NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description of business and summary of significant accounting policies
|
Description of business
–Brownie’s
Marine Group, Inc., (hereinafter referred to as the “Company”, “we” 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 Pompano Beach, 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 OTC Markets (Pink) 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.
The condensed consolidated financial statements as
of March 31, 2016 and for the three month periods ended March 31, 2016 and 2015 are unaudited and, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as
of March 31, 2016, and the results of operations for the three month periods ended March 31, 2016 and 2015, the statement of shareholders’
deficit for the three months ended March 31, 2016 and the statements of cash flows for the three month periods ended March 31,
2016 and 2015. The condensed consolidated results of operations for the three months ended March 31, 2016 are not necessarily indicative
of the results to be expected for the entire year. The condensed consolidated balance sheet as of December 31, 2015 has been derived
from the Company’s audited financial statements for the year ended December 31, 2015. While management of the Company believes
that the disclosures presented are adequate to make the information not misleading, these condensed consolidated financial statements
should be read in conjunction with our audited financial statements and the footnotes thereto for the fiscal year ended December
31, 2015 as filed with the Securities and Exchange Commission as part of the Company’s Form 10-K which was filed on March
29, 2016.
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 2015 financial statement amounts and disclosures to conform to the 2016 financial statement presentation.
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. Although profitable for the years ended December 31, 2015 and 2014, we have otherwise incurred losses since
2009. We have predominantly had a working capital deficit since 2009.
The Company is behind on payments due for 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.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Because the Company does not expect that existing
operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about BWMG’s
ability to continue as a going concern within one year from date the financial statements are issued. Therefore, the Company will
need to raise additional funds and is currently exploring alternative sources of financing. BWMG has issued a number of convertible
debentures in the past as an interim measure to finance working capital needs and may continue to raise additional capital through
sale of restricted common stock or other securities, and obtaining some short term loans. The Company has previously paid for some
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.
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.
Accounts receivable
–
Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance
for doubtful accounts is estimated based on historical customer experience and industry knowledge.
Inventory
– Inventory is stated at the
lower of cost or net realizable value. Cost is principally determined by using the average cost method that approximates the First-In,
First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale.
The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when
indicated.
Furniture, Fixtures, Equipment and Leasehold Improvements
–
Furniture, Fixtures, Equipment and Leasehold Improvement is stated at cost less accumulated depreciation and/or amortization. Depreciation
and amortization is provided principally on the straight-line method over the estimated useful lives of the assets or the lease,
which are primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property
betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation
are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events
and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining
balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash
flows over the remaining life of the fixed assets in measuring their recoverability.
Revenue recognition
– Revenues from
product sales are recognized when the Company’s products are shipped or when service is rendered. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Product development costs
– Product development expenditures are charged to expenses as incurred.
Advertising and marketing costs
– The
Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs
of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense
incurred for the three months ended March 31, 2016 and 2015, was $1,997 and $1,454, 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 presented.
Stock-based compensation
– The Company
accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is
measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting
period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees
and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally
accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is
determined through use of the quoted stock price.
Beneficial conversion features on convertible
debentures
– The fair value of the stock upon which beneficial conversion feature (BCF) computations, as applicable,
was determined through use of the quoted stock price.
Fair value of financial instruments
–
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. There are three levels of inputs that may be used to measure fair value:
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Level 1 - Quoted prices in active markets that are
accessible at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices for similar assets and liabilities
in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Unobservable inputs that are supported
by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities
include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques,
as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Inputs are used in applying the various valuation
techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions
about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment
by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant
market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does
not necessarily correspond to the Company’s perceived risk of that investment.
At March 31, 2016, and December 31, 2015, 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.
