair value, and it was determined that a step-up analysis was necessary in order to evaluate
the fair value of the inventory at the time of closing. The step up represents the net profit that would be attained when the inventory
is sold. The key assumptions used in this analysis is a gross margin of 38.3% and selling costs of 5.0%, The analysis resulted in a necessary
step up of $31,000 at the time of closing.
Goodwill
represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized.
The goodwill arising from the acquisition is attributable to the value of the potential expanded market opportunity with new customers.
The goodwill is not expected to be deductible for tax purposes.
As
December 31, 2021, the Company has recorded an estimated fair value of the intangible assets and goodwill of $992,986 based on a preliminary
purchase price allocation prepared by management. As a result, during the preliminary purchase price allocation period, which may be
up to one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. After the preliminary purchase price allocation period, we record adjustments to assets acquired or
liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments
were determined
Pro
Forma Information
The
following is the unaudited pro forma information assuming all business acquisitions occurred on January 1, 2021. For all of the business
acquisitions depreciation and amortization have been included in the calculation of the below pro forma information based upon the actual
acquisition costs.
Schedule of Business Acquisition, Pro Forma Information
| |
Year ended December 31, 2021 | |
Revenue | |
$ | 7,259,384 | |
Net Loss | |
$ | (1,560,900 | ) |
Basic and Diluted Loss per Share | |
$ | (0.00 | ) |
Basic and Diluted Weighted Average Common Shares Outstanding | |
| 368,144,534 | |
The
information included in the pro forma amounts is derived from historical information obtained from the sellers of the businesses. The
pro forma amounts above for basic and diluted weighted average shares outstanding have been adjusted to include the stock issued in connection
with the acquisition of SSI.
Note
12. Goodwill and Intangible Assets, Net
The
following table sets for the changes in the carrying amount of the Company’ Goodwill for the year ended December 31, 2021
Summary
of Changes in Goodwill
| |
2021 | |
Balance, January 1 | |
$ | - | |
Acquisitions of Submersible Systems, Inc. | |
| 249,986 | |
Balance, December 31 | |
$ | 249,986 | |
The
following table sets for the components of the Company’s intangible assets at December 31, 2021:
Summary of Intangible Assets
| |
Amortization Period (Years) | | |
Cost | | |
Accumulated Amortization | | |
Net Book Value | |
| |
| | |
| | |
| | |
| |
Intangible Assets Subject to amortization | |
| | | |
| | | |
| | | |
| | |
Trademarks | |
| 15 | | |
$ | 121,000 | | |
$ | (2,628 | ) | |
$ | 118,372 | |
Customer Relationships | |
| 10 | | |
| 600,000 | | |
| (20,000 | ) | |
| 580,000 | |
Non-Compete Agreements | |
| 5 | | |
| 22,000 | | |
| (1,467 | ) | |
| 20,533 | |
Total | |
| | | |
$ | 743,000 | | |
$ | (24,095 | ) | |
$ | 718,905 | |
The
aggregate amortization remaining on the intangible assets as of December 31, 2021 is a follows:
Schedule of Estimated Intangible Assets Amortization Expenses
| |
Intangible Amortization | |
2022 | |
| 72,467 | |
2023 | |
| 72,467 | |
2024 | |
| 72,467 | |
2025 | |
| 72,467 | |
Thereafter | |
| 429,037 | |
Total | |
$ | 718,905 | |
Note
13. Shareholders’ Equity
Common
Stock
The
Company had 393,850,475 and 306,185,206 common shares outstanding at December 31, 2021 and December 31, 2020, respectively.
In
December 2018, the Company issued 20,000,000
shares of common stock to Robert M. Carmichael
as an incentive bonus with a fair value of $200,000.
As the shares are subject to continued employment by Mr. Carmichael through January 2, 2020. Expense for the issuance was recognized
over the full vesting period, and accordingly, the Company recognized stock compensation expense of $1,280
year ended December 31, 2020 and was fully
expensed.
In
January 2020 the Company issued 2,647,065 shares of common stock in exchange for $45,000 to an accredited investor and daughter of Mr.
Charles F. Hyatt, a member of our Board of Directors.
In
February 2020 the Company issued 12,500,000 shares of common stock related to the exercise of common stock purchase warrants at an exercise
price of $.01, for a total conversion price of $125,000. The shares were issued to Mr. Hyatt, a member of the Board of Directors.
