UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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1.
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Description
of business and summary of significant accounting policies
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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,
and scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. The Company sells its products
both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Fort Lauderdale, Florida.
The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. The Company’s common
stock is quoted on the OTCBB under the symbol “BWMG”.
Basis of Presentation
– The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted
in the United States of America (“GAAP”). In the opinion of management all normal recurring adjustments considered
necessary to give a fair presentation of operating results for the periods presented have been included.
Definition of fiscal year
– The Company’s fiscal year end is December 31.
Use of estimates
- The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
–
Certain reclassifications have been made to the 2013 financial statement amounts to conform to the 2014 financial statement presentation.
Effective July 15, 2013 the Company effectuated a reverse stock split (1 -for- 1,350). See Note 18.
CHANGE IN CAPITAL STRUCTURE
for more information. Accordingly, the transactional number of shares referenced throughout the Notes has been retroactively
stated unless otherwise noted.
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 financial statements. We have incurred losses since 2009, and expect to
have during 2014. We have had a working capital deficit since 2009.
The Company is behind on payments
due for payroll taxes and withholding, matured convertible debentures, related parties notes payable, accrued liabilities and
interest – related parties, and certain vendor payables. The Company is handling delinquencies on a case by case basis.
However, there can be no assurance that cooperation the Company has received thus far will continue. Payment delinquencies are
further addressed in Note 7.
RELATED PARTIES TRANSACTIONS
, Note 9.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES,
Note
10.
OTHER LIABILITIES
, Note 11.
NOTES PAYABLE,
and Note 12.
CONVERTIBLE DEBENTURES
.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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1.
|
Description
of business and summary of significant accounting policies
(continued)
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Going Concern
(continued)
– During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of
2012, purchased the assets of another, with assumption of their retail location lease. The Company accomplished both transactions
predominantly through issuance of restricted common stock in BWMG. The Company believed these transactions would help generate
sufficient future working capital. Neither endeavor did or has generated profit or positive cash-flow. Therefore, effective May
31, 2013, the Company closed and ceased operations at its retail facility. The Company is still involved in the joint venture.
See Note 17.
JOINT VENTURE EQUITY EXCHANGE AGREEMENT
and Note 8.
ASSET PURCHASE
for further discussion of these
transactions. As a result, the Company does not expect that existing operational cash flow will be sufficient to fund presently
anticipated operations beyond the second quarter of 2014. This raises substantial doubt about BWMG’s ability to continue
as a going concern. The Company will need to raise additional funds and is currently exploring alternative sources of financing.
BWMG has issued a number of convertible debentures as an interim measure to finance working capital needs as discussed in Note
12.
CONVERTIBLE DEBENTURES
and may continue to raise additional capital through sale of restricted common stock or other
securities, and obtaining some short term loans. The Company has paid for legal and consulting services with restricted stock
to maximize working capital, and intends to continue this practice when possible. In addition, the Company implemented some cost
saving measures and will continue to explore more to reduce operating expenses.
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 this uncertainty.
Inventory
– Inventory
is stated at the lower of cost or fair market 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 required.
Furniture, Fixtures, and
Equipment
– Furniture, Fixtures, and Equipment is stated at cost less accumulated depreciation. Depreciation is provided
principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 5 years. The cost
of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized.
Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any
gain or loss is reflected in other income (expense).
The Company periodically evaluates
whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether
the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Revenue recognition
– Revenues from product sales are recognized when the Company’s products are shipped or when service is rendered.
Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost
incurred to date to estimated total cost of each contract. This method is used because management considers the percentage of
cost incurred to date to estimated total cost to be the best available measure of progress on the contracts.
Contract costs include all
direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance, job conditions,
and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions
are determined.
Revenue and costs incurred
for time and material projects are recognized as the work is performed.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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1.
|
Description
of business and summary of significant accounting policies
(continued)
|
Product development costs
– Product development expenditures are charged to expenses as incurred.
Advertising and marketing
costs
– The Company expenses the costs of producing advertisements and marketing material at the time production occurs,
and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising
and trade show expense was $912 and $27,262 for the years ended March 31, 2014, and 2013, respectively.
Customer deposits and returns
policy
– The Company 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.
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.
Comprehensive income
– The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all
periods.
Stock-based compensation
– The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby
compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which
is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants
issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in
accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction.
The fair value has been determined either through use of the quoted stock price.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description
of business and summary of significant ACCOUNTING policies
(continued)
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Stock-based
compensation (continued)
– For the three months ended March 31, 2014 and 2013, the Company compensated and/or
converted all accrued payroll to stock for one employee. For the three months ended March 31, 2014 and 2013, the Company
transacted stock-based compensation transactions as follows: amortized prepaid equity based compensation for personal
guarantees of Chief Executive Officer on Company’s bank debt; additional compensation expense to the Chief Executive
Officer; Board of Directors’ Fees and Bonuses; certain consulting, legal, and other professional fees; equity based
incentive and/or retention bonuses for some employees, and consultants; and operating expense for exclusivity pursuant to
strategic alliance agreement payable. These transactions, as applicable, are also further discussed in Note 7.
RELATED
PARTIES TRANSACTIONS
, Note 13.
EQUITY BASED COMPENSATION FOR CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES
,
Note 20.
EQUITY BASED INCENTIVE/RETENTION BONUSES
, and Note 12.
STRATEGIC ALLIANCE AGREEMENT
.
Beneficial conversion features
on convertible debentures
– The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation
has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it
does not represent the fair value. Under these circumstances, the Company determines fair value through an analysis of its fair
value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations
and industries. See Note 12.
CONVERTIBLE DEBENTURES
for further discussion.
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.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description
of business and summary of significant ACCOUNTING policies
(continued)
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Fair
value of financial instruments
(continued)
–
At March 31, 2014, and December 31,
2013, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned
revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related
parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value
because of the short maturity of these instruments. The fair value of the Company’s convertible debentures was the principal
balance due at March 31, 2014, and December 31, 2013, or $516,800, and $526,910, respectively, as presented in Note 12.
CONVERTIBLE
DEBENTURES
. The principal balance due approximates fair value because of the short maturity of these instruments. On the face
of the balance sheet the convertible debentures are presented net of discount, which is less than fair market value at period
end dates when discount is not fully accreted.
Earnings per common share
– Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings
per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings
per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.
Common stock equivalent shares are excluded from the computation if their effect is antidilutive. All common stock equivalent
shares were excluded in the computation dilutive earnings per share for the three months ended March 31, 2014, and 2013, since
their effect was antidilutive.
New accounting pronouncements
– The Company believes there was no new accounting guidance adopted but not yet effective that either has not already
been disclosed in prior reporting periods or is relevant to the readers of BWMG’s financial statements.
Inventory consists of the following
as of:
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March 31, 2014
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December 31, 2013
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Raw materials
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$
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318,484
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$
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317,187
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Work in process
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|
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—
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|
|
|
—
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Finished goods
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428,409
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|
|
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418,739
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|
|
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$
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746,893
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$
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735,926
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3.
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PREPAID EXPENSES AND OTHER CURRENT
ASSETS
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Prepaid expenses and other
current assets totaling $116,161 at March 31, 2014, consists of $78,911 prepaid inventory, $28,676 prepaid insurance, $7,989 prepaid
subcontract labor; and $585 other current assets and prepaids.
Prepaid expenses and other
current assets totaling $109,523 at December 31, 2013, consists of $94,990 prepaid inventory, $14,141 prepaid insurance, and $392
other current assets.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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4.
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FURNITURE, FIXTURES, AND EQUIPMENT
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Furniture, fixtures, and equipment
consists of the following as of:
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March 31, 2014
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December 31, 2013
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Furniture, fixtures, vehicles and equipment
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$
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204,896
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$
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204,896
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Less: accumulated depreciation and amortization
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(134,233
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)
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(128,631
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)
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$
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70,663
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|
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$
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76,265
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Other assets of $27,635 at
March 31, 2014 and December 31, 2013, consists of $24,740 investment in joint venture, and $2,895 refundable deposits. See Note
17.
JOINT VENTURE EQUITY EXCHANGE AGREEMENT
for further information on investment in joint venture.
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6.
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CUSTOMER CREDIT CONCENTRATIONS
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The Company sells to three
entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer, and two Company’s owned
by the Chief Executive Officer as further discussed in Note 7. –
RELATED PARTIES TRANSACTIONS.
Combined sales to these
five entities for three months ended March 31, 2014 and 2013, represented 49.09% and 28.09%, respectively, of total net revenues.
Sales to no other customers represented greater than 10% of net revenues for three months ended March 31, 2014, and 2013.
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7.
