See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
NOTES
TO UNAUDITED 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 September 30, 2016 and for the three and nine month periods ended September
30, 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 September 30, 2016, and the results of operations for the
three and nine month periods ended September 30, 2016 and 2015, the statement of stockholders’ equity for the nine months
ended September 30, 2016 and the statements of cash flows for the nine month periods ended September 30, 2016 and 2015. The condensed
consolidated results of operations for the three and nine months ended September 30, 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 may have been made to the 2015 financial statement amounts and disclosures to conform to
the 2016 financial statement presentation.
Going
Concern
– The accompanying condensed unaudited 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 frequently incurred losses 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.
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 may 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.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
Property
and, Equipment and Leasehold Improvements
– Property and, Equipment and Leasehold Improvements are 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.
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 September 30, 2016 and 2015, was $313 and $138 respectively.
Advertising and trade show expense incurred for the nine months ended September 30, 2016 and 2015, was $3,550 and $2,842, 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.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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:
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.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Inputs
are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make
valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on
the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes
“observable” requires significant judgment by the Company. Management considers observable data to be market data
which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple,
independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy
is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived
risk of that investment.
At
September 30, 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 4,845,004 shares for the three months and nine months
ended September 30, 2016. Potentially dilutive shares included in dilutive earnings per share totaled 48,965,429 shares and 47,325,387
shares for the three months and nine months ended September 30, 2015, respectively.
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:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
383,152
|
|
|
$
|
422,115
|
|
Work in process
|
|
|
—
|
|
|
|
—
|
|
Finished goods
|
|
|
229,068
|
|
|
|
232,098
|
|
|
|
$
|
612,220
|
|
|
$
|
654,213
|
|
3.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Prepaid inventory
|
|
$
|
37,939
|
|
|
$
|
42,076
|
|
Prepaid insurance
|
|
|
9,442
|
|
|
|
8,819
|
|
Prepaid fixed assets
|
|
|
8,600
|
|
|
|
—
|
|
Prepaid legal
|
|
|
35,000
|
|
|
|
—
|
|
Prepaid other
|
|
|
6,190
|
|
|
|
7,117
|
|
|
|
$
|
97,171
|
|
|
$
|
58,012
|
|
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.
|
PROPERTY
AND EQUIPMENT, NET
|
Property and equipment consists of the following as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Factory and office equipment
|
|
$
|
62,633
|
|
|
$
|
62,633
|
|
Tooling
|
|
|
59,149
|
|
|
|
59,149
|
|
Computer equipment and software
|
|
|
31,519
|
|
|
|
23,932
|
|
Vehicles
|
|
|
44,160
|
|
|
|
44,160
|
|
Leasehold improvements
|
|
|
43,779
|
|
|
|
43,779
|
|
|
|
|
241,240
|
|
|
|
233,653
|
|
Less: accumulated depreciation and amortization
|
|
|
(175,098
|
)
|
|
|
(147,941
|
)
|
|
|
$
|
66,142
|
|
|
$
|
85,712
|
|
Depreciation
and amortization expense totaled $9,197 and $27,157
for the three and nine month periods ending
September 30, 2016 and $8,754 and $26,019 for the three and nine month periods ending September 30, 2015, respectively.
Other
assets of $6,649 at September 30, 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 September 30, 2016 and 2015, represented 28.64%
and 25.50% respectively, of total net revenues. Combined sales to these six (6) entities for the nine months ended September
30, 2016 and 2015, represented 30.65% and 30.49% respectively, of total net revenues.
7.
|
RELATED
PARTIES TRANSACTIONS
|
Notes
payable – related parties
Notes
payable – related parties consists of the following at September 30, 2016 and December 31, 2015:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Promissory note payable to Chief Executive Officer, unsecured, payable in twelve monthly principal payments of $2,250 beginning September 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.
|
|
$
|
—
|
|
|
$
|
11,098
|
|
|
|
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
—
|
|
|
|
(11,098
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of notes payable – related parties
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable – related parties
|
|
$
|
—
|
|
|
$
|
11,098
|
|
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Effective
April 22, 2015, the Company issued Mr. Carmichael, Chief Executive Officer of the Company, an unsecured promissory note in consideration
for a $27,000 advance. For the three months ended September 30, 2016 the Company converted 108,274 shares of accrued interest
on the note payable. For the nine months ended September 30, 2016 the Company converted $572 of accrued interest on the note payable
– related party into 124,326 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 September 30, 2016 and 2015, was $234,367 and $280,786,
respectively. Combined net revenues from these entities for nine months ended September 30, 2016 and 2015, was $566,607 and $652,124
respectively. Accounts receivable from these three entities at September 30, 2016, was $53,126 Accounts receivable from the three
entities at December 31, 2015, was $32,880.