On
June 9, 2020 the Company issued an aggregate of 330,636 shares of common stock to an employee for services performed in December 2019
and the first five months of 2020. The fair value of these shares was $9,520.
On
April 2, 2020 the Company issued 10,000,000 shares of common stock related to the exercise of common stock purchase warrant at an exercise
price of $.01 per share. The Company received proceeds of $100,000 upon such exercise from Mr. Hyatt, a member of our Board of Directors.
On
April 10, 2020 the Company sold an aggregate of 20,000,000 shares of its common stock at a purchase price $0.025 per share to two accredited
investors, including Mr. Hyatt, in a private transaction, resulting in proceeds to the Company of $500,000.
On
April 9, 2020, the Company issued to an investor relations consultant, 3,000,000 shares of common stock, with a fair market value of
$133,500.
On
April 9, 2020, the Company issued, to a corporate communications consultant 2,000,000 shares of its common stock with a fair market value
of $89,000.
On
April 28, 2020, the Company issued 1,333,333 shares of its common stock as incentives to two employees. The fair value of the stock was
$64,000.
On
May 21, 2020, the Company issued 3,658,633 shares of common stock with a fair market value of $160,980 to six individuals for compensation
related to the BLU3-VENT project. Of the shares issued, Mr. Carmichael received a total 725,087 shares with a fair value of $31,904 and
Blake Carmichael, CEO of BLU3, Inc. who is also Mr. Carmichael’s adult son, received a total of 849,305 shares with a fair value
of $37,369. The balance of the shares were received by employees of the Company and independent contractors.
In
the third quarter of 2020 the Company issued 280,038 shares of its common stock to an employee for services performed from June 2020
to August 2020. The fair value of these shares was $5,890.
In
the third and fourth quarters of 2020 the Company issued 2,795,000 shares of its common stock to Christopher Constable under the consulting
agreement with Brandywine, LLC. The aggregate fair value of these shares was $45,659.
On
December 15, 2020, the Company issued 2,100,000 shares of its common stock with a fair value of $40,320 related to an agreement with
Newbridge Securities to provide investment banking and business advisory services.
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 28, 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.
On
August 18, 2021, the Company issued 6,114,516 shares of common stock related to the conversion of a convertible debenture and accrued
interest of $61,145.
On
September 1, 2021, the Company issued Mr. Charles F. Hyatt, a member of our Board of Directors, 10,000,000 units of the securities of
the Company, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025
per share in consideration of $250,000. The Company did not pay any fees or commissions in connection with the sale of the unit.
On
September 1, 2021, the Company issued Ms. Grace Hyatt, the adult child of a member of our Board of Directors, 600,000 units of the securities
of the Company, with the unit consisting of 1 share of common stock and 1 two year common stock purchase warrants exercisable at $0.025
per share in consideration of $15,000. The Company did not pay any fees or commissions in connection with the sale of the unit.
In
September, 2021, the Company issued 4,000,000
units of the securities of the Company to three
accredited investors, with the unit consisting of 1 share of common stock and 1 24 month common stock purchase warrants exercisable at
$0.025
per share in consideration of $100,000.
The Company did not pay any fees or commissions in connection with the sale of the unit.
On
September 3, 2021, the Company issued 273,054 shares of common stock to Tierra Vesta Group as part of the purchase agreement of Submersible
Systems, Inc. with a fair value of $14,499.
On
September 3, 2021, the Company issued 27,032,388 shares of common stock to Summit Holdings V, LLC. as part of the purchase agreement
of Submersible Systems, Inc. with a fair value of $1,435,420.
On
September 22, 2021, the Company issued a law firm 1,190,476 shares of common stock with a fair value of $55,952 as partial consideration
for its legal services related to acquisition of SSI.
In
November and December, 2021 the Company issued 597,006 shares of its common stock with a fair value of $21,000 to a consultant for services
related to the dive retail industry.
On
December 31, 2021 the Company issued 763,983 shares of its common stock with a fair market value of $36,690 to a vendor related to exclusive
distribution of its product line in the US and Caribbean.