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RELATED PARTIES TRANSACTIONS
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Notes payable – related
parties
Notes payable – related
parties consists of the following at March 31, 2014:
Promissory note payable to the non-employee Board of Director, secured by up to $200,000
in and to all of the Company’s right, title and interest in its fixed assets, inventory, receivables, and all documents
including its books, records, and files; bearing interest at 21.21% per annum, due in monthly principal and interest payments
of $8,585, maturing on November 1, 2014
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$
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70,833
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|
|
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|
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Less amounts due within one year
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70,833
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|
|
|
|
|
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Long-term portion of notes payable
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$
|
—
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|
As of March 31, 2014, principal
payments on the notes payable – related parties are as follows:
2014
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$
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70,833
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|
2015
|
|
|
—
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|
2016
|
|
|
—
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|
2017
|
|
|
—
|
|
2018
|
|
|
—
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|
Thereafter
|
|
|
—
|
|
|
|
|
|
|
|
|
$
|
70,833
|
|
During the three months ended
March 31, 2014, the Company fully satisfied the note payable due the Chief Executive Officer for $49,702, which had matured in
September 2013.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
7.
|
RELATED PARTIES TRANSACTIONS
(continued)
|
As of March 31, 2014, the Company
was two months in arrears on payments due under the Note payable to the non-employee Board of Director. No notice of default has
been received and the Company plans to make payments as able.
Notes payable – related
parties consists of the following at December 31, 2013:
Promissory note payable to the Chief Executive Officer of the the Company, unsecured,
bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013.
|
|
$
|
49,702
|
|
|
|
|
|
|
Promissory note payable to the non-employee Board of Director, secured by
up to $200,000 in and to all of the Company’s right, title and interest in its fixed assets, inventory, receivables,
and all documents including its books, records, and files; bearing interest at 21.21% per annum, due in monthly principal
and interest payments of $8,585, maturing on November 1, 2014.
|
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77,917
|
|
|
|
|
|
|
|
|
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127,619
|
|
|
|
|
|
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Less amounts due within one year
|
|
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127,619
|
|
|
|
|
|
|
Long-term portion of notes payable
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|
$
|
—
|
|
As of December 31, 2013, the
Company was approximately nine months in arrears on principal payments due under the Note payable to the Chief Executive Officer.
On May 13, 2013, the Company granted the Chief Executive Officer 370,371 shares of common stock in satisfaction of $50,000 of
note payable – related parties. The shares of stock were issued at the fair market value, or trading price, on the date
of the transaction.
On October 30, 2013, the Company
signed a secured promissory note with Mikkel Pitzner, the non-employee Board of Director (BOD), for $85,000. In addition to the
terms of the Note Payable disclosed in the table above, the Company was to use its best efforts to settle the Branch Banking and
Trust (“BBT”) Judgment and terminate all Uniform Commercial Code filings in favor of Mr. Pitzner within 10 business
days of the date of the agreement. As further inducement to make the loan, Mr. Pitzner was granted an option to purchase 1,802,565
shares of the Company’s common stock for $.01 per share. The option is exercisable immediately and will continue for a period
ending two years from the agreement date with an option for cashless exercise based on a formula within the agreement. The closing
price per share of the Company’s stock closing on the OTCBB on the date of the agreement was $.025 per share. As a result
of the option granted, the Company recorded $44,610 stock option expense using the Black-Scholes valuation model on date of the
agreement.
Net revenues and accounts
receivable – related parties
– The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s
Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms
of sale are no more favorable than those extended to any of the Company’s other customers. Combined net revenues from these
entities for three months ended March 31, 2014 and 2013, was $221,741 and $164,245, respectively. Accounts receivable from Brownie’s
SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at March 31, 2014, was $24,679,
$17,110, and $23,833, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm
Beach Divers, and Brownie’s Yacht Toys at December 31, 2013, was $11,926, $6,116, and $3,047, respectively.
The Company sells products
to Brownie’s Logistics, LLC. And 940 Associates, Inc., fully owned by the Company’s Chief Executive Officer. Terms
of sale are no more favorable than those extended to any of the Company’s other customers. Combined net revenues from these
entities for three months ended March 31, 2014 and 2013, was $67,115 and $0, respectively. Accounts receivable from Brownie’s
Logistics, LLC. at March 31, 2014 was $2,658.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
7.
|
RELATED PARTIES TRANSACTIONS
(continued)
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Net revenues and accounts
receivable – related parties
(continued) - Sales to Pompano Dive Center for the three months ended March 31, 2014, and
2013, was $1,079 and $1,137, respectively. Accounts Receivable from Pompano Dive Center at December 31, 2013, and December 31,
2012, was $13,330, and $14,029, respectively. See Note 17.
JOINT VENTURE EQUITY EXCHANGE AGREEMENT
for further discussion
regarding Pompano Dive Center. Sales to the Company’s Chief Executive Officer for the three months ended March 31, 2014,
and 2013 was $130 and $0, respectively.
Royalties expense –
related parties
– The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to
as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns. Under
the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing
5% annually. Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”,
“Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement.
Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above
agreements for the three months ended March 31, 2014 and 2013, is disclosed on the face of the Company’s Consolidated Statements
of Operations. As of March 31, 2014, and December 31, 2013, the Company was approximately twenty-six months in arrears on royalty
payments due. No default notice has been received and the Company plans to make payments as able.
Equity based compensation
for Chief Executive Officer
– On November 2, 2012, the Board of Directors (BODs) approved a stock incentive bonus to
certain key employees and consultants to vest and pay out on May 2, 2013, contingent upon continued employment or services. The
stock bonus price per
share was calculated based on last closing
price per the OTCBB on the effective date of the transaction. Of the total stock incentive bonuses declared for the key employees
and consultants of $75,150 or 61,852 shares of common stock, the Chief Executive was awarded $45,000 or 37,037 shares. The Company
recorded compensation expense ratably over the vesting period, and for the three months ended March 31, 2013, compensation expense
to the Chief Executive Officer related to this transaction was $22,500. See Note 20.
EQUITY BASED INCENTIVE/RETENTION BONUSES
for further discussion. In addition, on February 23, 2013, the Company declared a bonus payable for the years ended 2012 for
certain employees, service providers, and consultants. As part of this bonus, the Chief Executive Officer was awarded $67,000
to be paid out in cash or stock based on later determination by the BODs. This amount is included in operating expense for the
year ended December 31, 2012. See table below for inclusion in other liabilities and accrued interest – related parties.
Further, pursuant to a Written Consent of the BODs of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012,
the BOD declared an $83,333 bonus due the Chief Executive Officer payable in shares of restricted stock. The shares vested as
of January 2, 2013. The grant price per share was based on the closing price of the stock on May 31, 2012. For accounting purposes,
the Company recognized $83,333 operating expense ratably over the seven months the shares vested. These shares are included in
shares payable on the statement of stockholders’ deficit. These shares are included in shares payable on the statement of
stockholders’ deficit.
In addition, the
Chief Executive Officer’s monthly salary was increased by $16,667 per month beginning in June 2012, payable in
restricted stock calculated based on a monthly weighted average share factor of .70, or a 30% discount
(“incremental salary”). The shares were to vest six months after the last day of each month, continued employment
was requirement for vesting, and shares would not be issuable until vested. The Company recorded $23,801 operating expense
each month related to the incremental salary, which was $16,667 plus $7,144 discount added back to record at full monthly
weighted average price per market. On December 23, 2013, the Chief Executive Officer forgave all incremental salary shares
payable to him by the Company from 2012 and through November 2013. As a result, the Company recorded $428,578 contribution to
Additional Paid in Capital for the year ended December 31, 2013, for the cancellation of the $261,904, and $166,667 stock
payable from 2013 and 2012, respectively.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
7.
|
RELATED PARTIES TRANSACTIONS
(continued)
|
Non-employee Board of Director
fees and bonus
– Effective December 23, 2013, the Board of Directors cancelled the $2,500 per month non-employee Board
of Director fee agreement under which Mikkel. Pitzner was being compensated. In addition, Mr. Pitzner forgave the $27,500 BOD
fees due in shares payable and/or paid him monthly through November 2013. Related to the forgiveness of the BOD fees for 2013,
the Company cancelled related stock payable to him, recorded $5,917 receivable for the stock due back from him, and recorded the
$27,500 as contribution to Additional Paid in Capital. During the three months ended March 31, 2014, Mr. Pitzner returned 14,406
shares, or $1,383 of $5,917.
On February 23, 2013, the Company
declared a bonus payable for the years ended 2012 for certain employees, service providers, and consultants. As part of this bonus,
Mr. Pitzner was awarded restricted shares of common stock with $73,000 fair market value. The shares were issued to Mr. Pitzner
during the three months ended March 31, 2013.
