UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended September 30, 2019 |
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ___________ to ___________ |
Commission file number 333-99393
Brownie’s Marine Group, Inc.
(Exact name of registrant as specified in its charter)
| Florida | 90-0226181 | |
|
State or other jurisdiction of incorporation or organization |
I.R.S. Employer Identification No. |
| 3001 NW 25 th Avenue, Suite 1 | ||
| Pompano Beach, Florida | 33069 | |
| Address of principal executive offices | Zip code |
(954) 462-5570
Registrant’s telephone number, including area code
Not applicable
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| none | n/a | n/a |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [X] | Smaller reporting company [X] |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There were 244,502,146 shares of common stock outstanding at November 18, 2019.
TABLE OF CONTENTS
| Page No. | ||
| PART I - FINANCIAL INFORMATION | ||
| ITEM 1. | FINANCIAL STATEMENTS. | 4 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 24 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | 28 |
| ITEM 4. | CONTROLS AND PROCEDURES. | 28 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | LEGAL PROCEEDINGS. | 29 |
| ITEM 1A. | RISK FACTORS. | 29 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | 29 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. | 30 |
| ITEM 4. | MINE SAFETY DISCLOSURES. | 30 |
| ITEM 5. | OTHER INFORMATION. | 30 |
| ITEM 6. | EXHIBITS. | 30 |
| 2 |
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Various statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived from utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report, our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on June 7, 2019 and our other filings with the Securities and Exchange Commission in their entirety. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report the terms “Brownie’s”, “BWMG,” the “Company,” “we”, “us”, “our” and similar terms refer to Brownie’s Marine Group, Inc., a Florida corporation, and its subsidiaries. In addition, when used in this report, “third quarter of 2019” refers to the three months ended September 30, 2019, “third quarter of 2018” refers to the three months ended September 30, 2018, “2019” refers to the year ending December 31, 2019 and “2018” refers to the year ended December 31, 2018.
We maintain a corporate website at www.browniesmarinegroup.com . Unless specifically set forth to the contrary, the information which appears on our website at www.browniesmarinegroup.com is not part of this report.
| 3 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2019 | December 31, 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 153,125 | $ | 78,784 | ||||
| Accounts receivable - net | 25,177 | 27,204 | ||||||
| Accounts receivable - related parties | 55,325 | 78,423 | ||||||
| Inventory | 794,237 | 723,170 | ||||||
| Prepaid expenses and other current assets | 71,237 | 58,520 | ||||||
| Total current assets | 1,099,101 | 966,101 | ||||||
| Property, equipment and leasehold improvements, net | 95,753 | 3,718 | ||||||
| Right-to-use lease assets | 568,127 | - | ||||||
| Other assets | 21,649 | 26,147 | ||||||
| Total assets | $ | 1,784,630 | $ | 995,966 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 330,359 | $ | 325,309 | ||||
| Accounts payable - related parties | 150,998 | 125,243 | ||||||
| Customer deposits and unearned revenue | 286,709 | 245,907 | ||||||
| Other liabilities | 234,499 | 142,142 | ||||||
| Operating lease liabilities | 95,755 | - | ||||||
| Convertible debentures, net | 110,000 | 110,000 | ||||||
| Total current liabilities | 1,208,320 | 948,601 | ||||||
| Long-term operating lease liabilities | 472,372 | - | ||||||
| Total Liabilities | 1,680,692 | 948,601 | ||||||
| Commitments and contingent liabilities (See note 11) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 425 | 425 | ||||||
| Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 244,311,059 and 224,311,059 issued and outstanding at September 30, 2019 and 181,086,228 and 161,086,228 shares issued and outstanding at December 31, 2018 | 22,431 | 16,109 | ||||||
| Common stock payable 138,481 shares and 138,481 shares, respectively as of September 30, 2019 and December 31, 2018 | 14 | 14 | ||||||
| Additional paid-in capital | 11,090,161 | 10,213,595 | ||||||
| Accumulated deficit | (11,009,093 | ) | (10,182,778 | ) | ||||
| Total stockholders’ equity | 103,938 | 47,365 | ||||||
| Total liabilities and stockholders’ equity | $ | 1,784,630 | $ | 995,966 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 4 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
Three
Months Ended
September 30, |
Nine
Months Ended
September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net revenues | ||||||||||||||||
| Net revenues | $ | 641,420 | $ | 674,011 | $ | 1,682,147 | $ | 1,542,531 | ||||||||
| Net revenues - related parties | 199,993 | 213,719 | 551,439 | 510,132 | ||||||||||||
| Total net revenues | 841,413 | 887,730 | 2,233,586 | 2,052,663 | ||||||||||||
| Cost of net revenues | ||||||||||||||||
| Cost of net revenues | 488,738 | 464,473 | 1,391,459 | 1,275,541 | ||||||||||||
| Cost of net revenues - related parties | 111,433 | 175,286 | 283,920 | 254,201 | ||||||||||||
| Royalties expense - related parties | 14,207 | 19,137 | 38,324 | 42,532 | ||||||||||||
| Total cost of revenues | 614,378 | 658,896 | 1,713,703 | 1,572,274 | ||||||||||||
| Gross profit | 227,035 | 228,834 | 519,883 | 480,389 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | 534,354 | 239,986 | 1,263,499 | 743,695 | ||||||||||||
| Research and development costs | 12,629 | 32,346 | 76,873 | 75,522 | ||||||||||||
| Total operating expenses | 546,983 | 272,332 | 1,340,372 | 819,217 | ||||||||||||
| Loss from operations | (319,948 | ) | (43,498 | ) | (820,489 | ) | (338,828 | ) | ||||||||
| Other expense, net | ||||||||||||||||
| Interest expense | (2,016 | ) | (6,294 | ) | (5,826 | ) | (38,107 | ) | ||||||||
| Total other expense | (2,016 | ) | (6,294 | ) | (5,826 | ) | (38,107 | ) | ||||||||
| Loss income before provision for income taxes | (321,964 | ) | (49,792 | ) | (826,315 | ) | (376,935 | ) | ||||||||
| Provision for income taxes | —- | —- | —- | —- | ||||||||||||
| Net loss | $ | (321,964 | ) | $ | (49,792 | ) | $ | (826,315 | ) | $ | (376,935 | ) | ||||
| Basic loss per common share | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Diluted loss per common share | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Basic weighted average common shares outstanding | 221,369,879 | 104,404,703 | 206,288,923 | 103,283,065 | ||||||||||||
| Diluted weighted average common shares outstanding | 221,369,879 | 104,404,703 | 206,288,923 | 103,283,065 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 5 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
For The Three Months Ended September 30, 2018 And 2019
| Common | Additional | Total | ||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Stock Payable | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance, June 30, 2018 (unaudited) | 425,000 | $ | 425 | 103,903,691 | $ | 10,389 | 138,941 | $ | 14 | $ | 9,262,415 | $ | (9,206,936 | ) | $ | 66,307 | ||||||||||||||||||||
| Shares issued for services | - | - | 921,162 | 92 | - | - | 20,874 | - | 20,966 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (49,792 | ) | (49,792 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2018 (unaudited) | 425,000 | $ | 425 | 104,824,853 | $ | 10,481 | 138,941 | $ | 14 | $ | 9,283,289 | $ | (9,256,728 | ) | $ | 37,481 | ||||||||||||||||||||
| Balance, June 30, 2019 (unaudited) | 425,000 | $ | 425 | 218,119,561 | $ | 21,812 | 138,941 | $ | 14 | $ | 10,856,775 | $ | (10,687,129 | ) | $ | 191,897 | ||||||||||||||||||||
| Shares issued for services | - | - | 3,691,498 | 369 | - | - | 102,875 | - | 103,244 | |||||||||||||||||||||||||||
| Unit offering | - | - | 2,500,000 | 250 | - | - | 24,750 | - | 25,000 | |||||||||||||||||||||||||||
| Stock Option Expense | - | - | - | - | - | - | 105,761 | - | 105,761 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (321,964 | ) | (321,964 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2019 (unaudited) | 425,000 | $ | 425 | 224,311,059 | $ | 22,431 | 138,941 | $ | 14 | $ | 11,090,161 | $ | (11,009,093 | ) | $ | 103,938 | ||||||||||||||||||||
For The Nine Months Ended September 30, 2018 And 2019
| Common | Additional | Total | ||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Stock Payable | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2017 | 425,000 | $ | 425 | 92,192,717 | $ | 9,819 | 138,941 | $ | 14 | $ | 9,170,198 | $ | (8,879,793 | ) | $ | 300,663 | ||||||||||||||||||||
| Shares issued for services | - | - | 3,264,019 | 325 | - | - | 53,428 | - | 53,753 | |||||||||||||||||||||||||||
| Unit offering | - | - | 2,608,695 | 261 | - | - | 29,739 | - | 30,000 | |||||||||||||||||||||||||||
| Shares issued for licensing fee | - | - | 759,422 | 76 | - | - | 29,924 | - | 30,000 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (376,935 | ) | (376,935 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2018 (unaudited) | 425,000 | $ | 425 | 98,824,853 | $ | 10,481 | 138,941 | $ | 14 | $ | 9,283,289 | $ | (9,256,728 | ) | $ | 37,481 | ||||||||||||||||||||
| Balance, December 31, 2018 | 425,000 | $ | 425 | 161,086,228 | $ | 16,109 | 138,941 | $ | 14 | $ | 10,213,595 | $ | (10,182,778 | ) | $ | 47,365 | ||||||||||||||||||||
