PART
I
FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISKS
Information
included or incorporated by reference in this filing may contain forward-looking statements. This information may involve known
and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially
different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking
statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by
use of the words “may,” “will,” “should,” “expect,” “anticipate,”
“estimate,” “believe,” “intend” or “project” or the negative of these words or
other variations on these words or comparable terminology.
This
filing contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability,
(b) our Company’s growth strategies, (c) our Company’s future financing plans and (d) our Company’s anticipated
needs for working capital. These statements may be found under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Business,” as well as in this annual report generally. Actual events
or results may differ materially from those discussed in forward-looking statements as a result of various factors, including,
without limitation, the risks outlined under “Risk Factors” and matters described in this filing generally. In light
of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will
in fact occur.
Overview
Brownie’s
Marine Group, Inc., a Florida corporation (referred to herein as “BWMG”, “the Company”, “we”,
or “Brownie’s”), does business through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s
Third Lung, a Florida corporation. The Company designs, tests, manufactures and distributes recreational hookah diving, yacht
based scuba air compressor and Nitrox Generation Systems, and scuba and water safety products. BWMG sells its products both on
a wholesale and retail basis, and does so from its headquarters and manufacturing facility located at 3001 NW 25
th
Avenue, Suite 1, Pompano Beach, Florida 33069. The Company’s common stock is quoted on the OTC Markets under the symbol
“BWMG”. The Company’s website is
www.Browniesmarinegroup.com
. Information on the website is not
a part of this report.
Mr.
Robert Carmichael, our Chief Executive Officer, has operated Trebor as its President since 1986. Since April 16, 2004, Mr. Carmichael
has served as President, Acting Principal Accounting Officer and Acting Chief Financial Officer of the Company. From March 23,
2004 to April 16, 2004, Mr. Carmichael served as the Company’s Executive Vice-President and Chief Operating Officer. The
Company was organized under the laws of the State of Nevada and effective October 22, 2015, the Company reincorporated to the
State of Florida pursuant to a plan of conversion, effective October 22, 2015.
The
Company’s diving and marine based products are generally marketed under the
Brownie’s Third Lung, Brownie’s
Tankfill,
and
Brownie’s Public Safety
trade names.
Executive
Summary and Business Strategy
From
a garage based business making hookah diving systems in the late 1960s, the Company has grown into a niche manufacturing and distribution
company with dive-oriented products loosely classified into three categories: Brownie’s Third Lung (low pressure hookah
systems), Brownie’s Tankfill (high pressure and mixed gas systems), and Brownie’s Public Safety (first-responder/emergency
personnel systems). The Company serves middle income boat owners, higher income yacht owners, and recreational, military and public
safety divers.
The
Company strives for meticulous attention to detail and high quality product innovation. We believe that within the boating/diving
industry Brownie’s Marine Group is known as the industry standard for surface supplied “family” dive systems
and Scuba Tankfill Systems for yacht diving. Brownie’s products and support services range from shallow-water dive systems
and extend into deep-water with mixed gas support systems for exploration divers and submersibles/submarines.
The
Company holds numerous patents and is dedicated to designing and building the world’s finest and most innovative products,
and to setting the industry standard for the world’s best yacht-based diving systems. While Brownie’s Third Lung hookah
diving units were the very first product sold by the Company, the Company recognized early on that there was a need for tank filling
systems and unique diving applications. This realization was the catalyst for the addition of the two product categories: Brownie’s
Tankfill and Brownie’s Public Safety. Brownie’s Tankfill designs, builds, and sells diving solutions from marine-ready
tank filling compressors, Nitrox Makers™, complete dive lockers, and full submarine support systems. Brownie’s Public
Safety features highly specialized diving gear for rescue and safety professionals and a unique automatic floatation device for
body-armor that can also be integrated into foul weather jackets, traditional load bearing harnesses and other garments, such
as the Garment Integrated Personal Flotation Device (GI-PFD) for use with body armor. The following paragraphs further describe
the business and sales models for each of the categories of products sold:
Brownie’s
Third Lung
hookah systems have long been a dominant figure in gasoline powered, high-performance, and feature rich hookah
systems. Taking full advantage of the proprietary compressor system, a complete series of traditional “fixed speed”
electric compressors were developed for the built-in-boat market in 2005. Prior to 2010, Brownie’s did not offer for sale
a floating battery powered hookah due to the inadequate performance/runtime afforded by previous technology. After years of inventing,
testing and development, Brownie’s introduced multiple battery powered models in 2010 that we believe provide performance
and runtimes as great as 300% better than the best devices previously on the market by utilizing a variable speed technology that
controls battery consumption based on diver demand. Our variable-speed battery powered hookah system provides divers with gasoline-free
all day shallow diving experiences.
Brownie’s
Tankfill
designs, manufactures, sells and installs Scuba tank fill systems for on-board yacht use under the brand “Yacht-Pro™”.
Brownie’s Tankfill provides complete diving packages and dive training solutions for yachts. Brownie’s Tank Fill installs
Nitrox systems which allow yacht owners to fill tanks with oxygen enriched air on board. The Yacht-Pro™ compressor systems
offer a completely marine-prepared, VFD (variable frequency drive)-driven, automated alternative to other compressors on the market.
Brownie’s Tankfill also designs complete dive lockers, mixed gas production and distribution systems, and the unique Nitrox
Maker™. Nitrox is oxygen-enriched air, which reduces the effects of nitrogen on divers; it is the industry standard for
dive professionals. The Nitrox Maker™ continuously generates the oxygen rich breathing gas directly from low-pressure air;
no stored oxygen or other gases are required onboard. We believe a parallel product analogy to this device is the fresh water-maker
that swept through the yachting industry over the last two-decades. While less yacht owners may opt for diving systems than fresh
water-makers, there is a broad market potential for yacht owners that will want to have an uninterrupted supply of the premium
breathing gas. Recently, an increase in commercial NitroxMaker™ system sales has been seen as more diving operations and
operators are responding to the demand from their customers to provide nitrox at diving destinations. In addition to the traditional
yacht-based NitroxMaker™ systems the Company has now established a full line of commercial products to meet this need, the
NMCS series.
Brownie’s
Public Safety
designs, manufactures, distributes, and sells the RES (Rapid Entry System)/ HELO™ system, a complete mini
SCUBA system designed for quick water rescues. The HELO™ system can be donned in less than 60 seconds and stored in a briefcase-size
padded bag. Brownie’s Public Safety includes the GI-PFD™ (Garment Integrated Personal Flotation Device™) System
for body armor flotation. This system can reliably support the distressed or unconscious wearer in a true life-saving position.
This patented device addresses a need as law-enforcement, coast guard and military personnel are beginning to wear heavy (life-threatening
in the water) body armor during waterborne patrol, inspection, and surveillance missions. The system helps the personnel float
in heavy armor, hopefully saving their lives. The Company is not currently pursuing aggressive expansion into this market until
it has sufficient working capital to do so.
Some
of the Company’s Products in Depth
Surface
Supplied Air Systems:
The Company produces a line of Surface Supplied Diving products, commonly called hookah systems.
These systems allow one to four divers to enjoy the marine environment up to a depth of 90 feet/27 meters without the bulk and
weight of conventional SCUBA gear. We believe that hookah diving holds greater appeal to families with children of diving age
than does conventional SCUBA. The reduction of weight by eliminating the tank allows smaller divers, especially children, to participate
more actively and enjoyably. The design of our product also reduces the effort required for both its transport and use. We believe
the PELETON™ Hose System revolutionizes hose management for recreational surface supplied diving. It reduces the work required
of any single diver by dispersing the load over the entire group. We use a single, larger diameter hose as a main downline with
up to four individual hoses attached to it. This configuration not only reduces the weight and bulk of the hose required, but
also reduces drag and entanglement. An entire line of deck-mounted systems is available for commercial applications that demand
extremely high performance. In addition to the gasoline-powered units and the Variable Speed battery powered units mentioned above,
a series of electric powered systems is also available for light to commercial duty. Powered by battery for portability or household
current for virtually unlimited dive duration, these units are used primarily by businesses that work in a marine environment.
E-Reel
and Built-in Battery Systems:
The Company developed two surface supplied air products that it believes makes boat diving
even easier. The Built-in Battery System builds a battery powered electric unit into the boat, eliminating the need to transport
the compressor/motor assembly. The need for a flotation tube is also removed, as the boat itself serves in that capacity. The
E-Reel advances this idea by adding a reel system to provide compact storage of up to 150 feet/46 meters of hose. Boaters can
perform their own in-water maintenance and inspections, or just dive for enjoyment. The hose is manually pulled from the reel
supporting up to two divers to a depth of 50 feet/15 meters. When the dive is complete, the hose is automatically recoiled and
stowed by the simple activation of a switch.