Equity based compensation
to employee
– During November 2013, Alexander F. Purdon, an employee of the Company, exceeded 10% ownership whereby
he was reclassified to related party. The Company pays Mr. Purdon’s employment compensation in restricted shares of stock
in lieu of cash. The number of shares paid is based on the weighted average price per share during the months the services were
rendered. For the three months ended March 31, 2014 and 2013, stock based compensation to Mr. Purdon was $13,500 and $9,000, respectively.
In addition, of the $129,500 employee bonuses declared payable for 2012 year end, which is payable in stock or cash to be determined
by the Board of Directors, Mr. Purdon is due $17,500. Further, of 61,852 total shares of common stock attributable to incentive
retention bonuses declared by the Board of Directors in 2012, which vested as of May 2013, Mr. Purdon is payable 1,852 shares
of stock, which were valued at $2,250. These shares are included in shares payable on the statement of stockholders’ deficit.
Patent purchase
agreements
– In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”),
an entity that the Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the
Company of patents previously subject to Non-Exclusive License Agreements. Effective September 24, 2010, the Company
finalized and executed terms of the purchase from CRC for payment of $25,500 and nominal shares of the Company’s common
stock. In addition, the principals of CRC were entitled to a percentage of future sales amounting to $8,250 of products the
Company is to receive in conjunction with two patent infringement lawsuits settled in the third quarter of 2010. See
Other
liabilities and accrued interest– related parties
below for inclusion of $6,017 remaining from the original $8,250
liability due the Principals of CRC. By acquiring the IP the Company (i) has an opportunity to further develop the IP, (ii)
has the ability to incorporate the IP into current and future products, and (iii) has the opportunity to license the IP to
third parties.
Other liabilities and accrued
interest– related parties
Other liabilities and accrued
interest– related parties consists of the following at:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
Year-end 2012 bonus payable to Chief Executive Officer
|
|
$
|
67,000
|
|
|
$
|
67,000
|
|
Year-end 2012 bonus payable to employee
|
|
|
17,500
|
|
|
|
17,500
|
|
Accrued interest on note payable non-employee Board of Director
|
|
|
3,004
|
|
|
|
—
|
|
Due to Principals of Carleigh Rae Corp., net
|
|
|
6,017
|
|
|
|
6,017
|
|
|
|
$
|
93,521
|
|
|
$
|
90,517
|
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
7.
|
RELATED PARTIES TRANSACTIONS
(continued)
|
Restricted common stock
issued for personal guarantee
– On April 21, 2011, the Company granted Robert Carmichael, the Chief
Executive Officer, 14,815 shares of restricted common stock in consideration of personal guarantees he provided to secure
restatement and consolidation of the first and second mortgages of the Company. The restrictions on the common stock expired
50% on April 20, 2012, and 50% on April 20, 2013, since Mr. Carmichael continued his full time employment with the Company.
The company valued the stock at determined fair market value per share on the date of the transaction and has recorded
$1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expired. The
unearned balance of the compensation was recorded as prepaid compensation as a component of shareholders’ deficit. For
the three months ended March 31, 2014 and 2013, the Company recognized $0 and $125,001, respectively, as amortization of
prepaid compensation under this agreement. Compensation remaining under this agreement as of March 31, 2014, and
December 31, 2013, was $0.
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 (“IP), the Company issued Mr. Carmichael 234 stock options (adjusted for 1 –for 1,350 reverse
stock split) at a $1,350 exercise price with expiration ten years from the effective date of grant, or March 2, 2019. None of
the options have been exercised to-date.
On February 3, 2012, the Company
entered into an asset purchase agreement with Florida Dive Industries, Inc. (“Seller”). On March 5, 2012, the same
parties executed an amendment (“Amendment”) to the agreement (collectively, the “Agreement”). Under the
terms of the Agreement, the Company acquired certain diving and related inventory, and Seller provided a three year non-compete
agreement within a 10-mile wide radius. In addition, the Company assumed a commercial lease obligation for a retail dive store
in Boca Raton, Florida beginning in April 1, 2012. The lease was automatically renewable on an annual basis through May 31, 2014,
with 90 days written notice assuming the Lessee was in compliance with all terms of the lease. On May 31, 2013, the Company closed
the dive store and vacated the premises. The $3,200 lease deposit was returned during the year ended December 31, 2013. As of
March 31, 2014, the Company had paid Seller $9,643 toward the $22,500 cash purchase price leaving a balance of $12,857 included
in other liabilities.
|
9.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable and accrued
liabilities of $510,277 at March 31, 2014, consists of $231,957 accounts payable trade, $48,181 accrued payroll and related fringe
benefits, $45,000 accrued year-end bonuses, $43,411 accrued payroll taxes and withholding, and $141,728 accrued interest. Accrued
payroll taxes and withholding were approximately six months in arrears at March 31, 2014. Balances due certain vendors are also
due in arrears to varying degrees. The Company is handling all delinquent accounts on a case by case basis.
Accounts payable and accrued
liabilities of $517,058 at December 31, 2013, consists of $245,672 accounts payable trade, $50,910 accrued payroll and related
fringe benefits, $45,000 accrued year-end bonuses, $42,093 accrued payroll taxes and withholding, and $133,383 accrued interest.
Accrued payroll taxes and withholding were approximately six months in arrears at December 31, 2013. Balances due certain vendors
are also due in arrears to varying degrees.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
10.
OTHER LIABILITIES
Other liabilities of $250,521
at March 31, 2014, consists of $235,000 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement
(Note 8.
ASSET PURCHASE
), and $2,664 on-line training liability. The $235,000 short-term loans is comprised of three loans
due on demand from unrelated parties. The loans have no other stated terms except one for $200,000 indicated it was for settlement
of debenture debt. Therefore, the Company used the proceeds from that loan toward settlement of convertible debentures referenced
in (13) of Note 12.
CONVERTIBLE DEBENTURES
.
Other liabilities of $252,009
at December 31, 2013, consists of $235,000 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement
(Note 8.
ASSET PURCHASE
), $3,169 on-line training liability, and $983 other liabilities. The $235,000 short-term loans
is comprised of three loans due on demand from unrelated parties. The loans have no other stated terms except one for $200,000
indicated it was for settlement of debenture debt. Therefore, the Company used the proceeds from that loan toward settlement of
convertible debentures referenced in (13) of Note 12.
CONVERTIBLE DEBENTURES
.
On-line
training certificates are included with all hookah units sold. The training certificates entitle the holder to an on-line
interactive course at no additional charge to the holder. The number of on-line training certificates issued per unit is the
same as the number of divers the unit as sold is designed to accommodate (i.e., a three diver unit configuration comes with
three on-line training certificates). The certificates have eighteen-month redemption from the time customer purchases the
unit before expiration. The Company owes the on-line training vendor an agreed upon negotiated rate for on-line certificates
redeemed prior to expiration, and payment is due upon redemption. The Company estimates the on-line training liability based
on the historical redemption rate of approximately 10%. The Company continues to monitor and maintain a reserve for
certificate redemption that approximates the historical redemption rate.
Notes payable consists of the
following as of March 31, 2014:
Promissory note payable, unsecured, bearing interest at 5% simple interest per annum,
due in weekly principal and interest payments of $250, maturing on March 10, 2015.
|
|
$
|
12,229
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
12,229
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
—
|
|
As of March 31, 2014, principal
payments on the notes payable are as follows:
2014
|
|
$
|
12,229
|
|
2015
|
|
|
—
|
|
2016
|
|
|
—
|
|
2017
|
|
|
—
|
|
2018
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
|
|
|
|
|
$
|
12,229
|
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
11.
|
NOTES PAYABLE
(continued)
|
The unsecured note
payable in the table above and as reflected in the table below in note payable balance resulted from
conversion of a vendor payable dating back to February 2011. The note payable was restructured once in June 2012 to reduce
the monthly payments and to extend the maturity date.