| Shares issued for services | - | - | 10,724,831 | 1,072 | - | - | 251,055 | - | 252,127 | |||||||||||||||||||||||||||
| Unit offering | - | - | 52,500,000 | 5,250 | - | - | 519,750 | - | 525,000 | |||||||||||||||||||||||||||
| Stock Option Expense | - | - | - | - | - | - | 105,761 | - | 105,761 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (826,315 | ) | (826,315 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2019 (unaudited) | 425,000 | $ | 425 | 224,311,059 | $ | 22,431 | 138,941 | $ | 14 | $ | 11,090,161 | $ | (11,009,093 | ) | $ | 103,938 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 6 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
Nine
Months Ended
September 30, |
||||||||
| 2019 | 2018 | |||||||
| Cash flows provided by operating activities: | ||||||||
| Net loss | $ | (826,315 | ) | $ | (376,935 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | 4,689 | 17,798 | ||||||
| Shares issued for services | 252,127 | 53,753 | ||||||
| Stock option expense | 105,761 | - | ||||||
| Shares issued for licensing fee | - | 3,000 | ||||||
| Amortization of Operating right of use asset | 67,486 | - | ||||||
| Amortization of debt discount | - | 18,751 | ||||||
| Change in deferred tax asset, net | - | 2,520 | ||||||
| Forgiveness of debenture debt | - | (2,744 | ) | |||||
| Changes in operating assets and liabilities | ||||||||
| Change in accounts receivable, net | 2,027 | (60,484 | ) | |||||
| Change in accounts receivable - related parties | 23,098 | 3,602 | ||||||
| Change in inventory | (71,067 | ) | (158,505 | ) | ||||
| Change in prepaid expenses and other current assets | (8,219 | ) | 203,428 | |||||
| Change in other assets | - | (21,000 | ) | |||||
| Change in accounts payable and accrued liabilities | 5,050 | 249,594 | ||||||
| Change in customer deposits and unearned revenue | 40,801 | 17,966 | ||||||
| Change in other liabilities | 92,357 | 338 | ||||||
| Change in accounts payable - related parties | 25,756 | 1,184 | ||||||
| Change in operating lease liabilities | (67,486 | ) | - | |||||
| Net cash used in operating activities | (353,935 | ) | (47,734 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | (96,724 | ) | - | |||||
| Net cash used in investing activities | (96,724 | ) | - | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from unit offering | 525,000 | 30,000 | ||||||
| Net cash provided by financing activities | 525,000 | 30,000 | ||||||
| Net change in cash | 74,341 | (17,734 | ) | |||||
| Cash, beginning of period | 78,784 | 150,898 | ||||||
| Cash, end of period | $ | 153,125 | $ | 133,164 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 4,201 | $ | - | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Operating lease assets obtained in exchange for operating lease liabilities | $ | 635,613 | $ | - | ||||
| Receipt of prepaid fixed asset | $ | - | $ | 27,800 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 7 |
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| NOTE 1. | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Description of business –Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company,” or “BWMG”) designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. and manufactures and sells high pressure air and industrial gas compressor packages through its wholly owned subsidiary Brownie’s High Pressure Compressor Services, Inc. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. and Brownie’s High Pressure Compressor Services, Inc. The Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”.
On August 7, 2017, Brownie’s Marine Group, Inc. entered into an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”), a German-based company engaged in the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean (the “Territory”). Pursuant to an intercompany assignment, Brownie’s High Pressure Compressor Services, Inc., our wholly-owned subsidiary (“BHPCS”), is party to the agreement. Through BHPCS we expect to conduct business and build the brand name “L&W Americas/LWA”, establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. Our goal will be to build a network of jobbers, dealers, installers and high-pressure compressor distributors throughout the Territory by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product OEM integration relationships.
In December 2017, the Company formed a wholly-owned subsidiary BLU3, Inc. The Company was formed to develop and market an innovation electric shallow dive system that is completely portable to the user. As of September, 30, 2019 and December 31, 2018 the company has had limited operations.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the Nine-month period ended September 30, 2019 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2019.
For further information, refer to the Company’s consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018.
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 Industries, Inc., Brownie’s High Pressure Compressor Services, Inc. and BLU3, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
| 8 |
Cash and equivalents – Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.
Going Concern – The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these consolidated financial statements. We incurred net losses for the nine months ended September 30, 2019 and 2018 of $826,315 and $376,935, respectively. The Company had an accumulated deficit as of September 30, 2019 of $11,009,093.
Because the Company believes that existing operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, the Company will continue to raise additional funds as needed and is currently exploring alternative sources of financing. The Company has issued a number of common shares and convertible debentures as an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or other securities or obtaining short term loans.
If BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
Accounts receivable – Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for doubtful accounts are estimated based on historical customer experience and industry knowledge. The allowances for doubtful accounts totaled $8,346 and $9,200 at September 30, 2019 and December 31, 2018, respectively.
Inventory – Inventory is stated at the lower of cost or net realizable value. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when indicated.
Property 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
On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive. The new revenue standard was applied using the modified retrospective method. As a result of the adoption of this standard, there was no impact on the prior year financial statements.
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.
| 9 |
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 three and nine months ended September 30, 2019 and September 30, 2018, totaled $8,856, $28,853, $12,179 and $57,816, respectively.
Research and development costs – The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. During the three and nine months ended September 30, 2019 and September 30, 2018 the Company incurred research and development costs of $12,629, $32,346, $76,873 and $75,522, 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 $286,709 and $245,907 at September 30, 2019 and December 31, 2018, respectively.
Warranty policy – Under the provisions of FASB ASC 460, Guarantor’s Guarantees, the Company accrues a liability for estimated warranty policy costs based on historical information and experience. 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 at September 30, 2019 and December 31, 2018 was 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 recognized a reserve for warranty work in 2018 of $8,834. During the Nine months ended September 30, 2019 the Company increased the reserve by $1,709 to a total of $10,543.
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.
| 10 |
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 three and nine months ended September 30, 2019 and 2018, the Company recognized share based compensation with a fair value of $209,005, $20,966, $357,888 and $53,753 respectively.
Beneficial conversion features on convertible debentures – A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share value of the underlying stock into which it is convertible. The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined through use of the quoted stock price.
Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.
At September 30, 2019 and December 31, 2018, the carrying amount of cash, accounts receivable, accounts receivable – related parties, accounts payable and accrued liabilities, customer deposits and unearned revenue, other liabilities, and convertible debentures, approximate fair value because of the short maturity of these instruments.
Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. At September 30, 2019 and September 30, 2018, 103,812,893 and 33,778,441, 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.
| 11 |
New accounting pronouncements
In June 2018, the Financial Accounting Standards Board issued ASU 2018-7, “Compensation – Stock Compensation” (Topic 718) amending the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments specify that nonemployee share-based payments are measured at grant-date fair value with the grant date being defined when the parties reach a mutual understanding of the key terms and conditions of the share-based award. ASU 2018-07 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU 2018—07 did not have an impact on our operations, cash flows or financial condition.