Preferred
Stock
During
the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment
to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of blank check preferred stock. The blank
check preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights
as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business
Corporation Act. In April 2011 the Board of Directors designated 425,000 shares of the blank check preferred stock as Series A Convertible
Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into a share of the Company’s common stock at
any time at the option of the holder at a conversion price of $18.23 per share. Holders of shares of Series A Convertible Preferred Stock
are entitled to 250 votes for each share held. The Company’s common stock and Series A Convertible Preferred Stock vote together
as on any matters submitted to our shareholders for a vote. As and December 31, 2021 and 2020, the 425,000 shares of Series A Convertible
Preferred Stock are owned by Robert Carmichael.
Equity
Compensation Plan
On
May 26, 2021 the Company adopted an Equity Compensation 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 December 31, 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 | |
| 2,125,000 | | |
$ | .0434 | | |
| 22,875,000 | |
Equity Compensation Plans Not Approved by Security Holders | |
| — | | |
| — | | |
| — | |
Total | |
| 2,125,000 | | |
$ | .0434 | | |
| 22,875,000 | |
Options
Effective
July 29, 2019 the Company issued options to purchase up to an aggregate of 10,380,952 shares of common stock to Blake Carmichael. The
options were issued pursuant to a stock option grant agreements and are exercisable at $0.018 per share for a period of five years from
the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $43,582 using the Black-Scholes
option pricing model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend
yield of 0%, iv) expected volatility of 172%. Stock option expense recognized during the year ended December 31, 2020 $5,362, fully expensing
this option agreement.
Effective
July 29, 2019 the Company issued Robert M. Carmichael options to purchase up to 20,761,904 shares of common stock. The options were issued
pursuant to a Grant Agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to
vesting over a period of six months. The fair value of the options totaled $87,147 using the Black-Scholes option pricing model with
the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected
volatility of 172%. Stock option expense recognized for the year ended December 31, 2020 was $10,724, fully expensing this option agreement.
Effective
January 6, 2020 the Company issued options to purchase up to 2,000,000
shares of common stock to Mr. Jeffrey Guzy. The
options were issued pursuant to a stock option grant agreement and is exercisable at $0.0229
per share for a period of three
years from the date of issuance. The options were
immediately vested. The fair value of the options on the date of the grant was $40,107
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of 1.55%,
ii) expected life of 1.5
years, iii) dividend yield of 0%,
iv) expected volatility of 250%.
Stock option expense recognized during the year ended December 31, 2020 for this option was $40,107
and was fully expensed at grant date.
Effective
January 11, 2020 the Company issued options to purchase up to 2,000,000
shares of common stock to BizLaunch Advisors,
LLC. The options were issued pursuant to a professional services agreement and are exercisable at $0.0229
per share for a period of three
years from the date of issuance. The options were
immediately vested. The fair value of the options on the date of the grant was $40,097
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of 1.54%,
ii) expected life of 1.5
years, iii) dividend yield of 0%,
iv) expected volatility of 250%.
Stock option expense recognized during the year ended December 31, 2020 for this option was $40,097
and was fully expensed at grant date.
On
April 14, 2020 the Company entered into a Non-Qualified Stock Option Agreement with Mr. Carmichael (the “Carmichael Option Agreement”).
Under the terms of the Carmichael Option Agreement, as additional compensation the Company granted Mr. Carmichael an option (the “Carmichael
Option”) to purchase up to an aggregate of 125,000,000 shares of the Company’s common stock at an exercise price of $.045
per share, of which the right to purchase 75,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue
milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase 50,000,000 shares of common
stock is subject to vesting upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE
American LLC or similar stock exchange. The Net Revenue Portion of the Option shall vest as follows:
|
● |
the
right to purchase 25,000,000 shares of the Company’s common stock shall vest at such time as the Company reports cumulative
consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any subsequent
acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively, “Net
Revenues”), in excess of $3,500,000 in the aggregate over four consecutive fiscal quarters commencing May 1, 2020 and ending
on April 30, 2023 (the “Net Revenue Period”); |
|
|
|
|
● |
the
right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues
in excess of $7,000,000 in the aggregate over four consecutive fiscal quarters during the Net Revenue Period; and |
|
|
|
|
● |
the
right to purchase an additional 25,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues
in excess of $10,500,000 in the aggregate over four consecutive quarters during the Net Revenue Period. |
The
Carmichael Option Agreement provides that the Carmichael Option is exercisable by Mr. Carmichael on a cashless basis. The Carmichael
Option is not transferrable by Mr. Carmichael, and he must remain an employee of the Company as an additional term of vesting. Once a
portion of the Carmichael Option vests, it is exercisable by Mr. Carmichael for 90 days. Any portion of the Carmichael Option which does
not vest during the Net Revenue Period lapses and Mr. Carmichael has no further rights thereto.