Brownie’s
Integrated Air Systems (BIAS™):
Compressed air can have many uses on a boat. The E-Reel and Built in Battery Systems
discussed above are just a few examples of BIAS. In addition to supplying air to divers, integrated air systems provide for the
inflating fenders, opening of doors, blowing of air horns, flushing toilets and more.
Kayak
Diving Hose Kits:
This product allows the use of a conventional SCUBA cylinder, but does not require the diver to wear
it. The cylinder remains above the surface, in a kayak or boat, and a hose ranging from 20 feet/6 meters to 150 feet/46 meters
allow the diver to explore the surrounding area.
Drop
Weight Cummerbelt:
The patented Drop Weight Cummerbelt is available with all our diving systems, and brings a new dimension
to weighting systems. The belt will accommodate waist sizes from 24 to 54 inches and is depth compensating. It features two pockets,
each capable of holding up to 10 pounds of block or shot weight. Each pocket can be instantly released by either hand, allowing
the diver to achieve positive buoyancy in an emergency while retaining the belt itself. Additionally, the design of this belt
provides for expanded capability. By adding an optional sleeve that zips onto the back of the belt, an egress, or bailout system,
can be added. The Egressor Add-on Kit contains the sleeve, a 6 or 13 cubic foot SCUBA cylinder, and a SCUBA regulator. In addition
to the added safety inherent in this design, many other uses for this present themselves, such as propeller clearing, overboard
item retrieval and pool maintenance, to name only a few.
Tankfill
Compressors:
Many yacht owners enjoy the convenience and freedom of filling their own diving tanks with air, NITROX or
custom mixed gases while out on cruise, freeing them from carrying extra cylinders or the need to locate a reputable source in
various ports-of-call. Brownie’s Tankfill specializes in the design and installation of high-end custom systems to do just
that. From surveying the vessel for installation requirements to custom fabrication of the necessary components, Tankfill provides
all the services necessary to satisfy this market. We believe that every large vessel currently in service, being re-fitted, or
being built is a potential customer. Through OEM relationships we have expanded our market to reach these customers. Our light
duty compressor, the Yacht Pro™25 is specifically designed and built to withstand the marine environment with all components
and hardware impervious to spray from the elements. The Yacht Pro™ series contains models for both medium-duty applications,
such as recreational divers and small groups, and heavy-duty use as found on research vessels, commercial operations and live-aboard
dive boats. All Yacht Pro™ models come with the Digital Frequency Drive, which is a Brownie’s Tankfill innovation.
The Digital Frequency Drive eliminates the spike previously experienced in starting the compressor, eliminating the need to ration
the boat’s electrical usage by shutting down components when the compressor is needed. Custom design work is done in-house
for major product installations and in conjunction with other entities.
NitroxMaker™:
We believe Nitrox has become the gas of choice for informed recreational divers the world over. What was once only available
from land-based gas mixing facilities is now easily accessible to the yacht diver. With a Brownie’s NitroxMaker™,
the user dials-in a desired oxygen level from 21% to 40%, eliminating the need to transport and handle pure oxygen. The resulting
diving gas mix is monitored with digital oxygen analyzers, removing the calculations required to blend or mix the gas.
Rapid
Entry System (RES) and HELO
™
System:
The Brownie’s Public Safety product line exists to address
the needs of the public safety dive market. The inherent speed and ease of donning our patented Drop Weight Cummerbelt with Egressor
Add-on Kit identified it as a choice for rapid response for water-related emergencies. A first-responder or officer on-scene can
initiate the location and extraction of victims while the dive team is enroute, saving valuable time and increasing the chances
for survival of victims. The RES is a small SCUBA system that can be quickly donned over clothes, usually in less than sixty seconds.
Its small size allows it to be stored in areas that do not accommodate a full set of SCUBA gear. The 13 cubic foot aluminum tank
can provide up to 15 minutes of air at the surface. The air cell remains stowed under the protective cover and can be partially
inflated to achieve positive flotation. The cover is a specially designed break-away zipper which bursts open to provide instant
inflation yet “heals” and can be repacked and fastened quickly in the field. The HELO offers all the same features,
but has been specially designed and modified for rescue divers working from helicopters. By placing the cylinder in the front
and adding leg straps, the HELO allows divers to use the standard seating configurations. The advantages of this system over full
sized SCUBA rigs are increased mobility for the diver and diminished space requirements for the gear. Since the bottle is mounted
at the diver’s waist, the diver can more easily control his gear during deployment, further adding to the comfort and safety.
The
Dive Industry and Growth Strategy
Currently,
we believe that no company in the dive industry offers a complete line of products and services to serve all divers’ needs.
The dive equipment manufacturing industry is highly fragmented with multiple manufacturers producing very similar products. The
top-ten volume leaders in the dive manufacturing industry provide the same product mix: Scuba BC’s (buoyancy compensators),
regulators, gauges, masks, fins, snorkels, wetsuits, and a few of the necessary accessories. These mature companies offer the
product selection to the “diving” market.
New
markets and classes of divers have developed over the years. The sport sector of Third Lung and Kayak diving have emerged as a
result of snorkel divers that wanted to sustain depth or Scuba divers that wanted more time in shallow waters with enhanced efficiency.
Diving
and Boating Markets
The
diving and boating markets are key to the expansion of the Brownie’s brand. Each of these industries has experienced growth
over the past several decades, but we believe each industry also has significant weaknesses. The dive industry has focused on
the initial certification of divers for revenue. According to industry data, follow up has been poor; causing many divers to quit
diving after their first experience. When the Company’s working capital reaches a sufficient level, BWMG intends to implement
a follow-up program, facilitate proper selection of equipment for divers, and institute mentoring programs.
The
boating industry was hard hit a couple years ago by the economic downturn coupled with the increase in fuel prices. We continue
to work with boaters to enhance their on-water experience by exploiting the diving activities that they can easily add as an accessory
to their investment in boating. Brownie’s OEM BIAS program will improve the overall value at the manufacturing level and
consumer experience by elimination of waste during the design/build phase. They can blow their horns, open air-powered doors and
dive directly from a BIAS package.
Statistics
According
to Global Certification and Membership Statistics as updated February 2014 on the Professional Association of Diver Instructors
(PADI) website, www.padi.com, worldwide PADI certifications of divers has grown annually from over 500,000 certifications in 1992,
to consistently over 900,000 annual certifications annually from 2003 to 936,149 certifications in 2013. There are other scuba
training organizations also issuing scuba dive training certifications, but PADI is the training organization issuing the largest
number of certifications annually. (source: PADI)
Approximately
88.5 million people went boating in the US in 2013; this represents approximately 37% of the adult population in the United States.
There were approximately 15.9 million boats in use in 2013, down slightly from approximately 16.0 million in use in 2012. (source:
National Marine Manufacturers Association)
Trade
names and Patents
The
Company has a product development and intellectual property program. It holds numerous patents and trademarks on its own and/or
through licensing agreements with its chief executive officer and his affiliates.
Trade
names
The
Company either owns or has licensed from an entity, which the Chief Executive Officer has an ownership interest, the use of the
following registered and unregistered trade names, trademarks and service marks for the terms of their indefinite lives: Brownie’s
Third Lung™, browniedive.com, Brownie’s, Brownie’s Third Lung oval symbol, browniedive, NitroxMaker™,
HELO, RES, fast float rescue harness, tankfill.com, browniestankfill, browniestankfill.com, browniespublicsafety.com, browniespublicsafety,
Peleton Hose System, Twin-Trim, Kayak Diving Hose Kit, Bell Bottom Flag Bag, Brownie’s Dogsnare, SHERPA, BC keel, and Garment
integrated personal flotation device (GI-PFD). Use of these trade names, trademarks, and service marks is exclusive to the Company
and the Company’s related parties.
Patents
The
Company owns multiple patents issued and in process related to the following:
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Water
safety and survival
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Garment
integrated flotation devices or life jacket
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Collar
for improved life jacket performance
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Combined
signaling and ballast for personal flotation device
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Inflatable
dive marker and collection bag.
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Three
dimensional dive flag
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Novel
dive raft and float system for divers
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Drop
weight Cummerbelt
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Buoyancy
compensator
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Utility
backpack
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Transport
harness or like garment with adjustable one size component for use by a wide range of individuals
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Active
control releasable ballast
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Marketing
Print
Literature, Public Relations, and Advertising
We
have in-house graphic design capability to create and maintain product support literature, catalogs, mailings, web-based advertising,
newsletters, editorials, advertorials, and press releases. We also, from time-to-time, target specific markets by selectively
advertising in journals and magazines that we believe reach our potential customers. In addition, we strive to issue press releases,
newsletters, and social media postings periodically to keep the public informed of our latest products and related endeavors.