In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The recognition of right of use assets and real estate operating lease liabilities had a material impact on our consolidated balance sheet presentation. Adoption of this standard resulted in additional right of use assets and additional liabilities of approximately $635,613 based on the present fair value of the remaining minimum rental payments under our current real property lease obligations. See Note 11.
The Company believes there was no other new accounting guidance adopted, but not yet effective that either has not already been disclosed in prior reporting periods or is relevant to the readers of our consolidated financial statements.
| NOTE 2. | INVENTORY |
|
September
30, 2019
(unaudited) |
December 31, 2018 | |||||||
| Raw materials | $ | 509,610 | $ | 353,619 | ||||
| Finished goods | 428,224 | 513,148 | ||||||
| Allowance for obsolete inventory | (143,597 | ) | (143,597 | ) | ||||
| $ | 794,237 | $ | 723,170 | |||||
For the year ended December 31, 2018, the Company recognized an additional reserve for obsolete or slow moving inventory of approximately $100,000. No additional reserve for obsolete or slowing moving inventory during the nine months ended September 30, 2019.
| NOTE 3. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consisted of the following:
|
September
30, 2019
(unaudited) |
December 31, 2018 | |||||||
| Prepaid inventory | $ | 68,012 | $ | 39,260 | ||||
| Prepaid insurance | - | 4,615 | ||||||
| Prepaid other current assets | 3,225 | 14,645 | ||||||
| $ | 71,237 | $ | 58,520 | |||||
| 12 |
|
NOTE 4. |
PROPERTY AND EQUIPMENT, NET |
Property, equipment and leasehold improvements consists of the following as of:
|
September
30, 2019
(unaudited) |
December 31, 2018 | |||||||
| Tooling and equipment | $ | 235,356 | $ | 138,632 | ||||
| Computer equipment and software | 27,469 | 27,469 | ||||||
| Vehicles | 44,160 | 44,160 | ||||||
| Leasehold improvements | 43,779 | 43,779 | ||||||
| 350,764 | 254,040 | |||||||
| Less: accumulated depreciation and amortization | (255,011 | ) | (250,322 | ) | ||||
| $ | 95,753 | $ | 3,718 | |||||
Depreciation and amortization expense totaled $4,689 and $17,798 for the nine months ended September 30, 2019 and 2018, respectively.
| NOTE 5. | OTHER ASSETS |
Other assets at September 30, 2019 of $21,649 consisted of refundable deposits $6,649 and an unamortized license fee of $15,000. Other assets at December 31, 2018 of $26,147 consisted of refundable deposits $6,649 and an unamortized license fee of $19,498.
| NOTE 6. | CUSTOMER CREDIT CONCENTRATIONS |
The Company sells to three (3) entities owned by the brother of Robert Carmichael, the Company’s Chief Executive Officer, and three (3) companies owned by the Chief Executive Officer as further discussed in Note 7 - RELATED PARTIES TRANSACTIONS. Combined sales to these six (6) entities for the nine month periods ended September 30, 2019 and 2018, represented 24.69% and 24.85% respectively, of total net revenues.
In excess of 90% of our total net revenues are made up of product sales to customers within the state of Florida.
| NOTE 7. | RELATED PARTIES TRANSACTIONS |
Net revenues and accounts receivable – related parties – The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, Inc., and Brownie’s Yacht Toys, Inc., owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers with similar sales volumes. Combined net revenues from these entities for the three and nine months ended September 30, 2019 and 2018, totaled $197,982, $213,719, $548,100 and $510,132, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Brownie’s Palm Beach Divers and Brownie’s Yacht Toys, at September 30, 2019, was $33,734, $3,441 and $16,277 respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2018, was $49,443, $7,731, and $8,646, respectively.
| 13 |
The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”), 3D Buoy (“3D”) and 940 Associates, Inc. (“940A”), entities wholly owned by the Company’s Chief Executive Officer. Terms of sale are more favorable than those extended to the Company’s regular customers, but no more favorable than those extended to the Company’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are consistent with those extended to Brownie’s strategic partners. Strategic partner terms on a per order basis include promotion of the Company’s technologies and “Brownie’s” brand, offered only on products or services not offered for resale, and must provide for reciprocal terms or arrangements to the Company on strategic partners’ product or services. BGL is fulfilling the strategic partner terms by providing exposure for the Company’s technologies and “Brownie’s” brand in the yachting and exploration community world-wide through its operations. Combined net revenues from these two entities for three and nine months ended September 30, 2019 and 2018, were $2,011, $0, $3,339 and $0, respectively. Accounts receivable from BGL, 3D and 940A totaled $1,873 (net of credit memo of $15,000 for 940A) and $12,603 at September 30, 2019 and December 31, 2018, respectively.
Accounts payable – related parties – The Company had accounts payable to related parties of $150,998 and $125,243 at September 30, 2019 and December 31, 2018, respectively. The balance payable at December 31, 2018 was due to BGL and 940A. The balance payable at September 30, 2019 was due to Brownies Southport, BGL, 940A and directly to our CEO.
Royalties expense – related parties – The Company has Exclusive License Agreements with 940A, an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. This license agreement requires the Company to pay 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three and nine months ended September 30, 2019 and 2018 as disclosed on the face of the Company’s Consolidated Statements of Operations totaled $14,207, $19,137, $38,324 and $42,532, respectively.
In December 2018, the Company issued 20,000,000 shares of common stock to its Chief Executive Officer as an incentive bonus. As the shares are subject to continued employment by the CEO through January 2, 2020, the Company has treated the shares as issued but not as yet outstanding. Expense for the issuance is being recognized over the full vesting period, and accordingly, the Company recognized stock compensation expense of $10,576 as of December 31, 2018. During the three and nine months ended September 30, 2019 the Company recognized additional stock compensation expense of $47,998 and $138,781, respectively. The Total amount of expense recorded as of September 30, 2019 is $149,357.
On August 1, 2017, Mr. Mikkel Pitzner was appointed by the Company’s board of directors to serve on the Company’s board of directors, filling a vacancy on the board. Mr. Pitzner shall serve on the board of directors and shall hold office until the next election of directors by stockholders and until his successor is elected and qualified or until his earlier resignation or removal. The Company has agreed to pay Mr. Pitzner an annual fee of $6,000 and has issued Mr. Pitzner 3,333,333 shares of restricted common stock valued at $31,250 under a consulting agreement expiring in January 2019. In December 2018, Mr. Pitzner was issued 708,287 common shares in payment of accrued director fees through December 31, 2018. The shares were valued at $0.0195 per share, totaling $13,812, the fair value on the date of grant. During the nine months ended September 30, 2019 the Company recorded $31,250 of stock compensation pursuant to this agreement.
In January 2018, the Company issued 2,000,000 shares of common stock to Mr. Dana Allan for his services for serving on our board of directors. The grant date fair value of the shares issued was $50,200 and were expensed during the year ended December 31, 2018. Mr. Allan also received 552,742 shares for his services on our board of directors with a grant date fair value of $10,778 and were expensed during the year ended December 31, 2018. Mr. Allen resigned as a director effective March 31, 2019.
Stock options outstanding from patent purchase – Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued patents. In exchange for the Intellectual Property, the Company issued Mr. Carmichael 297 stock options at a $1,350 exercise price expiring ten years from the effective date of grant. The options expired on March 2, 2019 without being exercised.
Commencing in February 2019, the Company began paying Mr. Pitzner $9,300 per month, inclusive of a $1,300 auto allowance, for consulting services. These payments are not covered by a written agreement. In August, 2019 the agreement with Mr. Pitzner was terminated.
| 14 |
Effective July 29, 2019 the Company issued options to purchase up to an aggregate of 22,838,094 shares of common stock to two service providers, including Mikkel Pitzner, a member of the Company’s board of directors, and Blake Carmichael, an employee of the Company and son of our CEO. The options were issued pursuant to a stock option grant agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $95,862 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 172%. In August, 2019 8,304,761 options belonging to Mikkel Pitzner were cancelled. Stock option expense recognized during the three and nine months ended September 30, 2019 was $46,873.
Effective July 29, 2019 the Company has agreed to pay the members of the Company’s board of directors an annual fee of $18,000 for serving on the Company’s board of directors for the year ending December 31, 2019. As of September 30, 2019 the Company has accrued $40,500 in board of directors fees.