The
fair value of the Carmichael Option on the date of the grate was $4,370,109 using the Black-Scholes option pricing model with the following
assumptions: i) risk free interest rate of .26%, ii) expected life of 1.5 years, iii) dividend yield of 0%, iv) expected volatility of
320%. The Company analyzed the likelihood that the vesting qualifications would be met, and as of December 31, 2021 deemed that there
was a 35% chance that the options would vest. Therefore, stock option expense recognized during the years ended December 31, 2021 and
December 31, 2020 was $874,022 and $655,515 respectively.
On
November 5, 2020 the company entered into a Non-Qualified Stock Option agreement with Christopher Constable the “Constable Option
Agreement” as part of his employment agreement. Under the terms of the option agreement, the Company granted Mr. Constable a 5
year option to purchase 5,434,783
shares of the Company’s common stock at
an exercise price of $.0184,
the “Compensation Options”. The Compensation Options were immediately vested. The fair value of the options on the date of
the grant was $106,199
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of .16%,
ii) expected life of 2.5
years, iii) dividend yield of 0%,
iv) expected volatility of 341%.
Stock option expense recognized during the year ended December 31, 2020 for this option was $106,890
and was fully expensed on grant date.
As
part of the Constable Option Agreement the company also granted Mr. Constable an option (the “Bonus Option”) to purchase
up to an aggregate of 30,000,000 shares of the Company’s common stock at an exercise price of $.0184 per share, of which the right
to purchase 10,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below
(the “Net Revenue Portion of the Option”) and the right to purchase 20,000,000 shares of common stock is subject to vesting
upon official notice of the listing of the Company’s common stock on The Nasdaq Stock Market, the NYSE American LLC or similar
stock exchange. The Net Revenue Portion of the Option shall vest as follows:
|
● |
the
right to purchase 2,000,000 shares of the Company’s common stock shall vest at such time as the Company reports cumulative
consolidated net revenues, including revenues from related parties and revenues recognized by the Company arising out of any subsequent
acquisitions, mergers, or other business combinations following the closing date of such transaction (the collectively, “Net
Revenues”), in excess of $5,000,000 in the aggregate over four consecutive fiscal quarters commencing January 1, 2021 and ending
on April 30, 2023 (the “Net Revenue Period”); |
|
|
|
|
● |
the
right to purchase an additional 3,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues
in excess of $7,500,000 in the aggregate over four consecutive fiscal quarters during the Net Revenue Period; and |
|
|
|
|
● |
the
right to purchase an additional 5,000,000 shares of common stock shall vest at such time as the Company reports cumulative Net Revenues
in excess of $10,000,000 in the aggregate over four consecutive quarters during the Net Revenue Period. |
The
Constable Option Agreement provides that the Compensation Options and Bonus Options are exercisable by Mr. Constable on a cashless basis.
The Carmichael Option is not transferrable by Mr. 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 4 years.
The
fair value of the Bonus Options on the date of the grant was $578,082 using the Black-Scholes option pricing model with the following
assumptions: i) risk free interest rate of .14%, ii) expected life of 2.0 years, iii) dividend yield of 0%, iv) expected volatility of
312.2%. The Company analyzed the likelihood that the vesting qualifications would be met, and as of December 31, 2021 deemed that there
was a 14% chance that the options would vest, as the measurement period does not begin until January 1, 2021. Therefore, stock option
expense recognized during the years ended December 31, 2021 and December 31, 2020 was $82,734 and $0, respectively.
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 Year ended December 31, 2021 was $13,843.
On
August 1, 2021 as part of the Blake Carmichael Employment Agreement (as defined below), the Company entered into a Non-Qualified
Stock Option agreement with Blake Carmichael. Under the terms of the Blake Carmichael Employment agreement, the Company will enter into
an option contract that will grant Blake Carmichael a 5 year option to purchase 3,759,400
shares of the Company’s common stock at
an exercise price of $.0399,
(the “BC Compensation Options”). The BC Compensation Options vest 33.3% upon the execution of the agreement, 33% at the first
anniversary date and 33% upon the second anniversary date. The fair value of the options on the date of the grant was $149,076
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of .25%,
ii) expected life of 2.5 years, iii) dividend yield of 0%,
iv) expected volatility of 346.36%.