Tradeshows
In
2016 and 2015, the Company was represented either through their own presence or by a dealer at the following annual trade shows:
The Miami Yacht and Brokerage Show, The Fort Lauderdale International Boat Show, the Palm Beach Boat Show, and the Seattle Boat
Show.
Websites
The
Company’s main website is www.browniesmarinegroup.com. Additionally, many of our products are marketed on some of our customers’
websites. In addition to these websites, numerous other websites have quick links to the Company’s website. Our products
are available both domestically and internationally. Internet sales and inquiries are also supported by the Company.
Distribution
Our
products are distributed to our customers primarily by common carrier.
Product
Research and Development (R&D)
We
continuously work to provide our customers with both new and improved products. We offer research and development services to
not only the related entities we license our patents and trademarks from, but also to other customers as well. R&D services
for customers and the related entities are invoiced in the normal course of business. In addition, we are working on internal
research and development projects as well as collaborating with others toward the goal of developing some of our own patentable
products. Research and development costs for the years ended December 31, 2016 and 2015, were $1,973 and $8,739, respectively.
Government
Regulations
The
SCUBA industry is self-regulating; therefore, the Company is not subject to government industry specific regulation. Nevertheless,
the Company strives to be a leader in promoting safe diving practices within the industry and believes it is at the forefront
of self-regulation through responsible diving practices. The Company is subject to all regulations applicable to “for profit”
companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses,
and bonds to operate its facility have been obtained. There can be no assurance that the Company’s operation and profitability
will not be subject to more restrictive regulation or increased taxation by federal, state, or local agencies in the future.
Customers
We
are predominantly a wholesale distributor to retail dive stores, marine stores, and shipyards. This includes approximately 160
active independent Brownie dealers. We retail our products to including, but not limited to, boat owners, recreational divers
and commercial divers. 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. Combined sales to these five entities for the
years ended December 31, 2016 and 2015, represented 33.58% and 31.75%, respectively, of total net revenues. A single non-related
party entity represented 18.7% of revenues for 2015.
Raw
Materials
Principal
raw materials for our business include machined parts such as rods, pistons, bearings; hoses; regulators; compressors; engines;
high-pressure valves and fittings; sewn goods; and various plastic parts including pans, covers, intake staffs, and quick release
connections. Most materials are readily available from multiple vendors. Some materials require greater lead times than other
materials. Accordingly, we strive to avoid out of stock situations through careful monitoring of these inventory lead times, and
through avoiding single source vendors whenever possible.
Competition
We
consider the most significant competitive factors in our business to be fair prices, feature advantages, shopping convenience,
the variety of available of products, knowledgeable sales personnel, rapid and accurate fulfillment of orders, and prompt customer
service. We currently recognize one significant competitor in hookah sales and a variety of competitors in high-pressure tankfill
systems sales. Products from the hookah competitor and those from one of the tankfill competitors appear to be very similar to
ours at first glance, but lack many of what we believe are our patently superior feature advantages. Brownie’s competitors
in the high pressure tankfill market are typically focused on traditional dive stores and fire department air service. Several
are large multi-national companies that do not offer adaptation to the yacht market or Nitrox integration; both areas that Brownie’s
long-term investments rise to a level to suit the buyer’s needs.
Overall,
we are operating in a moderately competitive environment. We believe that the price structure for all the products we distribute
compares favorably with the majority of our competitors based on quality and available features.
Personnel
We
currently have eleven (11) full time employees and three (3) part time employees at our facility in Pompano Beach, Florida. Three
(3) are classified as exempt sales and administrative or management, and eleven (11) are classified as nonexempt factory or administrative
support. We utilize consultants when needed in the absence of available in-house expertise. Our employees are not covered by a
collective
bargaining
agreement.
Seasonality
The
main product categories of our business, Brownie’s Third Lung and Brownie’s Tankfill, are seasonal in nature. The
peak season for Brownie’s Third Lung’s products is the second and third quarters of the year. The peak season for
Brownie’s Tankfill’s products is the fourth and first quarters of the year. Since the seasons complement one another,
we are able to shift cross-trained factory and warehouse personnel between the two product categories as needed. Thus, the Company
is able to avoid the down time normally associated with seasonal business.
Not
applicable to smaller reporting companies. However, our principal risk factors are described under Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
Item
1B.
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Unresolved
Staff Comments
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Not
applicable to smaller reporting companies.
Our
Pompano Beach facilities are comprised of approximately 8,541 square feet of leased space the bulk of which is factory and warehouse
space. Terms of the initial lease include a thirty-seven month term commencing on September 1, 2014; payment of $5,367 security
deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual
operating expenses (i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment. On
December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term
for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual
escalation throughout the amended term. We believe that the facilities are suitable for their intended purpose, are being efficiently
utilized and provide adequate capacity to meet demand for the foreseeable future.
Item
3.
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Legal
Proceedings.
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From
time to time we are 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. We currently
do not have product liability coverage. See “Risk Factors” below.
As
previously disclosed, the Company and Trebor were 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 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 at no additional cost to the Company.
In
addition, as previously disclosed, the Company, Trebor and other third parties, are each named as a co-defendants under an action
filed in March 2015 in the Circuit Court of Broward County under Case No. CACE15-03238 by the Estate of Ernesto Rodriguez, claiming
wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung
product. This claim falls outside the Company’s period of insurance coverage. Plaintiff has claims damages exceeding $1,000,000.
A default judgment was entered against Trebor in 2015 due to its failure to timely respond to the complaint. 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
believes the claim to be a Workers Compensation claim relating exclusively against other non-affiliated defendants and without
merit, and will aggressively defend this action and to appeal the default judgment. In the event Trebor is unable to overturn
the default judgment and the defendants are determined to be at fault, we would seek to allocate damages among all of the other
parties, including the plaintiff. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated due to
the undetermined validity of any claim or claims made by plaintiff and the mitigating factors among the parties. Therefore, the
Company has not recorded reserves and contingent liabilities related to this matter. However, in the future, as the case progress,
the Company may be required to record a contingent liability or reserve for these matters.
Item
4.
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Mine
Safety Disclosure
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None.
PART
II
Item
5.
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Purchases
of Equity Securities.
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The
Company’s common stock is quoted on the OTC Markets under the symbol “BWMG”. The Company’s high and low
closing bid prices by quarter during 2016 and 2015, as provided by the OTC Markets (Pink) are provided below. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
On March 17, 2017, the quoted closing price of our common stock was $0.016 per share.
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Calendar Year 2015
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High Bid
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Low Bid
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First Quarter
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$
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.004
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$
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.002
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Second Quarter
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$
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.003
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$
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.002
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Third Quarter
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$
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.003
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$
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.001
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Fourth Quarter
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$
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.007
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$
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.002
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Calendar Year 2016
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High Bid
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Low Bid
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First Quarter
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$
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.006
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$
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.002
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Second Quarter
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$
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.006
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$
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.003
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Third Quarter
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$
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.006
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$
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.004
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Fourth Quarter
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$
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.008
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$
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.001
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Holders
of Common Stock
As
of April 12, 2017, the Company had in excess of 335 shareholders of record.
Dividends
We
have not paid any dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We
intend to retain any earnings to finance the growth of the business. We cannot assure you that we will ever pay cash dividends.
Whether we pay any cash dividends in the future will depend on the financial condition, results of operations and other factors
that the Board of Directors will consider.
Sales
of Unregistered Securities
Excluding
unregistered securities previously disclosed in reports filed with the Securities and Exchange Commission during the period covered
by this report, the Company did not sell any additional securities without registration under the Securities Act of 1933, as amended,
during the period covered by this report.
Item
6.
|
Selected
Financial Data.
|
Information
not required by smaller reporting company.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
|
Overview
The
Company through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation,
designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and Nitrox Generation
Systems, and scuba and water safety products. We sell our products both on a wholesale and retail basis. Our headquarters and
manufacturing facility is located in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung.
Significant
Accounting Policies
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make a wide variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the financial statements, and (ii) the reported amounts
of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments
and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting
the future resolution of the uncertainties increases, these judgments become even more subjective and complex. We have identified
certain accounting policies that are most important to the portrayal of our current financial condition and results of operations.
Our significant accounting policies are as follows:
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 to conform to the 2016 financial
statement presentation. Effective July 15, 2013, the Company effectuated a reverse stock split (1-for-1,350). Accordingly, the
transactional number of shares and per share amounts referenced throughout this report 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. Although profitable for the years ended December
31, 2016 and 2015, we have incurred several years of losses since 2009.