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 world-wide through its operations. Combined net revenues from these entities for
three months ended September 30, 2016, and 2015, were $5,647 and $1,261, respectively. Combined net revenues from these entities
for nine months ended September 30, 2016, and 2015, were $8,255 and $43,649 respectively. Accounts receivable from these three
entities at September 30, 2016 was $2,146 Accounts receivable from these three entities at December 31, 2015 was $8,391.
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 and nine months ended September 30, 2016 and 2015, is disclosed on the face of the
Company’s Condensed Consolidated Statements of Operations. As of September 30, 2016, the Company was approximately 30 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 had an employment compensation agreement with Alexander F. Purdon to pay
his salary in restricted shares of the Company’s common stock in lieu of cash. This arrangement went into effect in April
of 2016, was retroactive to January 1, 2016, and terminated August 31, 2016. For the nine months ended September 30, 2016, stock
based compensation to Mr. Purdon was $36,000.
Other
liabilities and accrued interest– related parties
Other
liabilities and accrued interest– related parties consist of the following at:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Year-end 2012 bonus payable to Chief Executive Officer
|
|
$
|
—
|
|
|
$
|
67,000
|
|
|
|
|
|
|
|
|
|
|
Year-end 2012 bonus payable to employee
|
|
|
—
|
|
|
|
17,500
|
|
|
|
$
|
—
|
|
|
$
|
84,500
|
|
On
April 29, 2016 the Board of Directors determined that is was not in the best interest of either the Company or the recipients
to pay bonuses based on the current and foreseeable share price and cancelled the bonuses payable. The results of this action
are included in a reduction of shares payable as reflected on the Statement of Stockholders’ Deficit and the Balance Sheet.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
|
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
|
Accounts
payable and accrued liabilities consists of the following as of:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Accounts payable trade
|
|
$
|
53,972
|
|
|
$
|
59,916
|
|
Accrued payroll & fringe benefits
|
|
|
28,918
|
|
|
|
27,245
|
|
Accrued year-end bonuses
|
|
|
—
|
|
|
|
45,000
|
|
Accrued payroll taxes & withholding
|
|
|
18,267
|
|
|
|
36,520
|
|
Accrued interest
|
|
|
169,047
|
|
|
|
181,265
|
|
|
|
$
|
270,204
|
|
|
$
|
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:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Short-term loans
|
|
$
|
190,787
|
|
|
$
|
215,782
|
|
Asset purchase agreement payable
|
|
|
12,857
|
|
|
|
12,857
|
|
On-line training liability
|
|
|
5,777
|
|
|
|
2,912
|
|
|
|
$
|
209,421
|
|
|
$
|
231,551
|
|
The
short-term loans are comprised of two (2) 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.
Notes
payable consists of the following as of September 30, 2016 and December 31, 2015:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Promissory
note payable, secured by vehicle underlying loan having carrying value of $11,385 and $14,117 at September 30, 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
|
|
$
|
7,157
|
|
|
$
|
12,232
|
|
|
|
|
|
|
|
|
|
|
Less
amounts due within one year
|
|
|
(5,675
|
)
|
|
|
(6,099
|
)
|
|
|
|
|
|
|
|
|
|
Long-term
portion of notes payable
|
|
$
|
1,482
|
|
|
$
|
6,133
|
|
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
of September 30, 2016, principal payments on the notes payable are as follows:
2016
|
|
$
|
1,025
|
|
2017
|
|
|
6,132
|
|
2018
|
|
|
—
|
|
2019
|
|
|
—
|
|
2020
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
|
|
|
|
|
$
|
7,157
|
|
11.
|
CONVERTIBLE
DEBENTURES
|
Convertible
debentures consist of the following at September 30, 2016 and December 31, 2015:
Origination Date
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Origination Principal
|
|
|
Origination Discount
|
|
|
September 30, 2016 Debenture Balance
|
|
|
September 30, 2016 Accrued Interest
|
|
|
December 31, 2015 Debenture Balance
|
|
|
December 31, 2015 Accrued Interest
|
|
|
Ref.
|
|
11/27/2010
|
|
5/27/2011
|
|
|
10
|
%
|
|
|
125,000
|
|
|
|
(53,517
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,750
|
|
|
$
|
34,709
|
|
|
|
(1
|
)
|
5/3/2011
|
|
5/5/2012
|
|
|
10
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
162,500
|
|
|
|
300,000
|
|
|
|
140,000
|
|
|
|
(2
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
2,561
|
|
|
|
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
|
|
|
|
3,986
|
|
|
|
2,743
|
|
|
|
4,157
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
312,743
|
|
|
$
|
169,047
|
|
|
$
|
371,965
|
|
|
$
|
181,265
|
|
|
|
|
|
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.