The Company expensed $49,692
as of December 31, 2021.
As
part of the Blake Carmichael Agreement the company entered into a Non-Qualified Stock option agreement (the “BC Bonus Options”)
that will grant Blake Carmichael a 5-year option to purchase up to 18,000,000
shares to be vested annually on a contract year
basis, based upon the achievement of certain financial metrics tied to Revenue and EBITA. The fair value of the BC Bonus Options was
$713,777
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of .25%,
ii) expected life of 2.5
years, iii) dividend yield of 0%,
iv) expected volatility of 346.36%,
v) exercise price of .0399 per share. The measurement period for these options began in August, 2021. As of December 31, 2021 the Company
deemed that there was an opportunity for 3% of the total option to vest and an option expense of $21,810
was expensed for the year ended
December 31, 2021.
During
the Third Quarter, 2021 the Company issued options to purchase up to an aggregate of 175,000
shares of common stock to two employees under
the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $.044
to $.049
per share for a periods ranging from three
to four
years of from the date of issuance, with quarterly
vesting periods over one to two years. The fair value of the options totaled $7,149
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate from .155%
to .20%,
ii) expected life of 1.5
to 2
years, iii) dividend yield of 0%,
iv) expected volatility of 249.38%
to 287.12%.
The stock options expense recognized for the year ended December 31, 2021 was $2,989.
Effective
September 3, 2021 the Company issued options to purchase up to an aggregate of 300,000
shares of common stock to Christeen Buban, President
of SSI under the Plan. The options were issued pursuant to the Buban Agreement and a stock option grant agreement and is exercisable
at $0.053
per share for a period of five
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 $15,814
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of .315%,
ii) expected life of 2.5 years, iii) dividend yield of 0%,
iv) expected volatility of 339.21%.
The stock options expense recognized for the year ended December 31, 2021 was $3,953.
As
part of the Buban Agreement the company is also obligated to enter into a Non-Qualified Stock option agreement (the “Buban Bonus
Options”) that will grant Mrs. Buban a 5-year
option to purchase up to 7,110,000
shares to be vested annually on a contract year
basis, based upon the achievement of certain financial metrics tied to Revenue and EBITA. The fair value of the Buban Bonus Options was
$374,786
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of .3150%,
ii) expected life of 2.5
years, iii) dividend yield of 0%,
iv) expected volatility of 339.21%,
v) exercise price of .0531 per share. The measurement period for these options began on September 3, 2021. The company deemed that there
was no option expense to be recognized for the year ended December 31, 2021.
Effective
September 3, 2021 the Company issued options to purchase up to an aggregate of 500,000
shares of common stock to various employees of
SSI under the Plan. The options were issued pursuant to a stock option grant agreement and is exercisable at $0.0531
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
$25,201
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 276.1%.
The stock options expense recognized for the year ended December 31, 2021 was $6,300.
During
the Fourth Quarter, 2021 the Company issued options to purchase up to an aggregate of 100,000
shares of common stock to two employees under
the Plan. The options were issued pursuant to stock option grant agreements and are exercisable at a range of $.040
to $.0419
per share for a period of four
years of from the date of issuance, with quarterly
vesting periods over two years. The fair value of the options totaled $3,863
using the Black-Scholes option pricing model
with the following assumptions: i) risk free interest rate of .204%
ii) expected life of 2
years, iii) dividend yield of 0%,
iv) expected volatility of 249.38%
to 287.12%.
The stock options expense recognized for the year ended December 30, 2021 was $482.
On
November 5, 2021 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 2,403,846 shares of the Company’s common stock at an exercise price of $.041, the “Compensation Options”.
The Compensation Options were immediately vested. The fair value of the options on the date of the grant was $98,976 using the Black-Scholes
option pricing model with the following assumptions: i) risk free interest rate of .53%, ii) expected life of 2.5 years, iii) dividend
yield of 0%, iv) expected volatility of 269.12%. Stock option expense recognized during the year ended December 31, 2021 for these options
were $98,976.
A
summary of the Company’s stock option as of December 31, 2021 and 2020, and changes during the years ended December 31, 2021
and 2020 is presented below:
The Company’s income
tax returns for 2017 through 2021 remain subject to examination by the Internal Revenue Services and state tax authorities.