Effective July 29, 2019 the Company issued its chief executive officer 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 during the three and nine months ended September 30, 2019 was $58,888.
| NOTE 8. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
Accounts payable and accrued liabilities consists of the following as of:
|
September
30, 2019
(unaudited) |
December 31, 2018 | |||||||
| Accounts payable trade and other | $ | 235,972 | $ | 249,833 | ||||
| Accrued payroll & fringe benefits | 61,616 | 48,065 | ||||||
| Accrued Warranty Expense | 10,543 | 8,834 | ||||||
| Accrued payroll taxes & withholding | 7,191 | 8,415 | ||||||
| Accrued interest | 15,037 | 10,162 | ||||||
| $ | 330,359 | $ | 325,309 | |||||
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:
|
September
30, 2019
(unaudited) |
December 31, 2018 | |||||||
| Short-term loans | $ | 126,572 | (*) | $ | 126,572 | (*) | ||
| Asset purchase agreement payable | 12,857 | 12,857 | ||||||
| Other accrued liabilities | 6,791 | - | ||||||
| Accrued royalties’ expense | 8,357 | 2,027 | ||||||
| Accrued vendor settlement | 39,422 | - | ||||||
| Accrued Board of Director Fees | 40,500 | - | ||||||
| On-line training liability | - | 686 | ||||||
| $ | 234,499 | $ | 142,142 | |||||
(*) Initial balance of $200,000 non-convertible note dated July 7, 2013. The note carries a 0% interest rate and is due on demand.
| 15 |
| NOTE 10. | CONVERTIBLE DEBENTURES |
Convertible debentures consist of the following at December 31, 2018:
|
Origination
Date |
Maturity
Date |
Interest
Rate |
Origination
Principal Balance |
Original
Discount Balance |
Period
End Principal Balance |
Period
End Discount Balance |
Period
End Balance, Net |
Accrued
Interest Balance |
Reg. | |||||||||||||||||||||||||
| 8/31/2011 | 8/31/2013 | 5 | % | 10,000 | (4,286 | ) | 10,000 | — | 10,000 | 3,694 | (1 | ) | ||||||||||||||||||||||
| 12/01/17 | 12/01/19 | 6 | % | 50,000 | (12,500 | ) | 50,000 | — | 50,000 | 3,250 | (2 | ) | ||||||||||||||||||||||
| 12/05/17 | 12/04/19 | 6 | % | 50,000 | (12,500 | ) | 50,000 | — | 50,000 | 3,218 | (3 | ) | ||||||||||||||||||||||
| $ | 110,000 | $ | — | $ | 110,000 | $ | 10,162 | |||||||||||||||||||||||||||
Convertible debentures consist of the following at September 30, 2019:
|
Origination
Date |
Maturity
Date |
Interest
Rate |
Origination
Principal Balance |
Original
Discount Balance |
Period
End Principal Balance |
Period
End Discount Balance |
Period
End Balance, Net |
Accrued
Interest Balance |
Reg. | |||||||||||||||||||||||||
| 8/31/2011 | 8/31/2013 | 5 | % | 10,000 | (4,286 | ) | 10,000 | — | 10,000 | 4,069 | (1 | ) | ||||||||||||||||||||||
| 12/01/17 | 12/01/19 | 6 | % | 50,000 | (12,500 | ) | 50,000 | — | 50,000 | 5,500 | (2 | ) | ||||||||||||||||||||||
| 12/05/17 | 12/04/19 | 6 | % | 50,000 | (12,500 | ) | 50,000 | — | 50,000 | 5,467 | (3 | ) | ||||||||||||||||||||||
| $ | 110,000 | $ | — | $ | 110,000 | $ | 15,036 | |||||||||||||||||||||||||||
(1) The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the beneficial conversion feature of the convertible debenture at $4,286, which was accreted to interest expense over the period of the note. The discount has been fully amortized as of December 31, 2018. The company has not received any demand of payment or a notice of default from the lender.
(2) The Company entered into a 6% Secured Convertible Promissory Note, due December 1, 2018, subject to extension. The Note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor Industries, Inc. and Brownie’s High Pressor Compressor Services, Inc. and the personal guarantee of Robert M. Carmichael, the Company’s Chief Executive Officer. The conversion price under the Note range from $0.02 per share if converted in the first year to $0.125 if converted in year five. The lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of the outstanding Common Stock of the Company at any one time. The Note was extended subsequent to year end December 31, 2018 for one additional year with a reduction in the conversion price to $0.01 per share. The Company recorded a debt discount initially of $12,500 which was fully amortized as of December 31, 2018.
| 16 |
(3) The Company entered into a 6% Secured Convertible Promissory Note, due December 4, 2018, subject to extension. The Note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor Industries, Inc. and Brownie’s High Pressure Compressor Services, Inc. and the personal guarantee of Robert M. Carmichael, the Company’s Chief Executive Officer. The conversion price under the Note range from $0.02 per share if converted in the first year to $0.125 if converted in year five. The lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of the outstanding Common Stock of the Company at any one time. The Note was extended subsequent to year end December 31, 2018 for one additional year with a reduction in the conversion price to $0.01 per share. The Company recorded a debt discount initially of $12,500 which was fully amortized as of December 31, 2018.
| NOTE 11. | COMMITMENTS AND CONTINGENCIES |
From time to time the Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability insurance, which provided coverage for each claim up to $1,000,000. During the third quarter of 2014, the Company did not renew its product liability insurance since the renewal policy amount was cost prohibitive. As of August 15, 2017, the Company has obtained Product Liability Insurance, although prior claims are not covered under the new policy. The initial term of the policy was through August 14, 2018 and was renewed through August 14, 2019. The policy was renewed through August 14, 2020.
In addition, as previously disclosed, the Company, Trebor and other third parties, are each named as a co-defendants under actions initially filed in March 2015 in the Circuit Court of Broward County under Case No. CACE-15-03238 and CACE -16-0000242 by the Estate of Ernesto Rodriguez, claiming wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung product. This claim falls outside the Company’s period of insurance coverage. Plaintiff has claims damages exceeding $1,000,000. A default judgment was entered against Trebor in 2015 due to its failure to timely respond to the complaint. On November 2, 2016, the court granted plaintiff’s motion for sanctions against our company for frivolous litigation relating to our attempt to have the matter dismissed and granted the plaintiff’s motion to strike our motion for summary judgment due to our initial default. The Company believes the claim to be a Workers Compensation claim relating exclusively against other non-affiliated defendants and without merit, and will aggressively defend this action and to appeal the default judgment. In the event Trebor is unable to overturn the default judgment and the defendants are determined to be at fault, we would seek to allocate damages among all of the other parties, including the plaintiff. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated due to the undetermined validity of any claim or claims made by plaintiff and the mitigating factors among the parties. Therefore, the Company has not recorded reserves and contingent liabilities related to this matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or reserve for these matters.
In April 2019, the Company reached a settlement agreement with a customer regarding returned merchandise agreeing to refund $65,000. The Company determined the returned merchandise had little or no value and the adjustment was charged to Cost of Revenues at December 31, 2018. In addition, the Company recognized $1,500 in related legal fees in this matter as of December 31, 2018.
On August 14, 2014, the Company entered into a new lease commitment. Terms of the new lease include thirty-seven-month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term.
On November 11, 2018, the Company entered a new lease agreement for approximately 8,025 square feet adjoining its existing facility in Pompano Beach, Florida. Terms of the new lease include a sixty-nine month term commencing on January 1, 2019, or the date the Company takes possession of the premises, if earlier; a $6,527 security deposit; initial base rent of approximately $4,848 per month escalating at 3% per year during the term of the lease plus Florida state sales tax and payment of 10.11% of the buildings annual operating expenses (i.e. common area maintenance) which is approximately $1,679 per month subject to adjustment as provided in the lease.
| 17 |
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.