The
Company is behind on payments due for matured convertible debentures, related parties notes payable, accrued liabilities and interest
– related party, 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 our ability to continue as a going concern. Therefore, the Company will need to raise additional
funds and is currently exploring alternative sources of financing. The Company has issued a number of convertible debentures as
an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common
stock or other securities, and obtaining some short term loans. The Company has, in the past, paid for legal and consulting services
with restricted stock to maximize working capital, and intends to continue this practice where feasible. In addition, the Company
continues to explore additional cost saving measures.
If
BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale
back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements
do not include any adjustments that may result from the outcome of these uncertainties.
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 indicated.
Furniture,
Fixtures, Equipment and Leasehold Improvements
– Furniture, Fixtures, Equipment and Leasehold Improvement is stated at
cost less accumulated depreciation or amortization. Depreciation and amortization is provided principally on the straight-line
method over the estimated useful lives of the assets, 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. As of December
31, 2016 and 2015, there were no ongoing contracts accounted for using the percentage of completion method.
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
they occur.
Customer
deposits – unearned revenue and returns policy
– The Company typically takes a minimum 50% deposit against custom
and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery,
shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted,
nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as
stated on each sales invoice. . The Company provides our customers with an industry standard one year warranty on systems sold.
Historically, the cost of our warranty policy has been immaterial and no reserve has been established.
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, we 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.
Fair
value of financial instruments
– Fair value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure
fair value:
Level
1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices
for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets
that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable
in active markets.
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant
management judgment or estimation.
Inputs
are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make
valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on
the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes
“observable” requires significant judgment by the Company. Management considers observable data to be market data
which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple,
independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy
is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived
risk of that investment.
At
December 31, 2016, and 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 excludes any dilutive effects of options, warrants and convertible securities.
Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period.
Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares
outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.
New
accounting pronouncements
In
April 2016, the FASB issued ASU No. 2016-15,
“Classification of Certain Cash Receipts and Cash Payments”
ASU
2016- provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective
for annual periods beginning after December 15, 2017 with early adoption permitted. We do not believe this ASU will have an impact
on our results of operation, cash flows, other than presentation, or financial condition.
In
April 2016, the FASB issued ASU 2016–10
Revenue from Contract with Customers (Topic 606)
: identifying Performance
Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather,
the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing
implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on
(a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s
promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied
at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments
in this Update are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement
necessary to comply with Topic 606. We are currently reviewing the provisions of this ASU to determine if there will be any impact
on our results of operations, cash flows or financial condition.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of
the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards
as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently reviewing the provisions
of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In
February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize
(i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of,
a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors;
however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard
will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We
are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash
flows or financial condition.
In
July 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11,
Inventory
(Topic
330), Simplifying the Measurement of Inventory. ASU No. 2015-11 does not apply to inventory measurement using the last-in, last-out
(LIFO) or retail methods. ASU No. 2015-11 applies to all other inventory measurement methods, which includes first-in, first-out
(FIFO) or average cost. Previously, inventory valuation was at the lower of cost or fair market value. This ASU changes the valuation
to lower or cost of net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course
of the business, less reasonably predictable costs of completion, disposal, and transportation. ASU is effective for fiscal years
beginning after December 15, 2016, and interim periods within those fiscal years. ASU 2015-11 should be applied prospectively
with earlier application permitted. The Company opted for early adoption of ASU 2015-11 this period with no impact to financial
condition, results of operations, or cash flows. The Company updated its consolidated financial statements to reflect inventory
valuation at the lower of cost or net realizable value.
In
August 2014, the Financial Accounting and Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2014-15,
Presentation of Financial Statements Going Concern
(Subtopic 205-206): Disclosures of Uncertainties about an Entity’s
Ability to Continue as a Going Concern. The ASU requires an entity’s management to assess its ability to continue as going
concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. This includes (1)
providing a definition of the term substantial doubt, (2) requiring an evaluation every reporting period including interim periods,
(3) providing principles for considering then mitigating effect of management’s plans, (4) requiring certain disclosures
when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requiring an express statement
and other disclosures when substantial doubt is not alleviated, and (6) requiring an assessment for a period of one year after
the date that the financial statements are issued (or available to be issued). The ASU is effective for the annual period ending
after December 15, 2016, and for annual periods and interim periods thereafter with early adoption permitted. The Company elected
early adoption for the year ended December 31, 2014, with insignificant impact to both its current process for evaluating ability
to continue as going concern and to its existing disclosures.
The
Company believes there was no other new accounting guidance adopted, but not yet effective that either has not already been disclosed
in prior reporting periods or is relevant to the readers of its financial statements.
The
following discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an on-going basis, the Company evaluates its estimates, including those related to allowance for doubtful accounts and deferred
income tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Results
of Operations for the Year Ended December 31, 2016, as Compared to the Year Ended December 31, 2015
Net
revenues
. For the year ended December 31, 2016, total revenues declined approximately 18% with net revenues of $2,264,134
as compared to net revenues of $2,759,643 for the year ended December 31, 2015, a decrease of $495,509. Sales to related parties
totaled $760,356 and $876,188 for the same periods, respectively. While sales of hookah systems were relatively flat between the
periods, the decrease is primarily attributable to a single large tankfill sale in 2015. There was no similar tankfill in 2016.
This change in product mix is not believed to be attributable to any particular identifiable sales trend or competitive pressures
but rather normal fluctuations in market demand.
Cost
of net revenues
. For the year ended December 31, 2016, we had cost of net revenues of $1,664,681 as compared with cost of
net revenues of $1,831,989 for the year ended December 31, 2015, a decrease of $167,308, or 9%. This was primarily attributable
to the overall drop in net revenues between the periods including the related decrease in materials and direct labor costs.
Gross
profit.
For the year ended December 31, 2016, we had a gross profit of $599,453 as compared to gross profit of $927,654 for
the year ended December 31, 2015, a decrease of $328,201, or 35%. The decrease in gross profit was primarily attributable to the
corresponding decline in the level of overall sales activity.
Operating
expenses
. For the year ended December 31, 2016, we had operating expenses of $617,226 as compared to operating expenses of
$679,721, a decrease of $62,495 or approximately 9%. This decrease is predominantly the result of a reduction in our administrative
workforce and associated taxes, insurances and benefits between the periods.
Other
(income) expense, net
. For the year ended December 31, 2016, we had other income, net of $247,779 as compared to other expense,
net of $18,280 for the prior year. This account is comprised of other (income), net and interest expense. The overall difference
is primarily comprised of the $93,459 debt settlement of a convertible debenture and its associated interest and $140,366 derived
from the cancellation of incentive bonuses in the second quarter of 2016. The decline in interest expense reflects the decline
in balances of notes payable between the periods.
Net
income.
For the year ended December 31, 2016, net income remained relatively unchanged between the periods, increasing less
than 1%. However, it should be noted that the sharp increase in other (income) as described above, was comprised of a gain on
debt settlement and cancellation of the Company’s incentive bonus program, with both transactions being of a non-recurring
nature.
Liquidity
and Capital Resources
As
of December 31, 2016, the Company had current assets (primarily consisting of inventory) of $1,017,870 and current liabilities
of $914,885 or a current ratio of 1.1 to 1, representing a working capital balance of $102,985. At December 31, 2015, the Company
had cash and current assets of $957,811 and current liabilities of $1,232,943, or a current ratio of .78 to 1. This improvement
is due in large part to a settlement in royalties payable to related parties and settlement of the current portion of notes payable
to related parties.
The
consolidated financial statements included herein 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 we had net income for the years ended December 31, 2016 and 2015, we
have otherwise incurred several years of losses since 2009, and expect we may have losses in future periods.
The
Company is behind on payments due for matured convertible debentures; accrued liabilities 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.
The
Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations. This raises substantial
doubt about the Company’s ability to continue as a going concern during the twelve- month period following the date of the
financial statements included herein. The Company will need to raise additional funds and is currently exploring alternative sources
of financing. We have issued a number of convertible debentures as an interim measure to finance our working capital needs. We
have historically paid for some legal and consulting services with restricted stock to maximize working capital. We intend to
continue this practice in the future when possible. We have implemented some cost saving measures and will continue to explore
more to reduce operating expenses.
Net
cash provided by operating activities totaled $75,192 and $147,461 for the years ended December 31, 2016 and 2015, respectively.
The cash provided from operations in 2016 of $75,192 was primarily the result of net income of $230,026, a reduction in accounts
receivable of $58,448, shares issued for payroll compensation of $36,000 and an increase in accounts payable and accrued liabilities
of $65,070, being off-set by a gain recognized on the cancellation of debt of $234,678, a reduction in other liabilities of $54,937.