Notes payable consists of the
following as of December 31, 2013:
Promissory note payable, unsecured, bearing interest at 5% simple interest per annum,
due in weekly principal and interest payments of $250, maturing on March 10, 2015.
|
|
$
|
15,305
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
12,540
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
2,765
|
|
|
12.
|
CONVERTIBLE
DEBENTURES
|
Convertible debentures
consist of the following at March 31, 2014:
Origination
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Origination
Principal
Balance
|
|
|
Origination
Discount
Balance
|
|
|
Period End
Principal
Balance
|
|
|
Period
End
Discount
Balance
|
|
|
Period
End
Balance,
Net
|
|
|
Accrued
Interest
Balance
|
|
|
Ref.
|
|
11/27/2010
|
|
5/27/2011
|
|
|
10
|
%
|
|
|
125,000
|
|
|
|
(53,571
|
)
|
|
$
|
58,750
|
|
|
|
-
|
|
|
$
|
58,750
|
|
|
$
|
24,419
|
|
|
|
(2
|
)
|
1/7/2011
|
|
11/11/2011
|
|
|
5
|
%
|
|
|
76,000
|
|
|
|
(32,571
|
)
|
|
|
48,000
|
|
|
|
-
|
|
|
|
48,000
|
|
|
|
8,550
|
|
|
|
(3
|
)
|
8/8/2012
|
|
5/2/2013
|
|
|
8
|
%
|
|
|
42,500
|
|
|
|
(27,172
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
10/31/2012
|
|
8/2/2013
|
|
|
8
|
%
|
|
|
78,500
|
|
|
|
(50,189
|
)
|
|
|
76,835
|
|
|
|
-
|
|
|
|
76,835
|
|
|
|
8,889
|
|
|
|
(4
|
)
|
5/3/2011
|
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
87,500
|
|
|
|
(6
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
1,301
|
|
|
|
(7
|
)
|
2/2/2012
|
|
|
|
|
10
|
%
|
|
|
See
ref (9) for Discussion
|
|
|
|
|
|
|
|
-
|
|
|
|
379
|
|
|
|
(9
|
)
|
3/14/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
5,500
|
|
|
|
-
|
|
|
|
472
|
|
|
|
-
|
|
|
|
472
|
|
|
|
132
|
|
|
|
(10
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
-
|
|
|
|
2,743
|
|
|
|
-
|
|
|
|
2,743
|
|
|
|
3,296
|
|
|
|
(11
|
)
|
4/8/2013
|
|
4/14/2013
|
|
|
9.90
|
%
|
|
|
20,000
|
|
|
|
(13,333
|
)
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
1,935
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
516,800
|
|
|
|
|
|
|
$
|
516,800
|
|
|
$
|
136,401
|
|
|
|
|
|
Reference numbers in right hand column of table entitled Ref. refer to paragraphs with corresponding number
that immediately follow the next paragraph. The referenced paragraphs also support the December 31, 2013 table, which appears at
the end of this Note. Therefore, it is appropriate that some of the number references do not appear in the table above (i.e. Ref. 1).
During the first quarter of
2013, the Company determined based on closing market price of $.0005 (pre-reverse stock split), and based on terms of convertible
debt, its convertible and/or committed shares were in excess of its authorized common stock of 5,000,000,000. Most of the Company’s
convertible debentures have conversion rates at substantial discount to market price; therefore, a decline in market price impacts
the number of shares convertible. As a result, the Company recorded a derivative liability of $565,689, which represented the
amount of shares convertible or committed in excess of the shares authorized at $.0005 per share, the closing
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
market price at March 30, 2013,
and as valued according to the Black-Scholes valuation model. On July 15, 2013, the Company effectuated a reverse stock split
(1 -for- 1,350), which was applied retroactively. See Note 19.
CHANGE IN CAPITAL STRUCTURE
. Accordingly, this transaction
resulted in significant shares authorized in excess of those committed, and the full derivative liability of $565,689 was reversed.
|
(1)
|
The Company converted an accounts
payable for legal services to a convertible debenture. At the option of the lender, the
principal amount of the note plus any accrued interest may be converted in whole or in
part into Common Stock at the conversion price per share of $.001 by written notice.
The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock
of the Company at any one time. The debenture and the shares referenced within the debenture
may be assignable in whole or in part to a third party at any time during the term. The
Company valued the beneficial conversion feature (BCF) of the convertible debenture at
$20,635, the “ceiling” of its intrinsic value. The Company accreted the discount
to the convertible debenture and recognized interest expense through its maturity. On
the maturity date of the debenture, the lender sold and assigned the debenture to an
unrelated third party for the face value of the debenture. Because the original lender
asserted default against this party, the original lender re-assigned the debenture to
another party. See Ref. (12) for assignment of the debenture as well as accounting treatment
of the assignment.
|
|
(2)
|
The Company purchased in exchange
for convertible debenture exclusive rights for license of certain intellectual property
from an unrelated party. The parties agreed to a royalty of 2.5% of net revenues generated
from the sale, sub-license or use of the technology or a reasonable negotiated rate based
on similar invention. The debenture was convertible to common shares of the Company at
May 27, 2011, along with accrued interest at the option of the lender. Conversion price
per share is 30% discount as determined from the weighted average of the preceding 12
trading days’ closing market price. The Company valued the BCF of the convertible
debenture at $53,517, its intrinsic value. The Company accreted the discount to the convertible
debenture and will recognize interest expense through repayment in full or conversion.
Because there was no assurance of success and the invention was still in design and pre-prototype
phase, the Company recorded the initial net value of the debenture, $71,483, as research
and development expense during the year ended 2010. Both parties agreed to confidentiality
regarding the invention during the pre-prototype stage. In addition, the Company agreed
to provide the licensor with design services, as well as assist in completing the prototype
and initial production at the Company’s prevailing wholesale rate for comparable
services.
|
On February 10, 2012, the holder
of this debenture entered into an agreement with a third party to sell/assign the $125,000 principal balance, plus accrued interest.
The purchase was to be in installments with transfer/assignment of the debenture upon payment, referred to as “Closings”.
The first Closing was on or about February 15, 2012 for $7,500, with that amount assigned/transferred. The second Closing, occurred
90 days after the first closing for $11,750 paid/assigned. All subsequent Closings were to be for $11,750 and occur in 30 day
increments after the second Closing. This was to continue until the full principal balance of $125,000, plus accrued interest
has been purchased/assigned. See Ref. (9) for discussion of new terms on the assigned portions of the debenture.
|
(3)
|
The Company ratified a technology
and license agreement with commitment for purchase of inventory related to an agreement
signed in 2010, which set pricing for products if minimum quantity purchases were met.
Since the Company did not purchase the minimum quantities, but desired to maintain the
technology and licensing rights along with the pricing, it agreed to purchase the 2010
balance shortage in 2011, as well as the 2011 minimum quantities. The agreement required
the Company issue a convertible debenture for $76,000, and 38,000 shares of restricted common
stock. The lender at their option could 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 BCF of the convertible debenture at $32,571. The Company
accreted the discount to the convertible debenture and will recognize interest expense
through paid in full or converted. The Company repaid $28,000 of this debenture in 2011.
See Note 16.
COMMITMENTS AND CONTINGENCIES
for discussion of litigation involving
the technology and license agreement.
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
|
(4)
|
In 2011, the Company borrowed
$42,500, $37,500, and $37,500, respectively, in exchange for three convertible debentures
from a lender. The Company valued the related beneficial conversion features (BCF) at
$42,500, 37,500 and 37,500, respectively. On February 7, 2012, the lender sold/assigned
all rights and interest on the first debenture having net book value of $11,000 plus
accrued interest of $3,328. On March 9, 2012, the lender sold/assigned all rights and
interest in the second debenture having a net book value of $24,500, plus $1,448 of accrued
interest. See reference (11) which discusses the terms and conditions surrounding the
new debentures issued upon extinguishment of the two originals as well as accounting
treatment of the transactions. During the third quarter of 2012, the lender converted
to stock the third convertible debenture with $37,500 principal and $1,500 accrued interest
outstanding in full satisfaction of the convertible debenture. The stock was issued without
restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued
by the Company more than six months prior to the date of conversion and did not pay any
additional consideration for the shares.
|
On July 2, 2012, the Company
borrowed $78,500 from this same lender in exchange for a convertible debenture maturing on April 5, 2013. Beginning 180 days after
the date of the debenture, lender could convert the note to common shares at a 39% discount of the “Market Price”
of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In
addition, if the Company granted a lower price for common stock purchase or conversion to anyone else during the term of the agreement,
the lender’s conversion price would be adjusted downward to the same. The lender could not convert an amount greater than
4.99% of the outstanding common stock at any one time. The Company could have prepaid the debenture at any time before maturity
at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid
interest. There was a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company was also required
to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture.
The Company valued the BCF of the convertible debenture at $35,268. Accordingly, the $78,500 debenture was discounted by the amount
of the BCF and accreted to the convertible debenture through its maturity, and interest was recognized until converted. By December
31, 2013, the lender had converted $78,500 principal plus accrued interest on the convertible debenture in full satisfaction of
the debt. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued
by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.
On August 8, 2012, the
Company borrowed $42,500 from this same lender in exchange for a convertible debenture maturing on May 10, 2013. Beginning
180 days after the date of the debenture, lender could have converted the note to common shares at a 39% discount pursuant to
the same terms and conditions discussed in preceding paragraph. The Company valued the BCF of the convertible debenture at
$27,172. Accordingly, the $42,500 debenture was discounted by the amount of the BCF. The Company accreted the discount to the
convertible debenture through its maturity and will recognize interest expense until paid in full or converted. During the
year ended December 31, 2013, the lender converted $34,055 principal on the convertible debenture and the remaining $8,445
during the three months ended March 31, 2014 in full satisfaction of the debenture. In addition, during the three months
ended March 31, 2014 the lender converted $1,700 of accrued interest to shares of common stock. The stock was issued without
restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months
prior to the date of conversion and did not pay any additional consideration for the shares.