Supplemental balance sheet information related to leases was as follows:
| Operating Leases | Classification | September 30, 2019 | ||||
| Right-of-use assets | Operating right of use assets | $ | 568,127 | |||
| Current lease liabilities | Current operating lease liabilities | $ | 95,755 | |||
| Non-current lease liabilities | Long-term operating lease liabilities | 472,372 | ||||
| Total lease liabilities | $ | 568,127 | ||||
Lease term and discount rate were as follows:
| September 30, 2019 | ||||
| Weighted average remaining lease term (years) | 5.18 | |||
| Weighted average discount rate | 5.91 | % | ||
The component of lease costs were as follows:
|
Three
months ended
September 30, 2019 |
||||
| Operating lease cost | $ | 50,939 | ||
| Variable lease cost | - | |||
| Total lease costs | $ | 50,939 | ||
The component of lease costs were as follows:
|
Nine
months ended
September 30, 2019 |
||||
| Operating lease cost | $ | 92,813 | ||
| Variable lease cost | - | |||
| Total lease costs | $ | 92,813 | ||
| 18 |
Supplemental disclosures of cash flow information related to leases were as follows:
| September 30, 2019 | ||||
| Cash paid for operating lease liabilities | $ | 67,486 | ||
| Operating right of use assets obtained in exchange for operating lease liabilities | $ | 635,613 | ||
Maturities of lease liabilities were as follows as of September 30, 2019:
|
Trebor
Industries Office Lease |
BMG
Office
Lease |
Copier |
Total
lease
payments |
|||||||||||||
| Remainder of 2019 | $ | 14,510 | $ | 14,546 | $ | 2,097 | $ | 31,153 | ||||||||
| 2020 | 59,339 | 59,927 | 8,388 | 127,654 | ||||||||||||
| 2021 | 61,119 | 61,725 | 8,388 | 131,232 | ||||||||||||
| 2022 | 62,953 | 63,576 | 8,388 | 134,917 | ||||||||||||
| 2023 and thereafter | 114,559 | 116,070 | 2,796 | 233,425 | ||||||||||||
| Total | 312,480 | 315,844 | 30,057 | 658,831 | ||||||||||||
| Less: Imputed interest | (43,263 | ) | (43,961 | ) | (3,031 | ) | (90,254 | ) | ||||||||
| Present value of lease liabilities | $ | 269,217 | $ | 271,833 | $ | 27,028 | $ | 568,127 | ||||||||
On August 7, 2017 the Company entered into an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”), a German-based company engaged in the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean (the “Territory”). Pursuant to an intercompany assignment, Brownie’s High Pressure Compressor Services, Inc., our wholly-owned subsidiary (“BHPCS”), is party to the agreement. Through BHPCS we conduct business under the brand name “LW Americas/LWA”, establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. Under the terms of the agreement, we were granted a non-exclusive, non-transferrable and irrevocable right to use certain of L&W’s trademarks in connection with the marketing, use, sale and service of the products in the Territory. The agreement is for an initial term of five years, and will automatically renew for one additional five year term unless terminated by either party upon one year written notice prior to the expiration of the then current term. Either party may terminate the agreement without cause upon one year prior written notice to the other party. In addition, L&W may terminate the agreement for cause upon 120 days prior notice to us, subject to certain cure periods.
In May 2018 the Company entered into an agreement with an employee to pay him $28 an hour in cash and $10 per hour in common stock not to exceed 40 hours a week. The stock price is determined at the end of each month using the 10-day weighted average of the stock price. In September 2019, the Company issued 1,122,751 shares of common stock valued at $14,446 an average of ($0.013) per share for accrued consulting fees of $14.446. As of September 30, 2019, the Company has not issued all of the common stock to the employee and has recorded a liability of $1,520.
Under the patent license 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 which resulted in the Company amortizing $10,500 during the nine months ended September 30, 2019. The patent license agreement further provides for royalties to be paid based on annual net revenues achieved
| NOTE 12. | EQUITY AND EQUITY INCENTIVE PLAN |
Common Stock
The Company had 224,311,059 and 161,086,228 common shares outstanding at September 30, 2019 and December 31, 2018, respectively.
In December 2018, the Company issued 20,000,000 shares of common stock to our CEO as an incentive bonus. As the shares are subject to continued employment by the CEO through January 2, 2020, the Company has treated the shares as issued but not as yet outstanding. Expense for the issuance is being recognized over the full vesting period, and accordingly, the Company recognized stock compensation expense of $10,576 as of December 31, 2018. During the three and nine months ended September 30, 2019 the Company recognized additional stock compensation expense of $47,998 and $138,781, respectively. The Total amount of expense recorded as of September 30, 2019 is $149,357.
| 19 |
On August 1, 2017, Mr. Mikkel Pitzner was appointed by the Company’s board of directors to serve on the Company’s board of directors, filling a vacancy on the board. Mr. Pitzner shall serve on the board of directors and shall hold office until the next election of directors by stockholders and until his successor is elected and qualified or until his earlier resignation or removal. The Company has agreed to pay Mr. Pitzner an annual fee of $6,000 and has issued Mr. Pitzner 3,333,333 shares of restricted common stock valued at $31,250 under a consulting agreement expiring in January 2019. In December 2018, Mr. Pitzner was issued 708,287 common shares in payment of accrued director fees through December 31, 2018. The shares were valued at $0.0195 per share, totaling $13,812, the fair value on the date of grant. During the three and nine months ended September 30, 2019 the Company recorded $0 and $31,250, respectively of stock compensation pursuant to this agreement. In August 2019 the agreement was cancelled.
In January 2019, the Company entered into an investment banking and corporate advisory agreement. The term of the agreement is for one year and provided for compensation of 2,700,000 common shares with a fair value of $29,700 plus related expenses. The shares were issued in February and March 2019. For the three and nine months ended September 30, 2019 the Company expenses $7,425 and $22,275, respectively in stock compensation.
In January 2019, the Company issued 1,000,000 common shares with a fair value of $12,500 to a consultant for general administrative advisory services for the period from December 1, 2018 through April 30, 2019, of which $0 and $10,000 was expensed during the three and nine months ended September 30, 2019, respectively.
In March 2019 we issued an accredited investor, a unit of the securities of the Company, with the unit consisting of 50,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 eighteen month common stock purchase warrants exercisable at $0.01 per share in consideration of $500,000. The Company intends to use the proceeds from the sale for product research and development and working capital purposes. The Company did not pay any fees or commissions in connection with the sale of the unit.
In May 2019, the Company issued 1,000,000 common shares with a fair value of $16,000 to a consultant for general administrative advisory services, of which $8,000 and $10,000 was expensed during the three and nine months ended September30, 2019, respectively. In addition the Company agreed to pay the consultant $1,500 per month. If the Company acquires / merges with Mako the consultant is entitled to a $10,000 fee payable in common stock. If the Company acquires / merges with SNUBA the consultant is entitled to a $25,000 fee payable in common stock. The agreement expires on December 31, 2019.
On July 17, 2019 the Company sold 2,500,000 shares of common stock for proceeds of $25,000 ($0.01 per share).
In September 2019 the Company issued 1,250,000 shares of common stock valued at $20,375 ($0.016 per share) fair market value, pursuant to an investor relations agreement, and agreed to pay $2,500 and an additional $2,500 after 45 days for a variety of services, including investor and public relations assessment, marketing surveys, investor support, and strategic business planning. The agreement is for six months and may renew for an additional 6 months on the same terms unless either party notifies the other of non-renewal prior to the renewal date.
In August 2019 the Company issued 318,747 common shares with a fair value of $5,000 to a consultant for general administrative advisory services, of which $5,000 and $5,000 was expensed during the three and nine months ended September 30, 2019, respectively.
In September the Company issued 1,122,751 shares of common stock valued at $14,446 an average of ($0.013) per share for accrued consulting fees of $14,446.
Preferred Stock
During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business Corporation Act. Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock. As of September 30, 2019 and December 31, 2018, the 425,000 shares of preferred stock are owned by the Company’s Chief Executive Officer. The preferred shares have 250 to 1 voting rights over the common stock, and are convertible into 31,481 shares of common stock. The preferred stock votes with the Company’s common stock, except as otherwise required under Florida law.
| 20 |
Equity Incentive Plan
On August 22, 2007, the Company adopted an Equity Incentive Plan (the “Plan”). The Plan expired on August 22, 2017. All 297 options issued under the Plan had expired as of March 31, 2019.