Earnings per common share
– Basic earnings
per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings per share are computed using
the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using
the weighted average number of common and dilutive and common stock equivalent shares, if any, outstanding during the period. Common
stock equivalent shares are excluded from the computation if their effect is antidilutive. Potentially dilutive shares included
in dilutive earnings per share totaled 5,529,699 shares for the three months ended March 31, 2016. At March 31, 2015, all potentially
dilutive common stock and equivalent shares were excluded in the computation of dilutive earnings per share, as the effect was
anti-dilutive.
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:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
409,910
|
|
|
$
|
422,115
|
|
Work in process
|
|
|
—
|
|
|
|
—
|
|
Finished goods
|
|
|
240,814
|
|
|
|
232,098
|
|
|
|
$
|
650,724
|
|
|
$
|
654,213
|
|
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
3.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Prepaid inventory
|
|
$
|
27,674
|
|
|
$
|
42,076
|
|
Prepaid insurance
|
|
|
14,466
|
|
|
|
8,819
|
|
Prepaid other current assets
|
|
|
16,090
|
|
|
|
7,117
|
|
|
|
$
|
58,230
|
|
|
$
|
58,012
|
|
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment consists of the following as of:
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Factory and office equipment
|
|
$
|
62,633
|
|
|
$
|
62,633
|
|
Tooling
|
|
|
59,149
|
|
|
|
59,149
|
|
Computer equipment and software
|
|
|
23,932
|
|
|
|
23,932
|
|
Vehicles
|
|
|
44,160
|
|
|
|
44,160
|
|
Leasehold improvements
|
|
|
43,779
|
|
|
|
43,779
|
|
|
|
|
233,653
|
|
|
|
233,653
|
|
Less: accumulated depreciation and amortization
|
|
|
(156,920
|
)
|
|
|
(147,941
|
)
|
|
|
$
|
76,733
|
|
|
$
|
85,712
|
|
Other assets of $6,649 at March 31, 2016 and December
31, 2015, respectively, consisted solely of refundable deposits.
|
6.
|
CUSTOMER CREDIT CONCENTRATIONS
|
The Company sells to three (3) entities owned by
the brother of Robert Carmichael, the Company’s Chief Executive Officer, and three (3) companies owned or controlled by the
Chief Executive Officer as further discussed in Note 7. RELATED PARTIES TRANSACTIONS. Combined sales to these six (6) entities
for the three months ended March 31, 2016 and 2015, represented 28.11% and 36.69%, respectively, of total net revenues.
|
7.
|
RELATED PARTIES TRANSACTIONS
|
Notes payable – related
parties
Notes payable – related
parties consists of the following at March 31, 2016 and December 31, 2015:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Promissory note payable to Chief Executive Officer, unsecured, payable in twelve monthly principal payments of $2,250 beginning June 15, 2015, with interest at 10% per annum with payments monthly in shares of stock based on the monthly weighted average price of the stock, maturing May 15, 2016.
|
|
$
|
8,848
|
|
|
$
|
11,098
|
|
|
|
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
(8,848
|
)
|
|
|
(11,098
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,848
|
|
|
$
|
11,098
|
|
|
|
|
|
|
|
|
|
|
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Effective April 22, 2015, the Company issued Mr.
Carmichael, Chief Executive Officer of the Company, an unsecured promissory note presented in the table above in consideration
for a $27,000 advance. For the three months ended March 31, 2016 the Company converted $73 of accrued interest on the note payable
– related party into 16,052 shares of restricted stock.
Net revenues and accounts receivable – related
parties
– The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and
Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable
than those extended to any of the Company’s other customers with similar sales volume. Combined net revenues from these entities
for three months ended March 31, 2016 and 2015, was $109,423 and $156,637, respectively. Accounts receivable from Brownie’s
Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at March 31, 2016, was $21,496, $8,083
and $14,035 respectively. Accounts receivable from Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and
Brownie’s Yacht Toys at December 31, 2015, was $12,981, $4,678, and $15,221, respectively.
The Company sells products to Brownie’s Global
Logistics, LLC. (“BGL”), 3D Buoy and 940 Associates, Inc., affiliated with the Company’s Chief Executive Officer.
Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended
to Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are consistent
with those extended to Brownie’s strategic partners. Strategic partner terms on a per order basis include promotion of BWMG’s
technologies and “Brownie’s” brand, offered only on product or services not offered for resale, and must provide
for reciprocal terms or arrangements to BWMG on strategic partners’ product or services. BGL is fulfilling the strategic
partner terms by providing exposure for BWMG’s technologies and “Brownie’s” brand in the yachting and exploration
community word-wide through its operations. Combined net revenues from these entities for three months ended March 31, 2016, and
2015, were $589 and $13,806, respectively. Accounts receivable from BGL, 3D Buoy and 940 Associates at March 31, 2016 was $180,
$2,146, and $0, respectively. Accounts receivable from BGL, 3D Buoy and 940 Associates at December 31, 2015 was $6,443, $1,948
and $0, respectively.
Royalties expense – related parties
– The Company has an Exclusive License Agreement with 940 Associates, Inc. (hereinafter referred to as “940A”),
an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”,
“Brownies Public Safety” and various other related trademarks as listed in the agreement. This license agreement calls
for the Company to pay 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three months
ended March 31, 2016 and 2015, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of March 31,
2016, the Company was approximately thirty 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 to
employee
–The Company previously paid the employment compensation of Alexander F. Purdon, a more than 10%
shareholder of the Company, in restricted shares of stock in lieu of cash. This arrangement terminated December 31, 2015 and
was being renegotiated as of March 31, 2016. The number of shares previously paid was based on the weighted average price per
share during the months the services were rendered. For the three months ended March 31, 2016, $13,500 has been accrued in
anticipation of a successful renegotiation of Mr. Purdon’s compensation agreement. For the three months ended March 31,
2015, stock based compensation to Mr. Purdon was $13,500. 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.
Lastly, 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. See Note 17. SUBSEQUENT EVENTS.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Other liabilities and accrued
interest– related parties
Other liabilities and accrued
interest– related parties consist of the following at:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Year-end 2012 bonus payable to Chief Executive Officer(1)
|
|
$
|
67,000
|
|
|
$
|
67,000
|
|
|
|
|
|
|
|
|
|
|
Year-end 2012 bonus payable to employee(1)
|
|
|
17,500
|
|
|
|
17,500
|
|
|
|
$
|
84,500
|
|
|
$
|
84,500
|
|
|
(1)
|
See Note 17. SUBSEQUENT EVENTS
|
|
8.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable and accrued
liabilities consists of the following as of:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Accounts payable trade
|
|
$
|
94,862
|
|
|
$
|
59,916
|
|
Accrued payroll & fringe benefits
|
|
|
39,796
|
|
|
|
27,245
|
|
Accrued year-end bonuses
|
|
|
45,000
|
|
|
|
45,000
|
|
Accrued payroll taxes & withholding
|
|
|
30,087
|
|
|
|
36,520
|
|
Accrued interest
|
|
|
153,657
|
|
|
|
181,265
|
|
|
|
$
|
363,402
|
|
|
$
|
349,946
|
|
Balances due certain vendors are in arrears to varying
degrees. The Company is handling all delinquent accounts on a case-by-case basis.
Other liabilities consist
of the following as of:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Short-term loans
|
|
$
|
210,784
|
|
|
$
|
215,782
|
|
Asset purchase agreement payable
|
|
|
12,857
|
|
|
|
12,857
|
|
On-line training liability
|
|
|
2,505
|
|
|
|
2,912
|
|
|
|
$
|
226,146
|
|
|
$
|
231,551
|
|
The short-term loans are comprised of three (3) 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.