On October 31, 2012, the Company
borrowed $78,500 from this same lender in exchange for a convertible debenture maturing on August 2, 2013. Beginning 180 days
after the date of the debenture, lender could have converted the note to common shares at a 39% discount pursuant to the same
terms and conditions discussed in two paragraphs preceding this one. The Company valued the BCF of the convertible debenture at
$50,189. Accordingly, the $78,500 debenture was discounted by the amount of the BCF. The Company is accreting the discount to
the convertible debenture through its maturity and will recognize interest expense until paid in full or converted. During the
three months ended March 31, 2014, the lender converted $1,665 of the convertible debenture to shares of common stock. . The stock
was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more
than six months prior to the date of conversion and did not pay any additional consideration for the shares.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
|
(5)
|
On March 9, 2011, the Company
borrowed $50,000 in exchange for a convertible debenture. The lender could at any time
convert any portion of the debenture to common shares at a 30% discount of the “Market
Price” of the stock based on the average of the previous ten (10) days weighted
average closing prices on the date prior to the notice of conversion. The Company could
have prepaid the debenture plus accrued interest at any time before maturity. In addition,
as further inducement for loaning the Company the funds, the Company granted the lender
50,000 and 100,000 warrants at $337.50 and $472.50 per share (after restatement for 1
for -1,350- reverse stock split) , respectively. As a result, the Company allocated fair
market value (“FMV”) to both the BCF and to the warrants, or $34,472, which
was recorded as a discount against the debenture. The Company accreted the discount to
the convertible debenture through its maturity and recognized interest expense until
both the debenture and accrued interest were converted to stock in full satisfaction
of amounts due, in the first and second quarter of 2012, respectively. Before discount,
the Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation
model.
|
|
(6)
|
On May 3, 2011, the Company borrowed
$300,000 in exchange for a convertible debenture. The Debenture bears 10% interest per
annum. The lender may at any time convert any portion of the debenture to common shares
at a 30% discount of the “Market Price” of the stock based on the average
of the previous ten (10) days weighted average closing prices on the date prior to the
notice of conversion. The Company may prepay the debenture plus accrued interest at any
time before maturity. In addition, as further inducement for loaning the Company the
funds, the Company granted the lender 300,000 and 600,000 warrants at $337.50 and $472.50
per share (after restatement for 1 for -1,350- reverse stock split), respectively. As
a result, the Company allocated fair market value (“FMV”) to both the BCF
and to the warrants, or $206,832, which was recorded as a discount against the debenture.
The Company accreted the discount to the convertible debenture through maturity and will
recognize interest expense until paid in full or converted. Before discount, the Company
determined the FMV of the warrants as $45,000 using the Black-Scholes valuation model.
|
|
(7)
|
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 BCF of the convertible debenture
at $4,286. The Company accreted the discount to the convertible debenture and will recognize
interest expense until paid in full or converted.
|
|
(8)
|
The Company converted a note
payable and related accrued interest of $39,724 into 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 BCF of the convertible debenture at $17,025. Because the debenture was issued
and matured in the third quarter of 2011, the full amount of the discount, $17,025 was
accreted and recognized as interest expense during the period.
|
On February 10, 2012, the lender
sold/assigned all rights and interest on the debenture having a net book value of $39,724, plus $1,552 of accrued interest. See
reference (11) which discusses the terms and conditions surrounding the new debenture issued upon extinguishment of the original
as well as accounting treatment of the transaction.
|
(9)
|
The Company entered a new debenture
agreement upon sale/assignment of the original lender under the debenture as discussed
in reference (2) above. Because the stated terms of the new debenture agreement were
significantly different from the original debenture, including analysis of value of the
beneficial conversion feature at the assignment/purchase date, the transaction was treated
as extinguishment of the old debenture and recording of the new for accounting purposes.
Because the debenture is being assigned/sold in installments, the Company is calculating
and recognizing gain or loss on the extinguishment as it occurs.
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
On February 10, 2012, the new
holder (lender) purchased $7,500 of the original $125,000 principal balance, and based on this transaction, the Company recorded
a $4,286 loss on extinguishment. On May 18, 2012, the lender purchased another $11,750, and the Company recorded a $6,714 loss
on extinguishment related to this transaction. On July 17, 2012, the lender purchased another $11,750, and the Company recorded
a $6,714 loss on extinguishment related to this transaction. On November 8, 2012, the lender purchased another $11,750, and the
Company recorded a $6,714 loss on the extinguishment related to this transaction. Since that date the lender has not purchased
or converted any shares pursuant to the sale/assignment agreement.
The Company may prepay at any
time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debenture is $.37125 (adjusted
for 1-for-1,350 reverse stock split), and the lender may convert at any time until the debenture plus accrued interest is paid
in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will
be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. The debenture and the
shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term.
As of March 31, 2014 and December
31, 2013, the lender had assigned a cumulative $5,500 under the debenture to four separate parties, and $23,500 to another party.
See reference (10) and (12), respectively, related to the assignments.
|
(10)
|
This line is comprised of the
assignment of $5,500 of the convertible debenture from reference (9) above with the same
stated terms and conditions equally to four separate parties. Due to the smaller transaction
amounts, these four debenture holders have been combined for presentation purposes.
|
|
(11)
|
The Company entered into three
new debenture agreements upon sale/assignment of the original lenders under the debentures
as discussed in references (4) and (8) above. Because the stated terms of the new debenture
agreement and principal amounts were significantly different from the original debenture,
including analysis of value of the beneficial conversion feature at the assignment/purchase
date, the transactions are treated as extinguishment of the old debentures and recorded
as new for accounting purposes. As a result of these three transactions, the Company
recognized a combined loss on extinguishment of $71,577 in the year ended December 31,
2012.
|
The new debentures were issued
with the same following terms and conditions: The Company may prepay at any time in an amount equal to 150% of the principal and
accrued interest. The conversion price under the debentures is $.37125 (adjusted for 1-for-1,350 reverse stock split), and the
lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply
if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the
outstanding Common Stock of the Company at any one time. During the years ended December 31, 2013, the lender converted $3,211
of the debenture with original principal balance of $39,724 to stock. The stock was issued without restrictive legend pursuant
to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion
and did not pay any additional consideration for the shares.
On January 18, 2013, the lender
sold/assigned all rights and interest on one of its three debentures having net book value of $16,000 plus accrued interest of
$1,512. On the same day, the lender sold/assigned all rights and interest on another of its three debentures having a net book
value of $56,250, plus $4,825 of accrued interest. See reference (13) which discusses the terms and conditions surrounding the
new debentures issued upon extinguishment of the two originals as well as accounting treatment of the transactions. As of March
31, 2014, the lender still held the third debenture with original principal balance of $39,724 with net book value of $2,743.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
|
(12)
|
On April, 19, 2012, the original
lender discussed in ref (1) above re-assigned the debenture to this party asserting default
against the first assignee. The amount of assignment was the balance remaining per the
original lender’s records, or $16,347. The Company recognized a $3,700 loss on
this transaction. Terms of the assigned debenture are the same as the original debenture
as stated in ref (1). During the year ended December 31, 2012, the new holder converted
$16,347 of the debenture principal plus $162 of accrued interest in full satisfaction.
|
|
|
During the years ended December 31, 2012, the lender accepted assignment of $23,500, of a
convertible debenture from the lender discussed in (9) above. See reference (2) for terms surrounding the original
convertible debenture. In addition, the Company converted $2,125 of the assignments to stock during the year ended December
31, 2013, plus $202 of accrued interest in full satisfaction of the amount due this lender under the assignments. The stock
was issued without restrictive legend pursuant to Rule 144, as the holder acquired the convertible note issued by the
Company more than six months prior to the date of conversion and did not pay any additional consideration for the
shares.
|
|
(13)
|
On January 18, 2013, the Company
entered into three new convertible debenture agreements: one new lending and two upon
sale/assignment of two debentures as discussed in reference (11). Because the stated
terms of the new debenture agreements and principal amounts are significantly different
from the original debentures that were sold/assigned, including analysis of value of
the beneficial conversion feature at the assignment/purchase date, the sale/assignment
transactions are treated as extinguishment of the old debentures and recorded as new
for accounting purposes. As a result of the sale/assignment transactions, the Company
recognized a combined loss on extinguishment of $93,826. Principal balance on these two
new convertible debentures was $30,500 and $95,000, respectively. The Company was also
required to maintain a reserve of shares sufficient to cover the lender’s conversion
to common stock of the total amount of the debentures.
|
The Company borrowed $84,500,
the third debenture referred to above with this lender. The interest rate on the debenture was 10% per annum, and the conversion
price was 59% of the lowest closing bid price per share in the ten trading days prior to the conversion notice. Per terms of the
debenture agreement, the lender was not to convert an amount that would cause it or any of its affiliates to beneficially own
in excess of 4.99% of the Company. The Company could prepay the debenture within 90 days after the effective date at 140% multiplied
by outstanding principal and accrued interest. The Company was also required to maintain a reserve of shares sufficient to cover
the lender’s conversion to common stock of the total amount of the debenture. The Company valued the BCF of the convertible
debenture at $58,720, its intrinsic value. Accordingly, the $84,500 debenture was discounted by the amount of the BCF. The Company
accreted discount to the convertible debenture and interest expense through its settlement on August 12, 2013 as discussed below.