Equity Compensation Plan Information as of December 31, 2018.
|
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 | 297 | $ | 1,350 | — | ||||||||
| Equity Compensation Plans Not Approved by Security Holders | — | — | — | |||||||||
| Total | 297 | $ | 1,350 | — | ||||||||
Equity Compensation Plan Information as of September 30, 2019.
|
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 | — | $ | — | — | ||||||||
| Equity Compensation Plans Not Approved by Security Holders | — | — | — | |||||||||
| Total | — | $ | — | — | ||||||||
Options
Effective July 29, 2019 the Company issued options to purchase up to an aggregate of 22,838,094 shares of common stock to two service providers, including Mikkel Pitzner, a member of the Company’s board of directors, and Blake Carmichael, an employee of the Company and son of our CEO. The options were issued pursuant to a stock option grant agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $95,862 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 172%. In August 2019 8,304,761 options belonging to Mikkel Pitzner were cancelled. Stock option expense recognized during the three and nine months ended September 30, 2019 was $46,873.
| 21 |
Options
Effective July 29, 2019 the Company issued its chief executive officer options to purchase up to 20,761,904 shares of common stock. The options were issued pursuant to a Grant Agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $87,147 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.01%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 172%.
Stock option expense recognized during the three and nine months ended September 30, 2019 was $58,888.
A summary of the Company’s stock option as of September 30, 2019, and changes during the nine-month period then ended is presented below:
|
Number of Options |
Weighted Average Exercise Price |
|||||||
| Options outstanding at December 31, 2018 | - | $ | - | |||||
| Options granted | 43,599,998 | 0.018 | ||||||
| Options exercised | — | — | ||||||
| Options cancelled | (8,304,761 | ) | 0.018 | |||||
| Options expired | - | - | ||||||
| Options at end of period | 35,295,237 | $ | 0.018 | |||||
| Options exercisable at September 30, 2019 | 14,533,333 | $ | 0.018 | |||||
At September 30, 2019 the intrinsic value of the options outstanding is $243,337 and options exercisable is $100,280.Changes in the Company’s non-vested options for the nine months ended September 30, 2019 are summarized as follows:
|
Nine Months Ended September 30, 2019 |
||||||||
|
Number of Options |
Weighted Average Exercise Price |
|||||||
| Nonvested options at December 31, 2018 | - | $ | - | |||||
| Granted | 43,599,998 | 0.018 | ||||||
| Vested | (14,533,333 | ) | 0.018 | |||||
| Cancelled | (8,304,761 | ) | 0.018 | |||||
| Nonvested options at September 30, 2019 | 20,761,904 | $ | 0.018 | |||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||
|
Range
of
Exercise Price |
Number Outstanding | Remaining Average Contractual Life (In Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||
| $0.0123 -$0.012 | 35,295,237 | 4.83 | $ | 0.018 | 14,533,333 | $ | 0.018 | |||||||||||||
| Totals | 35,295,237 | 4.83 | $ | 0.018 | 14,533,333 | $ | 0.018 | |||||||||||||
Warrants
In March 2019 we issued an accredited investor, a unit of the securities of the Company, with the unit consisting of 50,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 eighteen month common stock purchase warrants exercisable at $0.01 per share in consideration of $500,000.
A summary of the Company’s warrants as of September 30, 2019, and changes during the nine-month period then ended is presented below:
|
Number of Warrants |
Weighted Average Exercise Price |
|||||||
| Warrants outstanding at December 31, 2018 | 6,783,551 | $ | 0.0115 | |||||
| Warrants granted | 50,000,000 | 0.01 | ||||||
| Warrants exercised | — | — | ||||||
| Warrants cancelled | — | — | ||||||
| Warrants expired | — | — | ||||||
| Warrants at end of period | 56,783,551 | $ | 0.01 | |||||
| Warrants exercisable at September 30, 2019 | 56,783,551 | $ | 0.01 | |||||
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||
|
Range of Exercise Price |
Number Outstanding | Remaining Average Contractual Life (In Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||
| $0.01 -$0.0115 | 56,783,551 | 1.73 | $ | 0.01 | 56,783,551 | $ | 0.01 | |||||||||||||
| Totals | 56,783,551 | 1.73 | $ | 0.01 | 56,783,551 | $ | 0.01 | |||||||||||||
| 22 |
NOTE 13 – SEGMENTS
We had three operating segments as described below;
1. Legacy SSA Products, which sells recreational hookah diving systems.
2. High Pressure Gas Systems, which sells high pressure air and industrial gas compressor packages.
3. Ultra Dive Systems, which sells next generation electric surface supply air diving systems and electric shallow dive system that are battery operated and completely portable to the user.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenues: | ||||||||||||||||
| Legacy SSA Products | $ | 683,043 | $ | 737,578 | $ | 1,762,523 | $ | 1,678,328 | ||||||||
| High Pressure Gas Systems | 158,370 | 150,152 |
471,063 |
374,335 | ||||||||||||
| Ultra Dive Systems | - | - | - | - | ||||||||||||
| Total revenues | $ | 841,413 | $ | 887,730 | $ | 2,233,586 | $ | 2,052,663 | ||||||||
| Cost of goods sold: | ||||||||||||||||
| Legacy SSA Products | $ | 555,818 | $ | 589,647 | $ | 1,375,036 | $ | 1,307,655 | ||||||||
| High Pressure Gas Systems |
58,560 |
69,249 | 338,667 | 264,619 | ||||||||||||
| Ultra Dive Systems | - | - | - | - | ||||||||||||
| Total cost of goods sold | $ | 614,378 | $ | 658,896 | $ | 1,713,703 | $ | 1,572,274 | ||||||||
| Gross Profit: | ||||||||||||||||
| Legacy SSA Products | $ | 127,225 | $ | 147,931 | $ |
387,487 |
$ | 370,673 | ||||||||
| High Pressure Gas Systems |
99,810 |
80,903 |
132,396 |
109,716 | ||||||||||||
| Ultra Dive Systems | - | - | - | - | ||||||||||||
| Total Gross Profit | $ |
227,035 |
$ | 228,834 | $ | 519,883 | $ | 480,389 | ||||||||
| Segment Depreciation: | ||||||||||||||||
| Legacy SSA Products | $ | 3,563 | $ | 9,342 | $ |
4,689 |
$ | 17,798 | ||||||||
| High Pressure Gas Systems | - | - | - | - | ||||||||||||
| Ultra Dive Systems | - | - | - | - | ||||||||||||
| Total Segment Depreciation | $ | 3,563 | $ | 9,342 | $ | 4,689 | $ | 17,798 | ||||||||
| Segment income / (Loss) from Operations: | ||||||||||||||||
| Legacy SSA Products | $ | (246,475 | ) | $ | (42,386 | ) | $ | (458,213 | ) | $ | (237,099 | ) | ||||
| High Pressure Gas Systems | 3,680 | 3,548 | (115,172 | ) | (97,069 | ) | ||||||||||
| Ultra Dive Systems | (77,153 | ) | (4,660 | ) | (247,104 | ) | (4,660 | ) | ||||||||
| Total Segment (Loss) from Operations | $ | (319,948 | ) | $ | (43,498 | ) | $ | (820,489 | ) | $ | (338,828 | ) | ||||
| September 30, 2019 | September 30, 2018 | |||||||
| Segment assets: | ||||||||
| Legacy SSA Products | $ | 1,415,903 | $ | 1,077,439 | ||||
| High Pressure Gas Systems | 176,855 | 264,809 | ||||||
| Ultra Dive Systems | 191,872 | 1,872 | ||||||
| Total Assets | $ | 1,784,630 | $ | 1,344,120 | ||||
| NOTE 14. | SUBSEQUENT EVENTS |
On October 2019, the Company issued 191,087 shares of common stock valued at $4,395 as compensation to a consultant.