On-line training certificates are provided 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 a historical redemption rate of approximately 10%. The Company continues to monitor and
maintain a reserve for certificate redemption that approximates the historical redemption rate.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Notes payable consists of
the following as of March 31, 2016 and December 31, 2015:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Promissory note payable, secured by vehicle underlying loan having carrying value of $13,206 and $17,760 at March 31, 2016 and December 31, 2015, respectively, bearing interest at 1.9% per annum, due in monthly principal and interest payments of $523, maturing on December 5, 2017
|
|
$
|
10,718
|
|
|
$
|
12,232
|
|
|
|
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
(6,128
|
)
|
|
|
(6,099
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
4,590
|
|
|
$
|
6,133
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016, principal
payments on the notes payable are as follows:
2016
|
|
$
|
4,585
|
|
2017
|
|
|
6,133
|
|
2018
|
|
|
—
|
|
2019
|
|
|
—
|
|
2020
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
|
|
|
|
|
$
|
10,718
|
|
|
11.
|
CONVERTIBLE DEBENTURES
|
Convertible debentures consist
of the following at March 31, 2016 and December 31, 2015:
Origination
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Origination
Principal
|
|
|
Origination
Discount
|
|
|
March 31,
2016
Debenture
Balance
|
|
|
March 31,
2016
Accrued
Interest
|
|
|
December 31,
2015
Debenture
Balance
|
|
|
December 31,
2015
Accrued
Interest
|
|
|
Ref.
|
|
11/27/2010
|
|
5/27/2011
|
|
|
10
|
%
|
|
|
125,000
|
|
|
|
(53,571
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,750
|
|
|
$
|
34,709
|
|
|
|
(1
|
)
|
5/3/2011
|
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
147,500
|
|
|
|
300,000
|
|
|
|
140,000
|
|
|
|
(2
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
2,309
|
|
|
|
10,000
|
|
|
|
2,183
|
|
|
|
(3
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
5,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
472
|
|
|
|
216
|
|
|
|
(4
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
3,848
|
|
|
|
2,743
|
|
|
|
4,158
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
312,743
|
|
|
$
|
153,657
|
|
|
$
|
371,965
|
|
|
$
|
181,266
|
|
|
|
|
|
Reference numbers in right hand column of table entitled
Ref. refer to paragraphs with corresponding numbers that immediately follow this paragraph.
(1) 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.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 is purchased
or assigned. The holder of the convertible note has voluntarily dissolved and ceased operation. In February 2016 both parties agreed
to cancel the agreement and all remaining principal and interest balances.
(2) 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 accrue 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.
(3) 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, which was accreted to interest expense.
(4) The Company entered into three new debenture
agreements upon sale or assignment by the original lender. Because the stated terms of the new debenture agreement and principal
amounts were significantly different from the original debenture, including analysis of the value of the beneficial conversion
feature at the assignment or purchase date, the transactions are treated as extinguishment of the old debentures and recorded as
new for accounting purposes.
|
12.
|
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, 2016, and December 31, 2015, the 425,000 shares
of preferred stock are owned by the Company’s Chief Executive Officer. The preferred shares have 250 to 1 voting rights over
the common stock, and are convertible into 31,481 shares of common stock. The preferred stock votes with the Company’s common
stock, except as otherwise required under Florida law. Accordingly, Mr. Carmichael will have approximately 55% 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.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
13.
|
COMMITMENTS AND CONTINGENCIES
|
From time to time the Company is subject to legal
proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability
claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability
insurance, which provided coverage for each claim up to $1,000,000. During the third quarter of 2014, the Company did not renew
its product liability insurance since the renewal policy amount was cost prohibitive. The Company is currently seeking a new insurance
carrier or alternative means to satisfy this potential liability exposure, as well as to fulfil the sales terms of some of our
customers, which require the insurance coverage.