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.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 the Florida Business
Corporation Act. Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred
stock. The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition
targets. The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action
by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences
and restrictions of each series, any or all of which may be greater than the rights of the common stock. As of September 30, 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.
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. The Company was a co-defendant
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 claimed damages in excess of $1,000,000. This matter was settled during the
three months ended September 30, 2016 by the Company’s insurance carrier.
As
previously disclosed, we are co-defendants 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. As a result of a miscommunication with legal counsel a default has been entered against the Company in this
action for failing to file a timely response. The Company has obtained different legal representation in this matter and is now
attempting to have the default set aside. The Company still believes the claim to be a Workers Compensation claim relating exclusively
against another defendant and without merit, and plans to aggressively defend this action.
See “Foot Note 17.
Subsequent Events.”
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.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Base
rent expense attributable to the Company’s headquarters facility totaled approximately $12,000 and $12,000 for the three-month
periods ending September 30, 2016 and 2015 and $36,000 and $36,000 for the nine-month periods ending September 30, 2016 and 2015,
respectively.
Future
minimum rental payments required under our operating lease agreement are as follows:
Year 1
|
|
$
|
48,000
|
|
Year 2
|
|
|
—
|
|
Year 3
|
|
|
—
|
|
Year 4
|
|
|
—
|
|
Year 5
|
|
|
—
|
|
|
|
$
|
48,000
|
|
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.
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. 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. On April 29, 2016 the Board of Directors determined that is was not in the best interest of either the Company
or the recipients to pay bonuses based on the current and foreseeable share price and cancelled the bonuses payable. The results
of this action are included in a reduction of 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 September 30, 2016, non-related parties interest expense of $7,734 is comprised of $7.695 interest on convertible
debentures and $39 interest on notes payable and other interest. For the three months ended September 30, 2015, non-related parties
interest expense of $9,269 is comprised of $9,177 interest on convertible debentures and $77 interest on notes payable and
other interest.
For
the nine months ended September 30, 2016, non-related parties interest expense of $23,251 is comprised of $23,093 interest on
convertible debentures and $158 interest on notes payable and other interest. For the nine months ended September 30, 2015, non-related
parties interest expense of $27,800 is comprised of $27,531 interest on convertible debentures and $269 interest on notes payable
and other interest.
For
the three months ended September 30, 2016, $3,173 other income, net is comprised primarily of $2,273 from the expiration of online
training liability certificates and no other individually significant items. For the three months ended September 30, 2015, $6,494
other income, net is comprised of $7,200 legal settlement receivable and no other individually significant items.
For
the nine months ended September 30, 2016, $233,825 was recognized in debt settlement and was comprised primarily of $93,459 cancelation
of a convertible debenture and its interest, $140,366 cancelation of an employee bonus payable, other income of $40,292 consisted
primarily of $14,970 royalty income, $13,605 from the expiration of online training liability certificates, $2,009 insurance premium
refund, $6,617 reconciliation adjustments and no other individually significant items. For the nine months ended September 30,
2015, $4,264 other income, net is comprised primarily of $7,200 legal settlement, $3,471 royalty income on licensed patents, $1,800
sales of fixed assets, $2,930 other income, net of individually insignificant items and is partially offset by $11,137 insurance
expense audit adjustments.
As
discussed under Footnote 13 “Commitments and Contingencies”, we are co-defendants
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. As a result of
a miscommunication with legal counsel a default has been entered against the Company
in this action for failing to file a timely response. The Company has obtained different
legal representation in this matter and attempted to have the default set aside. On November
2, 2016, the court granted plaintiff’s motion for sanctions against our company
for frivolous litigation relating to our attempt to have the matter dismissed and granted
the plaintiff’s motion to strike our motion for summary judgment due to our initial
default. The Company still believes the claim to be a Workers Compensation claim relating
exclusively against another defendant and without merit, and plans to aggressively defend
this action.