| 23 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
BWMG designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, scuba and water safety products. We also manufacture and sell high pressure air and industrial gas compressor packages. Our product lines include:
|
[
Legacy SSA Products |
This segment represents our surface supplied air (SSA) product line. We began our business making hookah diving systems in the late 1960s. Our Brownie’s Third Lung hookah systems have long been a dominant figure in gasoline powered, high-performance, and feature rich hookah systems. Taking full advantage of the proprietary compressor system, a complete series of traditional “fixed speed” electric compressors were developed for the built-in-boat market in 2005. After years of inventing, testing and development, in 2010 we introduced our variable-speed battery powered hookah system which provides divers with gasoline-free all day shallow diving experiences. We believe that these systems provide performance and runtimes as great as 300% better than the best devices previously on the market by utilizing a variable speed technology that controls battery consumption based on diver demand. | |
High Pressure Gas Systems |
Through this segment, we design, manufacture, sell and install SCUBA tank fill systems for on-board yacht use under the brand “Yacht-Pro™”. Our systems provide complete diving packages and dive training solutions for yachts, includes Nitrox systems which allow yacht owners to fill tanks with oxygen enriched air on board. The Yacht-Pro™ compressor systems offer a completely marine-prepared, VFD (variable frequency drive)-driven, automated alternative to other compressors on the market. We also design complete dive lockers, mixed gas production and distribution systems, and the unique Nitrox Maker™. Nitrox is oxygen-enriched air, which reduces the effects of nitrogen on divers; it is the industry standard for dive professionals. The Nitrox Maker™ continuously generates the oxygen rich breathing gas directly from low-pressure air; no stored oxygen or other gases are required onboard. We believe a parallel product analogy to this device is the fresh water-maker that swept through the yachting industry over the last two-decades. While less yacht owners may opt for diving systems than fresh water-makers, there is a broad market potential for yacht owners that will want to have an uninterrupted supply of the premium breathing gas. In addition to the traditional yacht-based NitroxMaker™ systems we introduced the NMCS series, a full line of commercial products. | |
| In August 2017, we entered into an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”), a German-based company engaged in the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean. Pursuant to an intercompany assignment, Brownie’s High Pressure Compressor Services, Inc., our wholly-owned subsidiary (“BHPCS”), is now party to the agreement. Through BHPCS we expect to conduct business and build the brand name “L&W Americas/LWA”, establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. Our goal will be to build a network of jobbers, dealers, installers and high-pressure compressor distributors throughout the Territory by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product OEM integration relationships. |
| 24 |
|
[
Ultra Dive Systems |
In the continued expansion of our business, in December 2017, we formed a wholly-owned subsidiary BLU3, to develop and market a next generation electric surface supplied air diving systems electric shallow dive system that is completely portable to the user. The BLU3 line currently consists of three models targeting specific performance levels and price points – NEMO, NOMAD and NEPTUNE. In November 2018, we announced that our crowdfunding Kickstarter program for the NEMO was successfully concluded, preselling approximately 350 units. During the three and nine months ended September 30, 2019, BLU3 was in the organizational phase of its operations, during which it incurred operating expenses as well as research and development expenses. In the fourth quarter of 2019 we began shipping the NEMO and expect to report revenues in this segment during the three months ending December 31, 2019. Currently, NOMAD is a functional design prototype and NEPTUNE is a multi-diver system still in conceptual stage. |
]
Results of Operations
Revenues, Costs of Sales and Gross Profit
Beginning with the third quarter of 2019 we began reporting our revenues, costs of goods sold and gross profit in three segments based upon these product lines. The following tables provide revenues, costs of goods sold and gross profit margins for our segments for the three and nine months ended September 30, 2019 and 2018.
Revenues
|
Three Months Ended September 30, |
% |
|||||||||||
| 2019 | 2018 | change | ||||||||||
| (unaudited) | (unaudited) | |||||||||||
| Legacy SSA Products | $ | 683,043 | $ | 737,578 | (7.3 | )% | ||||||
| High Pressure Gas Systems | 158,370 | 150,152 | 5.5 | % | ||||||||
| Ultra Dive Systems | - | - | - | |||||||||
| Total revenue | $ | 841,413 | $ | 887,730 | (5.2 | )% | ||||||
Revenues
| Nine Months Ended September 30, |
% |
|||||||||||
| 2019 | 2018 | change | ||||||||||
| (unaudited) | (unaudited) | |||||||||||
| Legacy SSA Products | $ | 1,762,523 | $ | 1,678,328 | 5.0 | % | ||||||
| High Pressure Gas Systems | 471,063 | 374,335 | 25.8 | % | ||||||||
| Ultra Dive Systems | - | - | - | |||||||||
| Total revenue | $ | 2,233,586 | $ | 2,052,663 | 8.8 | % | ||||||
Cost of sales as a percentage of revenues
|
Three
Months Ended
September 30, |
Nine
Months Ended
September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Legacy SSA Products | 81.4 | % | 79.9 | % | 78.0 | % | 77.9 | % | ||||||||
| High Pressure Gas Systems | 37.4 | % | 46.1 | % | 71.9 | % | 70.7 | % | ||||||||
| Ultra Dive Systems | - | - | - | - | ||||||||||||
Gross profit margins
|
Three
Months Ended
September 30, |
Nine
Months Ended
September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Legacy SSA Products |
18.6 |
% | 20.1 | % | 22.0 | % | 22.1 | % | ||||||||
| High Pressure Gas Systems | 62.6 | % | 53.9 | % | 28.1 | % | 29.3 | % | ||||||||
| Ultra Dive Systems | - | - | - | - | ||||||||||||
| 25 |
Legacy SSA Products segment
The decline in revenues from this segment for the third quarter of 2019 from the comparable three month period in 2018 is attributable to discounts provided to retailers during the quarter. The overall increase in revenues from this segment for the first nine months of 2019 from the comparable period in 2018, however, is due to signing on of new wholesalers and dealers.
Our costs of sales as a percentage of revenues in this segment increased for three months ended September 30, 2019 as compared to the comparable period in 2018. We lost our momentum during the second half of August and all of September 2019 due to hurricane and adverse weather predictions. The overall reduction in our revenues from this segment in the third quarter of 2019 adversely impacted our margins as a result of certain fixed costs. During the nine months ended September 30, 2019 our cost of sales as a percentage of revenues remains fairly consistent with the comparable period in 2018.
High Pressure Gas Systems segment
The increase in revenues from this segment for the third quarter of 2019 from the comparable three month period in 2018 is attributable to the timing of certain product sales during the 2018 period. The overall increase in revenues from this segment for the first nine months of 2019 from the comparable period in 2018, however, reflects penetration in the breathing air market in the diving industry. We believe that recognition and acceptance of the L&W brand is growing steadily and we expect sales to increase steadily as our exposure increases.
Our costs of sales as a percentage of revenues in this segment declined 8.7% for the three months ended September 30, 2019 from the comparable period in 2018 as a result of retail sales price increase, thereby improving our margins in this segment. During the nine months ended September 30, 2019 our cost of sales as a percentage of revenues increased 1.2% from the comparable period in 2018 as a result of selling to more wholesalers/ dealers to increase our exposure which adversely impacted our gross profit margins in 2019.
Revenues from related parties
As described in Note 7 to the Notes to Condensed Consolidated Financial Statements (unaudited) appearing earlier in this report, we sell various of our products to related products. The following table provides information on the amount of revenues per reporting segments which are attributable to sales to these related parties.
|
Three
Months Ended
September 30, |
Nine
Months Ended
September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Legacy SSA Products | 98.1 | % | 100 | % | 94.3 | % | 96.6 | % | ||||||||
| High Pressure Gas Systems | 1.9 | % | - | % | 5.7 | % | 3.4 | % | ||||||||
Operating expenses
Operating expenses, consisting of selling, general and administrative expenses and research and development costs, and are reported on a consolidated basis for our operating segments. Overall, our operating expenses increased 100% for the third quarter of 2019 from the comparable period in 2018, and 63.6% for the first nine months of 2019 as compared to the first nine months of 2018.
Selling, general and administrative expenses increased 122.6% for the three months ended September 30, 2019 from the three months ended September 30, 2018, and 69.9% for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increase in 2019 periods is primarily attributable to non-cash compensation expenses of $357,888 representing grants to management, together with increases in employee compensation costs and offset by a decrease in advertising expenses.
| 26 |
Research and development costs declined 61% for the quarter ended September 30, 2019 from the comparable period in 2018 as a result of a reduction in R&D costs associated with the Ultra Dive Systems segment. Research and development costs increased 1.8% for the first nine months of 2019 from the first nine months of 2018 which reflects costs associated with our Ultra Dive Systems segment.