As previously disclosed, we are co-defendants under
an action filed by an individual in June 2013 in the Circuit Court of Broward County claiming personal injury resulting from use
of a Brownie’s Third Lung. Plaintiff has claimed damages in excess of $1,000,000. The insurance carrier’s legal counsel
indicates unfavorable outcome is possible, but not probable. We believe such claim is without merit and intend to continue to aggressively
defend such action. In addition, as previously disclosed, we are also co-defendant under an action filed March 2015, in the Circuit
Court of Broward County claiming personal injury resulting from the use of a Brownie’s Third Lung product. This claim falls
outside the Company’s period of insurance coverage. The Company believes the claim to be a Workers Compensation claim relating
exclusively against other defendant and without merit, and has retained counsel to aggressively defend this action.
On August 14, 2014, the Company entered into a new
lease commitment. Terms of the new lease include thirty-seven month term commencing on September 1, 2014; payment of $5,367 security
deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual
operating expenses (i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment.
Base rent expense attributable to the Company’s
headquarters facility totaled approximately $12,000 and $12,000 for the three month periods ending March 31, 2016 and 2015, respectively.
Future minimum rental payments required under our
operating lease agreement are as follows:
Year 1
|
|
$
|
48,000
|
|
Year 2
|
|
|
24,000
|
|
Year 3
|
|
|
—
|
|
Year 4
|
|
|
—
|
|
Year 5
|
|
|
—
|
|
|
|
$
|
72,000
|
|
|
14.
|
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.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
15.
|
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 TRANS-ACTIONS, $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 included in shares payable as reflected on the Statement of Stockholders’
Deficit and the Balance Sheet.
|
16.
|
INTEREST EXPENSE NON-RELATED PARTIES AND OTHER EXPENSE (INCOME), NET
|
For the three months ended March 31, 2016, non-related
parties interest expense of $7,759 is comprised of $7,703 interest on convertible debentures and $56 interest on notes payable
and other interest. For the three months ended March 31, 2015, non-related parties interest expense of $9,277 is comprised of $9,177
interest on convertible debentures and $100 interest on notes payable and other interest.
For the three months ended March 31, 2016, $120,241
other income, net is comprised primarily of $93,838 cancelation of a convertible debenture and its interest, $14,970 royalty income,
and $5,723 from the expiration of online training liability certificates, offset by $528 other expense, net of individually insignificant
items. For the three months ended March 31, 2015, $3,984 other expense, net is comprised primarily of $11,379 insurance audit adjustments
partially offset by $3,471 product royalty income, $1,800 sale of fixed assets and $2,124 other income, net of individually insignificant
items.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
17.
SUBSEQUENT
EVENTS
Effective April 15, 2016 Trebor entered into an employment
agreement with Alexander F. Purdon, a former employee of Trebor. Under the terms of the agreement Purdon agreed to provide business
and sales services to the Company through August 31, 2016. Wages due to Purdon shall be payable at the sole discretion of the Company
in shares of its restricted common stock. Furthermore, as additional consideration for the Company to enter into the agreement,
Purdon agreed to tender 28,403,252 shares of the Company’s common stock beneficially owned by Purdon to the Company. The
shares have been retired and returned to the Company’s treasury without further consideration.
Following the return of the shares to the treasury
of the Company and issuance of 180,000 shares of common stock under the above agreement, the Company has 58,617,938 shares of common
stock issued and outstanding.
Effective April 29, 2016, the Company canceled, terminated
and rescinded an aggregate performance bonus payable of $129,500 (the “Bonus Payment”) payable to three Company employees,
including Robert Carmichael and Alexander Purdon, such bonuses initially reserved by the Board of Directors pursuant to a unanimous
written consent of the Board of Directors dated February 23, 2013 and to be paid at such time as it deemed appropriate by the Board
of Directors. The Company determined it was no longer appropriate to pay the remaining accrued Bonus Payment which was payable
at the discretion of the Board of Directors due to several factors, including but not limited to 1) the real-time tax impact to
the recipients, 2) the continued inability of the Corporation to pay cash bonuses, and 3) the difficulty of a recipient realizing
a cash benefit from the resale of the Shares due to the insider trading policies by which the recipient must abide and other securities
matters.