Cash flows in 2015 also increased primarily as a result of net income of $229,610, shares issued for payroll compensation of $54,000,
an increase in accounts receivable – related parties of $30,055, a reduction in other assets of $24,400 and an increase
in royalties payable – related parties of $24,885. These sources of funds were off-set in part by a decrease in accounts
payable and accrued expenses of $112,830 and an increase in inventory of $48,000.
Net
cash used in financing activities totaled $17,678 and $12,622 at December 31, 2016 and 2015, respectively, and primarily reflects
the repayments during the periods of principal payments on notes payable to related parties of $11,098 and $30,068, respectively.
The net cash used in financing activities for 2015 was net of $27,000 proceeds of additional notes payable - related parties.
For
both years ending December 31, 2016 and 2015, the Company has heavily depended upon the funding of related parties to maintain
its operations.
If
we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back
or cease operations, liquidate our 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.
Risk
Factors
The
Company is subject to various risks that may materially harm its business, financial condition and results of operations. These
may not be the only risks and uncertainties that the Company faces. Additional risks that we do not yet know of or that we currently
think are immaterial may also impair our future business operations. If any of these risks or uncertainties actually occurs, the
Company’s business, financial condition or operating results could be materially harmed. In that case, the trading price
of the Company’s common stock could decline and you could lose all or part of your investment.
Our
ability to continue as a going concern is in substantial doubt absent obtaining adequate new debt or equity financing and achieving
sufficient sales levels.
While
we incurred net income in 2016 and 2015, the Company is behind on payments due for matured convertible debentures, notes payable,
and certain vendor payables. The Company is working out all matters of delinquency on a case by case basis. However, there can
be no assurance that cooperation the Company has received thus far will continue. Our continued existence is dependent upon generating
working capital and obtaining adequate new debt or equity financing. Because of our historical losses, we may not have working
capital to permit us to remain in business through the end of the year, without improvements in our cash flow from operations
or new financing. Working capital limitations continue to impinge on our day-to-day operations.
The
optional conversion features of a series of convertible debentures issued by the Company could require the Company to issue a
substantial number of shares of common stock, which will cause dilution to the Company’s stockholders and a potentially
negative effect on our stock price.
Since
October 4, 2010, the Company has issued convertible debentures to several lenders and other third parties. At December 31, 2016
the outstanding principal balance of these debentures was approximately $312,743. The debentures convert under various conversion
formulas, all of which are at a significant discount to market price of our common stock. The conversion of any of the debentures
will result in the issuance of a significant number of shares of our common stock which will cause dilution to our existing shareholders.
Furthermore, the conversion at a significant discount to the market price of our common stock may have a negative effect on our
stock price.
Our
common stock may be affected by limited trading volume and may fluctuate significantly
.
Our
common stock is traded on the OTC Markets. There is a limited public market for our common stock and there can be no assurance
that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’
ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than
common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant
price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall
economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.
Our
company is a voluntary filer with the Securities and Exchange Commission and in the event that we cease reporting under the Exchange
Act, investors would have limited information available to them about the company.
While
we are subject to Section 15(d) of the Exchange Act, we do not have a class of securities registered under Section 12(g) of the
Exchange Act. To the extent that our duty to file Exchange Act reports has automatically suspended under Section 15(d) of the
Exchange Act, as a voluntary filer, we may elect to cease reporting under the Exchange Act at such time which would limit the
information available to investors and shareholders about the company.
Our
common stock is deemed to be “penny stock,” which may make it more difficult for investors to sell their shares due
to suitability requirements.
Our
common stock is deemed to be “penny stock” as that term is defined under the Securities Exchange Act of 1934. Penny
stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). Our common stock is covered by an SEC rule that imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors,
which are generally institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 jointly with their spouse.
Broker/dealers
dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor.
These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may
make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
We
depend on the services of our Chief Executive Officer
.
Our
success largely depends on the efforts and abilities of Robert M. Carmichael, our President and Chief Executive Officer. Mr. Carmichael
has been instrumental in securing our existing financing arrangements. Mr. Carmichael is primarily responsible for the development
of our technology and the design of our products. The loss of the services of Mr. Carmichael could materially harm our business
because of the cost and time necessary to recruit and train a replacement. Such a loss would also divert management attention
away from operational issues. We do not presently maintain a key-man life insurance policy on Mr. Carmichael.
We
require additional personnel and could fail to attract or retain key personnel
.
In
addition, our continued growth depends on our ability to attract and retain a Chief Financial Officer, a Chief Operations Officer,
and additional skilled associates. We are currently utilizing the services of two professional consultants to assist the Chief
Executive Officer with finance and operations. The loss of the services of these consultants prior to our ability to attract and
retain a Chief Financial Officer or Chief Operations Officer or further assistance in these areas may have a material adverse
effect upon us. Also, there can be no assurance that we will be able to retain our existing personnel or attract additional qualified
associates in the future.
Our
failure to obtain and enforce intellectual property protection may have a material adverse effect on our business
.
Our
success depends in part on our ability, and the ability of our patent and trademark licensors, entities owned and controlled by
Robert M. Carmichael, our President and Chief Executive Officer, to obtain and defend our intellectual property, including patent
protection for our products and processes, preserve our trade secrets, defend and enforce our rights against infringement and
operate without infringing the proprietary rights of third parties, both in the United States and in other countries. Despite
our efforts to protect our intellectual proprietary rights, existing copyright, trademark and trade secret laws afford only limited
protection.
Our
industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property
rights. Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future.
We
may be unable to manage growth.
Successful
implementation of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management
and financial resources. If we fail to manage our growth effectively, our business, financial condition or operating results could
be materially harmed, and our stock price may decline.
Reliance
on vendors and manufacturers.
We
deal with suppliers on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued
supply or pricing. In addition, we have no long-term contracts with our manufacturing sources and compete with other companies
for production facility capacity. Historically, we have purchased enough inventories of products or their substitutes to satisfy
demand. However, unanticipated failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain
substitutes could force us to curtail or cease operations.
Dependence
on consumer spending
.
The
success of the our business depends largely upon a number of factors related to consumer spending, including current and future
economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates.
In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products.
Any significant deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce
our sales and adversely affect our financial results. The impact of weakening consumer credit markets; layoffs; corporate restructurings;
higher fuel prices; declines in the value of investments and residential real estate; and increases in federal and state taxation
can all negatively affect our results. There can be no assurance that in this type of environment consumer spending will not decline,
thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely affected by continuing
or future downturns in the economy, boating industry, or dive industry. If declines in consumer spending on recreational marine
accessories and dive gear are other than temporary, we could be forced to curtail or cease operations.
Government
regulations may impact us
.
The
SCUBA industry is self-regulating; therefore, Brownie’s is not subject to government industry specific regulation. Nevertheless,
Brownie’s strives to be a leader in promoting safe diving practices within the industry and is at the forefront of self-regulation
through responsible diving practices. Brownie’s is subject to all regulations applicable to “for profit” companies
as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds
to operate its facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive
regulations in the future, which could force us to curtail or cease operations.
Bad
weather could have an adverse effect on operating results
.
Our
business is significantly impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably
rough surf, may decrease boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period
may not be indicative of results of any future period.
Investors
should not rely on an investment in our stock for the payment of cash dividends
.
We
have not paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the future. Investors
should not make an investment in our common stock if they require dividend income. Any return on an investment in our common stock
will be as a result of any appreciation, if any, in our stock price.
The
manufacture and distribution of recreational diving equipment could result in product liability claims and we currently lack product
liability insurance
.
We,
like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an
inherent risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims
may include, among other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions
as to proper use and/or side effects, if any. We do not anticipate obtaining contractual indemnification from parties
-
supplying
raw materials
,
manufacturing our products or marketing our products. In any event, any such indemnification if obtained
will be limited by our terms and, as a practical matter, to the creditworthiness of the indemnifying party. We currently do not
have any product liability insurance. In the event that we do not have adequate insurance or contractual indemnification, product
liabilities relating to defective products could have a material adverse effect on our operations and financial conditions, which
could force us to curtail or cease our business operations.
If
we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting, which
would harm our business and the trading price of our stock
.
Our
management has previously determined that we did not maintain effective internal controls over financial reporting. For a detailed
description of these material weaknesses and our remediation efforts and plans, see “Part II — Item 9A — Controls
and Procedures.” If the result of our remediation of the identified material weaknesses is not successful, or if additional
material weaknesses are identified in our internal control over financial reporting, our management will be unable to report favorably
as to the effectiveness of our internal control over financial reporting and/or our disclosure controls and procedures, and we
could be required to further implement expensive and time-consuming remedial measures and potentially lose investor confidence
in the accuracy and completeness of our financial reports which could have an adverse effect on our stock price and potentially
subject us to litigation.