Other expense, net
Other expense, net, which represents interest expense, decreased during both of the 2019 periods from the comparable periods in 2018 as a result of the elimination of amortization of debt discounts which were recognized in the 2018 period.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. The following table summarized total current assets, total current liabilities and working capital (deficit) at September 30, 2019 as compared to December 31, 2018.
|
September 30, 2019 (unaudited) |
December 31, 2018 |
% change |
||||||||||
| Total current assets | $ | 1,099,101 | $ | 966,101 | 13.8 | % | ||||||
| Total current liabilities | $ | 1,208,320 | $ | 948,601 | 27.4 | % | ||||||
| Working capital (deficit) | $ | (109,219 | ) | $ | 17,500 | (724.1 | )% | |||||
The increase in our current assets at September 30, 2019 from December 31, 2018 principally reflects increases in cash, inventory and prepaid expenses, offset by a decrease in accounts receivable – related parties. These changes are primarily attributable to working capital raised during the period and an increase in the inventory at our Ultra Dive Systems segment. The increase in our total current liabilities the periods presented principally reflects increases in accounts payable – related parties, customer deposits and unearned income, other liabilities which is primarily attributable to accrued vendor settlement and accrued fees for members of our board of directors, and operating lease liabilities.
The deposits had increased in early part of 2019 due to the Crowdfunding Campaign of our new product “NEMO”. We have started the production and our goal is to first deliver to the customers who pledged funds to our Crowdfunding campaign. We have already shipped more than 130 units to date and we expect the complete shipping of 380unites pledged by mid-January 2020. These deposits will be recognized as revenues as the units are shipped thus increasing the revenues in this segment.
Summary cash flows
|
Nine Months Ended September 30, |
||||||||
| 2019 | 2018 | |||||||
| (unaudited) | (unaudited) | |||||||
| Net cash (used) by operating activities | $ | (353,935 | ) | $ | (47,734 | ) | ||
| Net cash (used) by investing activities | $ | (96,724 | ) | $ | - | |||
| Net cash provided by financing activities | $ | 525,000 | $ | 30,000 | ||||
Net cash used in operating activities for the nine months ended September 30, 2019 was primarily the result of a net loss of $826,315 and increase in our inventory, prepaid expenses and other current assets and operating leases liabilities offset by decreases in accounts receivable, including accounts receivable – related party, and increase in customer deposits, unearned revenue and other liabilities.
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Net cash used in investing activities in the 2019 period reflects the purchase of molds in our Ultra Dive Systems segment.
Net cash provided by financing activities in the 2019 period reflects proceeds from the sale of our securities.
Going concern and management’s liquid plans
The condensed consolidated financial statements included herein have been prepared assuming we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of issuance of these consolidated financial statements. We incurred losses for the three and nine months ended September 30, 2019 $321,964 and $826,315, respectively. At September 30, 2019 we had a working capital deficit of $109,219 and an accumulated deficit of $11,009,093.
Our cash flow is not sufficient to fund our operations and our growth plans. We estimate that we need to raise approximately $500,000 in additional working capital over the next 12 months, however, we do not presently have any binding commitments for such funds. We are continuing to engage in discussions with potential sources for this required additional capital, however, our ability to raise capital is somewhat limited based upon our revenue levels, net losses and limited market for our common stock. If we fail to raise additional funds when needed, or if we do not have sufficient cash flows from operations, we may be required to scale back or cease certain of our operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. The Company’s management, under the supervision and with the Company’s Chief Executive Officer who also serves as our principal financial and accounting officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2019. Based upon that evaluation and the continuing material weakness in the Company’s internal control over financial reporting as described in Item 9A. of our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on June 7, 2019, the Chief Executive Officer who also serves as our principal financial and accounting officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report. We have failed to timely file certain reports with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018 and our Quarterly Report on Form 10-Q for the period ended March 31, 2019. We do not expect that the weaknesses in our disclosure controls will be remediated until such time as we remediate the material weaknesses in our internal control over financial reporting.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15 under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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From time to time the Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability insurance, which provided coverage for each claim up to $1,000,000. During the third quarter of 2014, the Company did not renew its product liability insurance since the renewal policy amount was cost prohibitive. As of August 15, 2017, the Company has obtained Product Liability Insurance, although prior claims are not covered under the new policy. The policy was renewed and is prepaid through its term and will remain in effect until its renewal date of August 14, 2020.
As previously disclosed, the Company, Trebor and other third parties, are each named as co-defendants under actions initially filed in March 2015 in the Circuit Court of Broward County under Case No. CACE15-03238 and CACE-16-0000242 by the Estate of Ernesto Rodriguez, claiming wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung product. This claim falls outside the Company’s period of insurance coverage. Plaintiff has claimed damages exceeding $1,000,000. A default judgment was entered against Trebor in 2015 due to its failure to timely respond to the complaint. On November 2, 2016, the court granted plaintiff’s motion for sanctions against our company for frivolous litigation relating to our attempt to have the matter dismissed and granted the plaintiff’s motion to strike our motion for summary judgment due to our initial default. The Company believes the claim to be a workers compensation claim relating exclusively against other non-affiliated defendants and without merit, and will aggressively defend this action and to appeal the default judgment. In the event Trebor is unable to overturn the default judgment and the defendants are determined to be at fault, we would seek to allocate damages among all of the other parties, including the plaintiff. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated due to the undetermined validity of any claim or claims made by plaintiff and the mitigating factors among the parties. Therefore, the Company has not recorded reserves and contingent liabilities related to this matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or reserve for these matters.
We incorporate by reference the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered sales of equity securities and use of proceeds
In addition to the transactions previously reported, during the nine months ended September 30, 2019 and through November 18, 2019, the Company has issued the following securities in transactions which were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”).
In May 2019, the Company issued 1,000,000 common shares valued at $16,000 as compensation to a consultant for general administrative advisory services. The recipient was an accredited or otherwise sophisticated investor with access to business and financial information concerning the Company. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2) of that act.
In July 2019, the Company sold 2,500,000 shares of common stock for proceeds of $25,000 to an accredited investor. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2) of that act.
In September 2019, the Company issued 1,250,000 shares of common stock valued at $20,375 as compensation pursuant to the terms of an investor relations agreement. The recipient was an accredited or otherwise sophisticated investor with access to business and financial information concerning the Company. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2) of that act.
In August 2019, the Company issued an aggregate of 318,747 common shares valued at $5,000 as compensation to a consultant for general administrative advisory services. The recipient was an accredited or otherwise sophisticated investor with access to business and financial information concerning the Company. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2) of that act.
In September 2019, the Company issued an aggregate of 1,122,751 shares of common stock valued at $14,446 as compensation to a consultant for accrued consulting fees. The recipient was an accredited or otherwise sophisticated investor with access to business and financial information concerning the Company. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2) of that act.
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In October 2019, the Company issued 191,087 shares of common stock valued at $4,395 as compensation to a consultant. The recipient was an accredited or otherwise sophisticated investor with access to business and financial information concerning the Company. The issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2) of that act.
As of November 18, 2019, there are 244,502,640 shares of the Company’s common stock and 425,000 shares of its Series A Convertible Preferred Stock issued and outstanding.
Item 3. Defaults Upon Senior Securities
None.
Item 4. MINE SAFETY DISCLOSURE
None.
None.
| Incorporated by Reference | Filed or | |||||||||
| No. | Exhibit Description | Form | Date Filed | Exhibit Number |
Furnished Herewith |
|||||
| 2.4 | Plan of Conversion | 8-K | 10/28/15 | 2.1 | ||||||
| 3.1 | Articles of Conversion (Nevada) | 8-K | 10/28/15 | 3.1 | ||||||
| 3.2 | Certificate of Conversion (Florida) | 8-K | 10/28/15 | 3.2 | ||||||
| 3.3 | Articles of Incorporation (Florida) | 8-K | 10/28/15 | 3.3 | ||||||
| 3.5 | Articles of Amendment | 8-K | 12/16/15 | 3.5 | ||||||
| 3.6 | Bylaws | 8-K | 10/28/15 | 3.4 | ||||||
| 31.1 | Certification Pursuant to Rule 13a-14(a)/15d-14(a) | Filed | ||||||||
| 31.2 | Certification Pursuant to Rule 13a-14(a)/15d-14(a) | Filed | ||||||||
| 32.1 | Certification Pursuant to Section 1350 | Filed | ||||||||
| 101 | XBRL Interactive Data File | Filed | ||||||||
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 21, 2019 | Brownie’s Marine Group, Inc. | |
| By: | /s/ Robert M. Carmichael | |
| Robert M. Carmichael | ||
| President, Chief Executive Officer, | ||
| Principal financial and accounting officer | ||
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