Further, the debenture agreement provided for post-closing expenses, which the lender noted was $1,000 per conversion and approximately
$700 in other fees per each debenture. The Company accrued these fees on each debenture and per conversion.
The $95,000 and $30,500 debentures
contained the same terms and conditions as the $84,500 debenture except there were no prepayment clause, and the conversion price
was 44% of the lowest closing bid price per share in the ten trading days prior to the conversion notice. During the years ended
December 31, 2013, the Company converted $30,500 plus $191 of accrued interest in full satisfaction of the $30,500 debenture,
and $22,500 toward the $95,000 debenture. The stock was issued without restrictive legend pursuant to Rule 144, as the holder
acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional
consideration for the shares.
On August 12, 2013, the Company
fully settled the two debentures outstanding with $157,446 principal and $8,794 accrued interest totaling $166,240 with this lender
for $170,000. All pre-payment penalties were waived and the Company recognized the difference between the $166,240 and $170,000,
or $3,760, as other expense for the year ended December 31, 2013.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
|
(14)
|
On April 8, 2013, the Company
borrowed $20,000 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 (40%) discount as determined from the lowest trading price for the
5 trading days prior to the conversion notice. The Company valued the BCF of the convertible
debenture at $13,333 and is accreting the discount to the convertible debenture, and
will recognize interest expense until paid in full or converted.
|
Convertible debentures
consist of the following at December 31, 2013:
Origination
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Origination
Principal
Balance
|
|
|
Origination
Discount
Balance
|
|
|
Period End
Principal
Balance
|
|
|
Period
End
Discount
Balance
|
|
|
Period
End
Balance,
Net
|
|
|
Accrued
Interest
Balance
|
|
|
Ref.
|
|
10/4/2010
|
|
4/4/2011
|
|
|
5
|
%
|
|
|
20,635
|
|
|
|
(20,635
|
)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
(1
|
)
|
11/27/2010
|
|
5/27/2011
|
|
|
10
|
%
|
|
|
125,000
|
|
|
|
(53,571
|
)
|
|
|
58,750
|
|
|
|
-
|
|
|
|
58,750
|
|
|
|
22,949
|
|
|
|
(2
|
)
|
1/7/2011
|
|
11/11/2011
|
|
|
5
|
%
|
|
|
76,000
|
|
|
|
(32,571
|
)
|
|
|
48,000
|
|
|
|
-
|
|
|
|
48,000
|
|
|
|
7,950
|
|
|
|
(3
|
)
|
2/10/2011
|
|
1/14/2012
|
|
|
8
|
%
|
|
|
42,500
|
|
|
|
(42,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
9/12/2011
|
|
6/14/2012
|
|
|
8
|
%
|
|
|
37,500
|
|
|
|
(37,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
12/19/2011
|
|
9/21/2012
|
|
|
8
|
%
|
|
|
37,500
|
|
|
|
(37,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
8/8/2012
|
|
5/2/2013
|
|
|
8
|
%
|
|
|
42,500
|
|
|
|
(27,172
|
)
|
|
|
8,445
|
|
|
|
-
|
|
|
|
8,445
|
|
|
|
3,949
|
|
|
|
(4
|
)
|
10/31/2012
|
|
8/2/2013
|
|
|
8
|
%
|
|
|
78,500
|
|
|
|
(50,189
|
)
|
|
|
78,500
|
|
|
|
-
|
|
|
|
78,500
|
|
|
|
7,325
|
|
|
|
(4
|
)
|
7/2/2012
|
|
4/5/2013
|
|
|
8
|
%
|
|
|
78,500
|
|
|
|
(35,268
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
3/9/2011
|
|
3/9/2012
|
|
|
10
|
%
|
|
|
50,000
|
|
|
|
(34,472
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
5/3/2011
|
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
80,000
|
|
|
|
(6
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
1,175
|
|
|
|
(7
|
)
|
9/8/2011
|
|
9/20/2011
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
(17,016
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
2/10, 5/18, 7/17, 11/8/2012
|
|
2/10, 5/18, 7/17, 11/8/2014
|
|
|
10
|
%
|
|
|
42,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
379
|
|
|
|
(9
|
)
|
3/14/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
5,500
|
|
|
|
-
|
|
|
|
472
|
|
|
|
-
|
|
|
|
472
|
|
|
|
120
|
|
|
|
(10
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
-
|
|
|
|
2,743
|
|
|
|
-
|
|
|
|
2,743
|
|
|
|
3,227
|
|
|
|
(11
|
)
|
3/9/2012
|
|
3/9/2014
|
|
|
10
|
%
|
|
|
56,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
4/19, 8/17, 11/7/2012
|
|
4/4/2011, 2/10, 4/14/2014
|
|
|
5%,
10
|
%
|
|
|
39,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
1/18/2013
|
|
1/18/2014
|
|
|
10
|
%
|
|
|
84,500
|
|
|
|
(58,720
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13
|
)
|
1/18/2013
|
|
1/18/2014
|
|
|
10
|
%
|
|
|
30,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13
|
)
|
1/18/2013
|
|
1/18/2014
|
|
|
10
|
%
|
|
|
95,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13
|
)
|
4/8/2013
|
|
4/14/2013
|
|
|
9.90
|
%
|
|
|
20,000
|
|
|
|
(13,333
|
)
|
|
|
20,000
|
|
|
|
(3,334
|
)
|
|
|
16,666
|
|
|
|
1,440
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
526,910
|
|
|
|
|
|
|
$
|
523,576
|
|
|
$
|
128,514
|
|
|
|
|
|
Reference numbers in right hand column of table entitled Ref.
refer to paragraphs above the table.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
13.
|
EQUITY BASED COMPENSATION FOR CONSULTING,
LEGAL, AND OTHER PROFESSIONAL SERVICES
|
Equity based compensation is
presented on the face of the Statement of Stockholders’ Deficit for the three months ended March 31, 2014. More information
on the significant components of the amounts presented for the years ended March 31, 2014 and 2013 follows:
For the three months ended
March 31, 2014, the Company converted $13,500 related party employee compensation payable to 1,223,977 shares of
restricted common stock. For additional information see Note 7.
RELATED PARTIES
-
Equity based compensation
to employee
Pursuant to a consulting agreement
for business advisory services, during the three months ended March 31, 2013, the Company issued 32,796 shares of common stock
for $19,600 in services. The stock conversion price under the agreement was calculated as a weighted average for the month the
services were granted at a 30% discount. However, operating expense was recorded based on full weighted average share price of
the market for the period in which the services were rendered.
On March 27, 2013, the Company
entered into a consulting agreement for financial strategic advice for a term of twelve months from the date of the agreement
and may be terminated by either party within 30 days written notice and any monies owed are due upon termination. As initial fee,
the Company paid the consultant $25,000 in restricted stock, or 37,038 shares, during the years ended December 31, 2013. Further,
upon obtaining $5,000,000 new capital into the Company, the consultant will be due $500,000, upon successfully obtaining a second
$500,000 commitment of new capital, $50,000 will be due to the consultant, upon successfully obtaining a third $500,000 commitment
of new capital, and the same arrangement through eleven additional commitments of new capital. Amounts due shall be paid in cash
and any brokerage commissions, private placement fees or other fees in connection with obtaining the new capital shall be reduced
from the fees due the consultant on a dollar per dollar basis.