We
currently have no independent directors, which poses a risk for us from a corporate governance perspective.
Robert
Carmichael, our only executive officer, also serves as our only director. Our director and executive officer is required to make
interested party decisions, such as the approval of related party transactions, his level of his compensation, and oversight of
our accounting function. Our director and executive officer also exercise substantial control over all matters requiring stockholder
approval, including the nomination of directors and the approval of significant corporate transactions. Due to our lack of independent
directors, we have not implemented various corporate governance measures, the absence of which may cause stockholders to have
more limited protections against transactions implemented by our board of directors, conflicts of interest and similar matters.
Stockholders should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
Our
Chief Executive Officer beneficially owns approximately 71% of the combined voting power of our Common Stock and Series A Convertible
Preferred Stock and is able to control voting issues and actions that may not be beneficial or desired by minority shareholders.
As
of March 17, 2017, Robert Carmichael, our only executive officer, beneficially owns approximately 71% 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.
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Not
required for smaller reporting companies.
Item
8.
|
Financial
Statements.
|
Our
consolidated financial statements appear beginning at page F-1.
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure.
|
None.
Item
9A.
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information
required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management
to allow timely decisions regarding required disclosure. The Company’s management, under the supervision and with the participation
of Robert Carmichael, the Company’s Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried
out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2016. Based upon that evaluation and the identification
of the material weakness in the Company’s internal control over financial reporting as described below under “Management’s
Report on Internal Control over Financial Reporting,” the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Management,
with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of
our internal control over financial reporting as of December 31, 2016, based on the 2013 criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2016, our internal control over financial
reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally accepted accounting principles because of the
Company’s limited resources and limited number of employees. To mitigate the current limited resources and limited employees,
we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we
grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the
internal control framework.
This
annual report does not include an attestation report of the company’s registered public accounting firm regarding internal
control over financial reporting.
Limitations
on Effectiveness of Controls and Procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations
include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Changes
in Internal Control over Financial Reporting
There
were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item
9B.
|
Other
Information.
|
None.
NOTES
TO 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,” “our”
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”).
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.
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. Although profitable for the years ended December
31, 2016 and 2015, we have incurred several years of losses since 2009. The Company has an accumulated deficit as of December
31, 2016 of $8,631,049.
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 our ability to continue as a going concern. Therefore, the Company will need to raise additional
funds and is currently exploring alternative sources of financing. The Company has issued a number of convertible debentures as
an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common
stock or other securities, and obtaining some short term loans. The Company has, in the past, paid for legal and consulting services
with restricted stock to maximize working capital, and intends to continue this practice where feasible. In addition, the Company
continues to explore additional cost saving measures.
If
BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale
back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements
do not include any adjustments that may result from the outcome of these uncertainties.
Accounts
receivable
– Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail
customers. The allowance for doubtful accounts are estimated based on historical customer experience and industry knowledge.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 indicated.
Furniture,
Fixtures, Equipment and Leasehold Improvements
– Furniture, Fixtures, Equipment and Leasehold Improvement is stated at
cost less accumulated depreciation or amortization. Depreciation and amortization is provided principally on the straight-line
method over the estimated useful lives of the assets, 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, when applicable, 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.
As of December 31, 2016 and 2015, there were no ongoing contracts accounted for using the percentage of completion method.
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 years ended December 31, 2016, and 2015, totaled $5,800 and $8,497,
respectively.
Research
and development costs
– The Company accounts for research and development costs in accordance with the Accounting Standards
Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development
costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party
research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and future products are expensed in the period incurred.
During the year ended December 31, 2016 and 2015 the Company incurred $1,973 and $8,739 respectively of expenses related to research
and development costs.
Customer
deposits – unearned revenue and returns policy
– The Company typically takes a minimum 50% deposit against custom
and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery,
shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted,
nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as
stated on each sales invoice. The Company provides our customers with an industry standard one year warranty on systems sold.
Historically, the cost of our warranty policy has been immaterial and no reserve has been established.
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.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
For
the years ended December 31, 2016 and 2015, the Company compensated and/or converted all accrued payroll to stock for one related
party employee totaling $36,000 and $54,000, respectively.
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 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. AND SUBSIDIARY
NOTES
TO 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
December 31, 2016, and 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 excludes any dilutive effects of options, warrants and convertible securities.
Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period.
Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares
outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.
Potentially dilutive shares included in dilutive earnings per share totaled 34,929,502 and 44,837,540 at December 31, 2016 and
2015, respectively. These shares reflect shares potentially issuable under convertible note agreements during the periods and
138,941 shares and 195,610 shares payable to a related party at both December 31, 2016 and 2015, respectively.
New
accounting pronouncements
In
April 2016, the FASB issued ASU No. 2016-15,
“Classification of Certain Cash Receipts and Cash Payments”
ASU
2016- provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective
for annual periods beginning after December 15, 2017 with early adoption permitted. We do not believe this ASU will have an impact
on our results of operation, cash flows, other than presentation, or financial condition.
In
April 2016, the FASB issued ASU 2016–10
Revenue from Contract with Customers (Topic 606)
: identifying Performance
Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather,
the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing
implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on
(a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s
promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied
at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments
in this Update are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement
necessary to comply with Topic 606. We are currently reviewing the provisions of this ASU to determine if there will be any impact
on our results of operations, cash flows or financial condition.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of
the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards
as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently reviewing the provisions
of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize
(i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of,
a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors;
however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard
will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We
are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash
flows or financial condition.
In
July 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11,
Inventory
(Topic
330), Simplifying the Measurement of Inventory. ASU No. 2015-11 does not apply to inventory measurement using the last-in, last-out
(LIFO) or retail methods. ASU No. 2015-11 applies to all other inventory measurement methods, which includes first-in, first-out
(FIFO) or average cost. Previously, inventory valuation was at the lower of cost or fair market value. This ASU changes the valuation
to lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course
of the business, less reasonably predictable costs of completion, disposal, and transportation. ASU is effective for fiscal years
beginning after December 15, 2016, and interim periods within those fiscal years. ASU 2015-11 should be applied prospectively
with earlier application permitted. The Company opted for early adoption of ASU 2015-11 this period with no impact to financial
condition, results of operations, or cash flows. The Company updated its consolidated financial statements to reflect inventory
valuation at the lower of cost or net realizable value.
In
August 2014, the Financial Accounting and Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2014-15,
Presentation of Financial Statements Going Concern
(Subtopic 205-206): Disclosures of Uncertainties about an Entity’s
Ability to Continue as a Going Concern. The ASU requires an entity’s management to assess its ability to continue as going
concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. This includes (1)
providing a definition of the term substantial doubt, (2) requiring an evaluation every reporting period including interim periods,
(3) providing principles for considering then mitigating effect of management’s plans, (4) requiring certain disclosures
when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requiring an express statement
and other disclosures when substantial doubt is not alleviated, and (6) requiring an assessment for a period of one year after
the date that the financial statements are issued (or available to be issued). The ASU is effective for the annual period ending
after December 15, 2016, and for annual periods and interim periods thereafter with early adoption permitted. The Company elected
early adoption for the year ended December 31, 2014, with insignificant impact to both its current process for evaluating ability
to continue as going concern and to its existing disclosures.
The
Company believes there was no other new accounting guidance adopted, but not yet effective that either has not already been disclosed
in prior reporting periods or is relevant to the readers of our financial statements.
2.
INVENTORY
Inventory
consists of the following as of:
|
|
December
31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
402,407
|
|
|
$
|
422,115
|
|
Work
in process
|
|
|
—
|
|
|
|
—
|
|
Finished
goods
|
|
|
270,113
|
|
|
|
232,098
|
|
|
|
$
|
672,520
|
|
|
$
|
654,213
|
|
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consisted of the following:
|
|
December
31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Prepaid
inventory
|
|
$
|
30,076
|
|
|
$
|
42,076
|
|
Prepaid
insurance
|
|
|
6,968
|
|
|
|
8,819
|
|
Prepaid
other current assets
|
|
|
47,292
|
|
|
|
7,117
|
|
|
|
$
|
84,336
|
|
|
$
|
58,012
|
|
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following as of:
|
|
December
31,
|
|
|
|
2016
|
|
|
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
|
|
|
(184,332
|
)
|
|
|
(147,941
|
)
|
|
|
$
|
56,908
|
|
|
$
|
85,712
|
|
Depreciation
and amortization expense totaled $21,798 and $14,593 for the year ended December 31, 2016 and $21,531 and $13,468 for the year
ended December 31, 2015, respectively.
5.
OTHER ASSETS
Other
assets of $6,649, at December 31, 2016 and 2015, consisted of refundable deposits.
6.
CUSTOMER CREDIT CONCENTRATIONS
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 the years ended December 31, 2016 and 2015, represented 33.58% and 31.75%, respectively, of total net
revenues. A single non-related party entity represented 18.7% of revenues for 2015.
7.
RELATED PARTIES TRANSACTIONS
Notes
payable – related parties
|
|
December
31,
|
|
|
|
2016
|
|
|
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.
|
|
$
|
—
|
|
|
$
|
11,098
|
|
|
|
|
|
|
|
|
|
|
Less
amounts due within one year
|
|
|
—
|
|
|
|
11,098
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion of notes payable
|
|
$
|
—
|
|
|
$
|
—
|
|
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO 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 purposes of calculating the interest due monthly on the note, the
weighted average price per share during the monthly period from the historical data as quoted on www.quotemedia.com for BWMG was
used. Interest was calculated as the unpaid principal balance times the daily rate for the number of the days in the period times
the average weighted price per share for the monthly period. The Company borrowed and is using the proceeds for tooling and inventory
of new product. For the years ended December 31, 2016 and 2015, the Company converted $570 and $1,015 accrued interest on the
note payable – related party into 124,326 and 396,891 shares of restricted stock respectively.
On
October 30, 2013, the Company signed a secured promissory note, with Mikkel Pitzner, a non-employee member of Board of Directors
at the date the note was issued for $85,000. 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 expired October 31, 2015 without being exercised,
in whole or in part. During the third quarter ended September 30, 2015, the Company paid off the remaining balance due under the
note payable – related party.
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
volumes. Combined net revenues from these entities for years ended December 31, 2016 and 2015, totaled $750,338 and $825,491,
respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s
Yacht Toys at December 31, 2016, was $40,012, $5,809, and $18,410, respectively. Accounts receivable from Brownie’s SouthPort
Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2015, was $12,980, $4,678,
and $15,221, respectively.
The
Company sells products to Brownie’s Global Logistics, LLC. (“BGL”), 940 Associates, Inc. and 3D Buoy,LLC fully
owned by 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 three entities
for years ended December 31, 2016, and 2015, were $9,130 and $50,697, respectively. Accounts receivable from BGL at December 31,
2016, and December 31, 2015 was $0 and $6,443, respectively. Accounts receivable from 3D Buoy was $3,074 and $1,948 at December
31, 2016 and 2015, respectively. In addition, the Company has made sales directly to our Chief Executive Officer totaling $888
and $0 in 2016 and 2015, respectively with an accounts receivable balance of $936 at December 31, 2016.
Royalties
expense – related parties
– The Company has Exclusive License Agreements 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. 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 years ended December 31, 2016 and 2015, as disclosed on the face of the Company’s Consolidated
Statements of Operations totaled $56,054 and $67,849, respectively. As of December 31, 2015, the Company was approximately 27
months in arrears on royalty payments due. In November 2016, the Company entered into a conversion agreement under which the Company
issued 10,000,000 shares of restricted common stock in satisfaction of $88,850 past due and payable to 940A. As of the date of
the conversion agreement, the Company was more than 31 months in arrears on its royalty payments totaling approximately $151,000.
In addition, 940A has agreed to forebear on any default under the License Agreement due to the Company’s remaining past
due amount for a period of three months from the effective date of the conversion agreement. The shares issued were valued at
$0.008885 per share, the closing price of the stock on the effective date of the conversion agreement. No default notice had been
received and prior to the conversion agreement.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Equity
based compensation
– During November 2013, Alexander F. Purdon, then an employee of the Company, exceeded 10% ownership
whereby he was reclassified to related party. The Company paid 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 years ended December 31, 2016 and 2015, stock based compensation shares issued to Mr. Purdon totaled 360,000
shares and 19,419,712 shares with a fair value of $36,000 and $54,000, 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 was
due $17,500 at December 31, 2015. The agreement with Mr. Purdon terminated August 31, 2016.
In
April 2016, the board of directors determined it was not in the best interest of either the Company or the recipients to pay bonuses
based on current or foreseeable share prices and cancelled bonuses payable. The result of this action is reflected in a reduction
of shares payable on the State of Stockholders’ Equity (Deficit) and Balance Sheet.
Other
liabilities – related parties
Other
liabilities – related parties consists of the following at:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Year-end
2012 bonus payable to Chief Executive Officer
|
|
$
|
—
|
|
|
$
|
67,000
|
|
Year-end
2012 bonus payable to employee
|
|
|
—
|
|
|
|
17,500
|
|
Total
|
|
$
|
—
|
|
|
$
|
84,500
|
|
Cancellation
of accrued bonuses
– In April 2016, the Company determined it was not in the best interest of the Company or the recipients
to pay bonuses based on current or foreseeable share prices and cancelled bonuses payable totaling $140,336.
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 at a $1,350 exercise price expiring ten years from the effective date of grant, or March
2, 2019. None of the options have been exercised to-date.
8.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities of $323,578 at December 31, 2016, consists of $110,020 accounts payable trade, $20,416 accrued
payroll and fringe benefits, $16,400 accrued payroll taxes and withholding, and $176,742 accrued interest. Balances due certain
vendors were also due in arrears to varying degrees.
Accounts
payable and accrued liabilities of $349,946 at December 31, 2015, consists of $59,916 accounts payable trade, $27,245 accrued
payroll and fringe benefits, $45,000 accrued year-end bonuses, $36,520 accrued payroll taxes and withholding, and $181,266 accrued
interest. Balances due certain vendors were also due in arrears to varying degrees. The Company is handling all delinquent accounts
on a case by case basis.
9.
OTHER LIABILITIES
Other
liabilities of $176,614 at December 31, 2016, consists of $160,782 short-term loans, $12,857 payable for assets purchased pursuant
to FDI Agreement, and $2,975 on-line training liability. Other liabilities of $231,551 at December 31, 2015, consist of $215,782
short-term loans, $12,857 payable for assets purchased pursuant to FDI Agreement and $2,912 on-line training liability.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
NOTES PAYABLE
Notes
payable consists of the following:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Promissory
note payable, secured by vehicle underlying loan having carrying value of $6,133 at December 31, 2016, bearing interest at
1.9% per annum, due in monthly principal and interest payments of $523, maturing on December 5, 2017.
|
|
$
|
6,133
|
|
|
$
|
12,232
|
|
|
|
|
|
|
|
|
|
|
Less
amounts due within one year
|
|
|
6,133
|
|
|
|
6,099
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion of notes payable
|
|
$
|
—
|
|
|
$
|
6,133
|
|
As
of December 31, 2016 and 2015, principal payments on the notes payable are as follows:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
2016
|
|
$
|
—
|
|
|
$
|
6,099
|
|
2017
|
|
|
6,133
|
|
|
|
6,133
|
|
2018
|
|
|
|
|
|
|
—
|
|
2019
|
|
|
|
|
|
|
—
|
|
2020
|
|
|
|
|
|
|
—
|
|
Thereafter
|
|
|
|
|
|
|
—
|
|
|
|
$
|
6,133
|
|
|
$
|
12,232
|
|
11.
CONVERTIBLE DEBENTURES
Convertible
debentures consist of the following at December 31, 2016:
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
|
|
|
Reg.
|
|
5/3/2011
|
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
170,000
|
|
|
|
(2
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
2,687
|
|
|
|
(3
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
4,055
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
312,743
|
|
|
$
|
—
|
|
|
$
|
312,743
|
|
|
$
|
176,742
|
|
|
|
|
|
Convertible
debentures consist of the following at December 31, 2015:
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.
|
|
5/27/2011
|
|
|
10
|
%
|
|
$
|
125,000
|
|
|
$
|
(53,571
|
)
|
|
$
|
58,750
|
|
|
|
-
|
|
|
$
|
58,750
|
|
|
$
|
34,709
|
|
|
|
(1
|
)
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
140,000
|
|
|
|
(2
|
)
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
2,183
|
|
|
|
(3
|
)
|
2/10/2014
|
|
|
10
|
%
|
|
|
5,500
|
|
|
|
-
|
|
|
|
472
|
|
|
|
-
|
|
|
|
472
|
|
|
|
216
|
|
|
|
(4
|
)
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
-
|
|
|
|
2,743
|
|
|
|
-
|
|
|
|
2,743
|
|
|
|
4,158
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
371,965
|
|
|
$
|
-
|
|
|
$
|
371,965
|
|
|
$
|
181,266
|
|
|
|
|
|
(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 beneficial conversion feature of the convertible debenture at $53,517, its intrinsic value. A beneficial conversion
feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note
is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the
beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. 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. AND SUBSIDIARY
NOTES
TO 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/assigned.
|
|
|
|
The
remaining balance under this note of $93,459, inclusive of $34,709, was cancelled by mutual consent of the parties in February
2016. This figure is included in gain on cancellation of debt in the Company’s Statement of Operations.
|
|
|
(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, 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 interest
expense. The Company recognized the FMV of the related 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 beneficial conversion feature
of the convertible debenture at $4,286, which was accreted to interest expense over the period of the note.
|
|
|
(4)
|
This
line is comprised of the assignment of $5,500 of a previously issued convertible debenture. The notes are convertible at $0.37125
per share.
|
|
|
(5)
|
The
Company entered into three new debenture agreements upon sale/assignment of the original lenders. 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.
|
|
|
|
The
conversion price under the debentures is $0.37125 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.
|
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
12.