The components of the provision
for income tax expense are as follows for the three months ended:
|
|
March 31, 2014
|
|
|
March 31, 2013
|
|
Current taxes
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Current taxes
|
|
|
—
|
|
|
|
—
|
|
Change in deferred taxes
|
|
|
(11,730
|
)
|
|
|
(5,567
|
)
|
Change in valuation allowance
|
|
|
11,774
|
|
|
|
9,350
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
$
|
44
|
|
|
$
|
3,783
|
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
14.
|
INCOME TAXES
(continued)
|
The following is a summary
of the significant components of the Company’s deferred tax assets and liabilities at March 31, 2014:
Deferred tax assets:
|
|
|
|
|
Equity based compensation
|
|
$
|
97,276
|
|
Allowance for doubtful accounts
|
|
|
13,260
|
|
Net operating loss carryforward
|
|
|
1,136,206
|
|
On-line training certificate reserve
|
|
|
932
|
|
Total deferred tax assets
|
|
|
1,247,674
|
|
Valuation allowance
|
|
|
(1,245,111
|
)
|
|
|
|
|
|
Deferred tax assets net of valuation allowance
|
|
|
2,563
|
|
|
|
|
|
|
Less deferred tax assets – non-current, net of valuation allowance
|
|
|
2,330
|
|
|
|
|
|
|
Deferred tax assets – current, net of valuation allowance
|
|
$
|
233
|
|
The effective tax rate used
for calculation of the deferred taxes as of March 31, 2014 was 34%. The Company has established a valuation allowance against
deferred tax assets of $1,245,111 or 99.8%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve
against the net operating carryforward, 100% reserve against the allowance for doubtful accounts, and 97% reserve against the
deferred tax assets attributable to the equity based compensation.
The significant differences
between the statutory tax rate and the effective tax rates for the Company for the three months ended are as follows:
|
|
March 31, 2014
|
|
|
March 31, 2013
|
|
Statutory tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
Increase (decrease) in rates resulting from:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward or carryback
|
|
|
(31
|
)%
|
|
|
(7
|
)%
|
Equity based compensation and loss
|
|
|
—
|
%
|
|
|
7
|
%
|
Book/tax depreciation and amortization differences
|
|
|
—
|
%
|
|
|
—
|
%
|
Change in valuation allowance
|
|
|
31
|
%
|
|
|
—
|
%
|
Other
|
|
|
—
|
%
|
|
|
—
|
%
|
Effective tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
The following is a summary
of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2013:
Deferred tax assets:
|
|
|
|
|
Equity based compensation
|
|
$
|
97,276
|
|
Allowance for doubtful accounts
|
|
|
13,260
|
|
Depreciation and amortization timing differences
|
|
|
—
|
|
Net operating loss carryforward
|
|
|
1,124,299
|
|
On-line training certificate reserve
|
|
|
1,109
|
|
Total deferred tax assets
|
|
|
1,235,944
|
|
Valuation allowance
|
|
|
(1,233,337
|
)
|
|
|
|
|
|
Deferred tax assets net of valuation allowance
|
|
|
2,607
|
|
|
|
|
|
|
Less deferred tax assets – non-current, net of valuation allowance
|
|
|
2,330
|
|
|
|
|
|
|
Deferred tax assets – current, net of valuation allowance
|
|
$
|
277
|
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
14.
|
INCOME TAXES
(continued)
|
The effective tax rate used
for calculation of the deferred taxes as of December 31, 2013 was 34%. The Company has established a valuation allowance against
deferred tax assets of $1,235,879 or 99.8%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve
against the net operating carryforward, 100% reserve against the allowance for doubtful accounts, and 97% reserve against the
deferred tax assets attributable to the equity based compensation.
|
15.
|
AUTHORIZATION OF 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 Chapter 78 of the Nevada Revised Statutes.
Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company
authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The
amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders,
to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of
each series, any or all of which may be greater than the rights of the common stock. As of March 31, 2014, and December 31, 2013,
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 Nevada law. Accordingly, Mr. Carmichael will have approximately
93% of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will
control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.
|
16.
|
COMMITMENTS AND CONTINGENCIES
|
On August 16, 2012, the Company’s
real estate foreclosed upon by Branch Banking and Trust (“BBT”) was sold through a court ordered auction. At the foreclosure
sale, BBT was highest bidder with a bid of $1,300. On July 17, 2012, the Court entered a Final Judgment of Foreclosure against
the Company for $1,123,269, plus post-judgment interest. On December 14, 2012, BBT served the Company with Notice of Final Judgment
of Foreclosure. Per the Notice, the lender sought Final Judgment including post-judgment interest and costs through date of sale
of $1,127,643 plus post-judgment interest and related expenses. The lender asserted the fair market value of the property on the
date of sale was $1,030,000 and was seeking final judgment against the Company for the shortfall amount between the Final Judgment
amount and the fair market value of the property, or approximately $100,000 plus post-judgment interest and related expenses.
Accordingly, the Company recorded a foreclosure liability of $110,000 to cover the shortfall plus post-judgment expenses. At the
time of the sale, carrying value of the building, building improvements, and land was $1,641,075, mortgage balance was $1,053,997,
accrued interest was $15,609, and accrued real estate taxes was $45,006. After reversing all amounts associated with the foreclosed
property and recording $110,000 adjustment for difference between the sale and final judgment amount the Company recorded $116,539
loss on foreclosure. The adjustment and loss include $10,000 estimate of post-judgment expenses based on managements’ best
judgment, and was periodically reviewed and adjusted as applicable. On October 14, 2013, BBT. brought before the court a Motion
for Deficiency Final Judgment (the “Motion”) against Trebor Industries, Inc., fully owned subsidiary of the Company,
and Robert M. Carmichael, the Company’s Chief Executive Officer, and received a final judgment of $103,026, plus interest.
As part of the Motion, a Fact Information sheet was to be provided the defendants for completion including all required attachments
within forty-five days of delivery from plaintiff, unless the Final Judgment is satisfied or post-judgment discovery is stayed.
During November 2013, the Company settled the Final Judgment with BBT for $85,000. Accordingly, BWMG recorded $18,026 to other
income for the period. The 17th Judicial Circuit of the Circuit Court of Broward County recorded Satisfaction of Final Judgment
on November 20, 2013.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
16.
|
COMMITMENTS AND CONTINGENCIES
(continued)
|
On November 1, 2012, the Company
entered into a one year lease on the foreclosed real estate, which the Company continues to occupy as it manufacturing facility
and headquarters. The terms of the lease were base rent of $3,750 plus sales tax. Either party could cancel the lease with 90
days written notice. Effective on the date of expiration, the lease was renewed with the same terms and conditions.
On June 28, 2013 the Company
received notice of claim for damages in excess of $15,000 claiming personal injury due to product defect. The Company believes
the case is without merit and will aggressively defend. The claim is being handled by the Company’s product liability insurance
carrier. In the less than probable chance that any liability will be assigned the Company, insurance coverage is deemed adequate
to address.
On January 12, 2013, the Company
received notice of claim for damages in excess of $15,000 claiming personal injury due to product defect. The Company believes
the case is without merit and will aggressively defend. The claim is being handled by the Company’s product liability insurance
carrier. In the less than probable chance that any liability is assigned Company, insurance coverage is deemed adequate to address.
On December 18, 2012,
Undersea Breathing Systems, Inc. (“UBS”) filed an amended complaint against the Company compelling purchase of
Medal Model No. 4241 membranes or equivalent pursuant to pricing agreement in 2011. UBS is the holder of the convertible
debenture referenced in Note 12.
CONVERTIBLE DEBENTURES
Ref (3). Under the complaint, UBS asserts the Company was to
purchase no less than 24 membranes from the company per year for $2,000 and $1,000, cash and Company stock, respectively, per
membrane. The Company took delivery, paid cash, and issued stock for 14 Medal Model No 4241 membranes pursuant to the stated
pricing in 2011, plus issued an additional $24,000 stock toward future purchases of 24 membranes. However, the Company has
not purchased or taken delivery of additional membranes. At the same time the stock was issued the Company granted UBS a
convertible debenture of $76,000 and reduced its balance to $48,000 when the Company paid $28,000 cash and took delivery of
the 14 membranes. Therefore, UBS currently has $24,000 worth of stock and a $48,000 convertible debenture for which the
Company took no membrane deliveries. If judgment or settlement were to go in favor of UBS, there would be no financial impact
to the statement of operations or net impact on financial position. This is because there would be corresponding decreases in
amounts to convertible debenture, prepaid inventory, cash, and increase in inventory, all netting to zero. In addition any
future compelled purchases would result in a decrease in cash with corresponding increase in inventory. As a result, no
accrual is warranted, and the Company will await legal advisement and decision on the matter.
On or about May 3, 2012, the
Company received notice of filing of an action for breach of contract, conspiracy to commit securities fraud and injunctive relief
against the Company and the first party named in Note 12.
CONVERTIBLE DEBENTURES
Ref (1). The Plaintiff, Eventus Capital,
Inc., is the second party referenced in Note 12.