INCOME TAXES
The
components of the provision for income tax expense are as follows for the years ended:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Current
taxes
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Current
taxes
|
|
|
—
|
|
|
|
—
|
|
Change
in deferred taxes
|
|
|
—
|
|
|
|
82,112
|
|
Change
in valuation allowance
|
|
|
—
|
|
|
|
(82,069
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for income tax expense
|
|
$
|
—
|
|
|
$
|
43
|
|
The
following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31,
2016:
Deferred
tax assets:
|
|
|
|
Equity
based compensation
|
|
$
|
210,263
|
|
Allowance
for doubtful accounts
|
|
|
15,000
|
|
Net
operating loss carryforward
|
|
|
1,015,748
|
|
On-line
training certificate reserve
|
|
|
818
|
|
Total
deferred tax assets
|
|
|
1,241,829
|
|
Valuation
allowance
|
|
|
(1,239,309
|
)
|
|
|
|
|
|
Deferred
tax assets net of valuation allowance
|
|
|
2,520
|
|
|
|
|
|
|
Less
deferred tax assets – non-current, net of valuation allowance
|
|
|
2,330
|
|
|
|
|
|
|
Deferred
tax assets – current, net of valuation allowance
|
|
$
|
190
|
|
The
effective tax rate used for calculation of the deferred taxes as of December 31, 2016 was 37.63%. The Company has established
a valuation allowance against deferred tax assets of $1,239,309 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 99% 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 years ended are as
follows:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Statutory
tax rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State
tax, net of Federal benefits
|
|
|
3.63
|
%
|
|
|
3.63
|
%
|
Change
in valuation allowance
|
|
|
(37.63
|
)%
|
|
|
(37.63
|
)%
|
Effective
tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31,
2015, Restated:
Deferred
tax assets:
|
|
|
|
Equity
based compensation
|
|
$
|
97,276
|
|
Allowance
for doubtful accounts
|
|
|
9,520
|
|
Depreciation
and amortization timing differences
|
|
|
—
|
|
Net
operating loss carryforward
|
|
|
1,015,748
|
|
On-line
training certificate reserve
|
|
|
818
|
|
Total
deferred tax assets
|
|
|
1,123,362
|
|
Valuation
allowance
|
|
|
(1,120,842
|
)
|
|
|
|
|
|
Deferred
tax assets net of valuation allowance
|
|
|
2,520
|
|
|
|
|
|
|
Less
deferred tax assets – non-current, net of valuation allowance
|
|
|
2,330
|
|
|
|
|
|
|
Deferred
tax assets – current, net of valuation allowance
|
|
$
|
190
|
|
The
effective tax rate used for calculation of the deferred taxes as of December 31, 2015 was 34%. The Company has established a valuation
allowance against deferred tax assets of $1,120,842 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.
13.
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. 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 December 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.
14.
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, the Company and Trebor were 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 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 at no additional cost to the Company.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
addition, as previously disclosed, the Company, Trebor and other third parties, are each named as a co-defendants under an action
filed in March 2015 in the Circuit Court of Broward County under Case No. CACE15-03238 by the Estate of Ernesto Rodriguez, claiming
wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung
product. This claim falls outside the Company’s period of insurance coverage. Plaintiff has claims damages exceeding $1,000,000.
A default judgment was entered against Trebor in 2015 due to its failure to timely respond to the complaint. 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
believes the claim to be a Workers Compensation claim relating exclusively against other non-affiliated defendants and without
merit, and will aggressively defend this action and to appeal the default judgment. In the event Trebor is unable to overturn
the default judgment and the defendants are determined to be at fault, we would seek to allocate damages among all of the other
parties, including the plaintiff. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated due to
the undetermined validity of any claim or claims made by plaintiff and the mitigating factors among the parties. Therefore, the
Company has not recorded reserves and contingent liabilities related to this matter. However, in the future, as the case progress,
the Company may be required to record a contingent liability or reserve for these matters.
On
August 14, 2014, the Company entered into a new lease commitment. Terms of the new lease include thirty-seven-month term commencing
on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease
plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), which is approximately $2,000
per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing
on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased
to $4,626 per month with a 3% annual escalation throughout the amended term. We believe that the facilities are suitable for their
intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.
Base
rent expense, attributable to the Company’s headquarters facility totaled approximately $48,000 and $48,000 for the years
ended December 31, 2016 and 2015, respectively.
The
following is an estimate of future minimum rental payments required under our lease agreement on August 14, 2014 and as amended
December 1, 2016:
|
|
Operating
lease
|
|
year
1
|
|
$
|
49,879
|
|
year
2
|
|
|
55,933
|
|
year
3
|
|
|
57,611
|
|
year
4
|
|
|
59,339
|
|
year
5 and thereafter
|
|
|
238,633
|
|
|
|
$
|
461,395
|
|
15.
EQUITY AND EQUITY INCENTIVE PLAN
Royalties
expense – related parties
– The Company has Exclusive License Agreements 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. 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 years ended December 31, 2016 and 2015, as disclosed on the face of the Company’s Consolidated
Statements of Operations totaled $56,054 and $67,849, respectively. As of December 31, 2015, the Company was approximately 27
months in arrears on royalty payments due. In November 2016, the Company entered into a conversion agreement under which the Company
issued 10,000,000 shares of restricted common stock in satisfaction of $88,850 past due and payable to 940A. As of the date of
the conversion agreement, the Company was more than 31 months in arrears on its royalty payments totaling approximately $151,000.
In addition, 940A has agreed to forebear on any default under the License Agreement due to the Company’s remaining past
due amount for a period of three months from the effective date of the conversion agreement. The shares issued were valued at
$0.008885 per share, the closing price of the stock on the effective date of the conversion agreement. No default notice had been
received and prior to the conversion agreement.
BROWNIE’S
MARINE GROUP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, with an
exercise price of $1,350 per share and to-date all remain outstanding.
Effective
April 15, 2016, Trebor, the wholly-owned subsidiary of the Company, entered into an employment agreement with Mr. Purdon, a former
employee of Trebor and affiliate of the Company. Under the terms of the agreement Mr. Purdon agreed to provide business and sales
services to the Company through August 31, 2016. Wages due to Mr. Purdon were payable at the sole discretion of the Company in
shares of its restricted common stock at a price per share of $0.10 cents per share. Mr. Purdon received 360,000 shares of restricted
common stock for services performed under the agreement during 2016 which was valued at $36,000. Furthermore, as additional consideration
for the Company to enter into the agreement, Mr. Purdon tendered 28,403,252 shares of the Company’s common stock beneficially
owned by Mr. Purdon to the Company. The shares were retired and returned to the Company’s treasury without further consideration.
16.
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 were issued.
On April 29, 2016, the Board of Directors determined it 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, 56,669
shares to be issued are included in a reduction of shares payable as reflected on the equity (deficit) and balance sheet at December
31, 2016.
17.
SUBSEQUENT EVENTS
On
March 1, 2017, the Company and 940A entered into a conversion agreement. Under the agreement the Company issued 940A 4,587,190
shares of restricted common stock in satisfaction of $63,303.23, which represented all past due and payable amounts to 940A under
that certain Exclusive License Agreement by and between the parties as of March 1, 2017, As of the date of the agreement the Company
was more than 3 months in arrears on royalty payments due under the Exclusive License Agreement. The shares were issued at a price
per share of $0.0138, which exceeds the closing price of the Company’s common stock as reported on the OTC Markets on the
date immediately preceding the closing. The shares issued to the 940A were issued pursuant to an exemption from registration under
the Securities Act of 1933, as amended, in reliance on the exemption provided by Section 3(a)(9) of that act.