CONVERTIBLE DEBENTURES,
Ref (1) who purchased the original debenture from
the first party. The net book value, excluding interest, on the debenture as of December 31, 2012 was approximately $12,700. The
amount named in the original lawsuit was “damages in excess of $15,000”, plus other fees. On July 16, 2012, the Palm
Beach County Court issued an Order on the Company’s Motion to dismiss this complaint. The motion was granted without prejudice
to allow the plaintiff 15 days to file an amended complaint with substantiating documentation. The plaintiff amended its complaint
as required, asserted it incurred a loss of $735,616 in damages. The other Defendant in the action has asserted counter and third
party claims against the plaintiff. Per the opinion of the Company’s legal counsel, the plaintiff has failed to establish
any legal or factual basis for claim, and judgment or settlement against the Company is not probable.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
17.
|
JOINT VENTURE EQUITY EXCHANGE AGREEMENT
|
On November 7, 2011, the
Company entered into a Joint Venture Equity Exchange Agreement (“Agreement”) with Pompano Dive Center, LLC.
(“PDC”). PDC owns a retail store, several dive boats, and has a classroom for training divers. Under the terms of
the Agreement, the Company will provide PDC with an assortment of Brownie’s Third Lung products on consignment, and PDC
will act as a training and demonstration site for Brownie’s Third Lung products. Beginning in 2012, both parties ceased
operating under the consignment inventory arrangement. Inventory not sold was returned, and inventory was purchased for sale.
See Note 7.
RELATED PARTIES TRANSACTIONS
-
Net revenues and accounts receivable – related parties
for
further information on sales to PDC for the three months ended March 31, 2014 and 2013, and Accounts Receivable balances at
March 31, 2014, and December 31, 2013. Terms of sale to PDC are no more favorable than those granted other dealers of the
Company’s products.
In addition, the Agreement
provides for a non-binding letter of intent for the possible acquisition of PDC in exchange for BWMG’s stock for the yet
to be agreed upon value of PDC. In anticipation of a possible purchase, the Agreement provides BWMG with a 33% interest in PDC.
As part of the transaction, BWMG issued 3,394 restricted shares of its common stock with fair market value on the date of the
transaction of $24,740 to PDC, reflected in other assets in the long-term portion of the Company’s balance sheet.
If BWMG purchases PDC, the
stock issued by BWMG will be credited to the purchase price. Further, PDC is required to remit no later than 45 days from the
end of each quarter, a 33% share in pre-tax net profits. At least 50% of the total pre-tax profits are required for distribution
under the Agreement, and BWMG is not required to share in losses. If PDC decides to sell any inventory provided by the Company,
the purchase price will be the same as that offered to other dealers of the Company’s products.
If this Agreement is terminated
by either party and/or a written purchase and sales agreement is not entered into by the parties, then the parties’ respective
interests in each other’s business will revert back to the original party. Accordingly, if this should happen, PDC will
relinquish the interest acquired in BWMG through this Agreement and BWMG will do the same. All property at PDC owned by BWMG would
be returned to BWMG at that time as well. Because the joint venture is cancellable at any time by either party with return of
respective interest transferred to each as per the joint venture agreement, possible acquisition of PDC is in the form of a non-binding
letter of intent, each entities assets and liabilities remain their own, BWMG will not share in any of PDC losses or additional
expenses unless otherwise approved, and the management and operation of PDC remains with PDC, the Company accounted for the investment
in PDC under the Cost basis. Since inception of the Agreement PDC has reported pre-tax net losses. Therefore, to-date there has
been no profit sharing due the Company under the agreement.
|
18.
|
CHANGE IN CAPITAL STRUCTURE
|
Effective July 15, 2013, the
Company effectuated a reverse split of all outstanding shares of Common Stock by a factor of one-for-one thousand three hundred
fifty (1 -for- 1,350). Fractional shares were rounded up to the nearest whole share. The reverse split became effective as of
July 15, 2013. In accordance with Securities and Exchange Commissions’ Staff Accounting Bulletin Topic 4C, when a change
in capital structure occurs after the period reporting date, but before release of the financial statements the Company must apply
retroactive treatment to the financial statements to reflect the change. Accordingly, the Company restated the financial statements
for three months ended March 31, 2013 to reflect the change in the number of shares, as well as throughout the Note disclosures,
as applicable.
Effective February 22, 2012,
also with retroactive restatement, the Company increased the number of authorized shares of common stock from 250,000,000 to 5,000,000,000,
and decreased the par value per share of Common Stock from $.001 to $.0001.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
19.
|
EQUITY INCENTIVE PLAN
|
On August 22, 2007, the Company
adopted an Equity Incentive Plan (the “Plan”). Under the Plan, Stock Options may be granted to Employees, Directors,
and Consultants in the form of Incentive Stock Options or Nonstatutory Stock Options. Stock Purchase Rights, time vested and/performance
invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan. The initial
maximum number of shares that may be issued under the Plan shall be 297 shares, and no more than 75 Shares of Common Stock may
be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one
calendar year period. Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury
by the Company. The term of the Plan shall be ten years. The Board of Directors may amend, alter, suspend, or terminate the Plan
at any time. All 297 options were issued under the plan prior to January 1, 2010, and to-date all remain outstanding.
|
20.
|
EQUITY BASED INCENTIVE/RETENTION
BONUSES
|
On November 2, 2012, the Board
of Directors consented to grant equity based bonuses to certain key employees and consultants as an incentive to retain their
services. Stock incentive bonuses were to vest, and be paid out on May 2, 2013, contingent upon continued employment or service.
The stock bonus price per share was calculated based on last closing price as reported on per the OTCBB prior to the grant date
for a total of $75,100. Shares were set aside and reserved for this transaction. As disclosed in Note 7.
RELATED PARTIES TRANSACTIONS
,
$45,000 and $2,250 of the $75,100 bonuses, or 37,038 and 1,854 shares, were awarded to the Chief Executive Officer and the related
party employee, respectively. The Company accrued operating expense ratably from the time of the awards through May 2, 2013, when
vested. Of the 61,852 vested shares, only 5,185 have been issued to-date. The rest are reflected in shares payable balance on
the Statement of Stockholders’ Deficit and the Balance Sheet.
|
21.
|
STRATEGIC ALLIANCE AGREEMENT
|
On April 10, 2012, the Company
entered into a strategic alliance agreement with Precision Paddleboards, Inc. The agreement provides for 12 month exclusivity
granted for $24,000 in one year restricted stock, or 494 shares. Price per share was calculated as the weighted average per share
for 30 days preceding the agreement or $.036 per share. The Company recognized the operating expense ratably over the twelve month
vesting term with corresponding entry to shares payable. For the three months ended March 31, 2013 the Company recognized $6,000
operating expense under the agreement. As of March 31, 2014, none of the 494 shares have been paid out and are reflected in shares
payable balance on the Statement of Stockholders’ Deficit and the Balance Sheet.
22.
INTEREST EXPENSE NON-RELATED
PARTIES AND OTHER EXPENSE (INCOME), NET
For the three months ended March 31, 2014, non-related parties interest expense of $13,552 is comprised of $12,921 interest on
convertible debentures and $631 interest on notes payable and other interest. For the three months ended March 31, 2013,
non-related parties interest expense of $68,850 is comprised of approximately $67,754 interest on convertible debentures
and approximately $770 interest on notes payable and other interest.
For the three months ended
March 31, 2014, $36,738 other income, net is comprised primarily of $31,463 write off of accrued legal expense from prior years
due to resolution of overbilling as identified by Company $5,144 royalty income on licensed patents, and $131 other income, net
of individually insignificant items. For the three months ended March 31, 2013, $91,779 other expense, net is comprised primarily
of $93,429 loss on extinguishment of convertible debentures and partially offset by $1,650 other income, net.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
On April 30, 2014, Mr. Alexander
F. Purdon, was issued 184,202 shares of restricted common stock in lieu of cash for $4,500 employee compensation for the month
of April 2014. The number of shares issued was based on the weighted average share price during the month.
Conversions of debentures to
shares of common stock occurred subsequent to March 31, 2014. The stock was issued upon partial conversion of a convertible note
without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months
prior to the date of conversion and did not pay any additional consideration for the shares. Conversions were as follows (ref.
number corresponds to lender reference number in Note 12.
CONVERTIBLE DEBENTURES
):
Ref (4) lender
–
On April 30, 2014, the lender converted $1,920 of its
debenture to 400,000 shares.
On April 24, 2014, the lender converted $2,080 of
its debenture to 400,000 shares
On April 21, 2014, the lender converted $2,280 of
its debenture to 400,000 shares.
On April 15, 2014, the lender converted $2,160 of
its debenture to 400,000 shares.
On April 9, 2014, the lender converted $2,160 of its
debenture to 400,000 shares.
In addition, related to convertible
debenture agreement with the above lender, the Company is required to maintain adequate shares in escrow for potential conversions.
As a result, the Company replenished its escrow of shares for future conversions by issuing an additional 52,500,000
on April 30, 2014.