U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(mark one)

 

[X] Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2016

 

[  ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _______ to _______.

 

Commission File No. 333-99393

 

Brownie’s Marine Group, Inc.

(Name of Small Business Issuer in Its Charter)

 

Florida   90-0226181

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

     
3001 NW 25 th Avenue, Suite 1, Pompano Beach, Florida   33069
(Address of Principal Executive Offices)   (Zip Code)

 

(954) 462-5570
(Issuer’s Telephone Number, Including Area Code)

 

 
(Former Name, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Website, in any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated filer [  ]
     
  Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

There were 58,906,212 shares of common stock outstanding as of November 9, 2016.

 

 

 

     
 

 

PART I

Item 1. Financial Statements

 

Financial Information

 

BROWNIE’S MARINE GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    September 30, 2016     December 31, 2015  
ASSETS                
                 
Current assets                
Cash   $ 304,612     $ 141,822  
Accounts receivable, net of $16,000 and $11,000 allowance for doubtful accounts, respectively     9,969       59,474  
Accounts receivable - related parties     55,272       41,270  
Inventory     612,220       654,213  
Prepaid expenses and other current assets     97,171       58,012  
Other current assets - related parties           3,020  
Deferred tax asset, net – current           190  
Total current assets     1,079,244       958,001  
                 
Property, equipment, and leasehold improvements, net     66,142       85,712  
Deferred tax asset, net - non-current     2,520       2,330  
Other assets     6,649       6,649  
                 
Total assets   $ 1,154,555     $ 1,052,692  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
                 
Current liabilities                
Accounts payable and accrued liabilities   $ 270,204     $ 349,946  
Customer deposits and unearned revenue     27,917       25,238  
Royalties payable - related parties     152,868       152,546  
Other liabilities     209,421       231,551  
Other liabilities and accrued interest - related parties           84,500  
Convertible debentures, net     312,743       371,965  
Notes payable     5,675       6,099  
Notes payable - related parties           11,098  
Total current liabilities     978,828       1,232,943  
                 
Long-term liabilities                
Notes payable - long-term portion     1,482       6,133  
                 
Total liabilities     980,310       1,239,076  
                 
Commitments and contingencies                
                 
Stockholders’ equity (deficit)                
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding     425       425  
Common stock; $0.0001 par value; 1,000,000,000 shares authorized; and 58,906,212 and 86,825,138 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively     5,890       8,681  
Common stock payable; $0.0001 par value; 138,941 and 195,610 shares, respectively     14       20  
Additional paid-in capital     8,704,928       8,665,565  
Accumulated deficit     (8,537,012 )     (8,861,075 )
Total stockholders’ equity (deficit)     174,245       (186,384 )
                 
Total liabilities and stockholders’ equity (deficit)   $ 1,154,555     $ 1,052,692  

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

  2  
 


BROWNIE’S MARINE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Three Months Ended
September 30,
    Nine months ended
September 30,
 
    2016     2015     2016     2015  
                         
Net revenues                                
Net revenues   $ 597,882     $ 823,868     $ 1,300,414     $ 1,585,863  
Net revenues - related parties     240,102       282,047       574,862       695,773  
Total net revenues     837,984       1,105,915       1,875,276       2,281,636  
                                 
Cost of net revenues                                
Cost of net revenues     517,123       632,896       1,278,806       1,438,669  
Royalties expense - related parties     20,714       27,718       46,332       56,138  
Total cost of net revenues     537,837       660,614       1,325,138       1,494,807  
                                 
Gross profit     300,147       445,301       550,138       786,829  
                                 
Operating expenses                                
Selling, general and administrative     161,929       193,608       474,944       531,982  
Research and development costs     10       931       1,425       1,897  
Total operating expenses     161,939       194,539       476,369       533,879  
                                 
Income from operations     138,208       250,762       73,769       252,950  
                                 
Other (income) expense, net                                
Debt settlement                   (233,825 )      
Other (income) expense, net     (3,173 )     (6,494 )     (40,292 )     (4,264 )
Interest expense     7,734       9,269       23,251       27,800  
Interest expense - related parties     499       489       572       693  
Total other (income) expense, net     5,060       3,264       (250,294 )     24,229  
                                 
Net income before provision for income taxes     133,148       247,498       324,063       228,721  
                                 
Provision for income tax expense                       43  
                                 
Net income   $ 133,148     $ 247,498     $ 324,063     $ 228,678  
                                 
Basic income per common share   $ 0.00     $ 0.00     $ 0.00     $ 0.00  
Diluted income per common share   $ 0.00     $ 0.00     $ 0.00     $ 0.00  
                                 
Basic weighted average common shares outstanding     58,773,434       78,368,659       69,481,418       73,003,680  
Diluted weighted average common shares outstanding     63,618,438       127,334,088       74,326,422       120,329,067  

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

  3  
 

 

BROWNIE’S MARINE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

 

    Preferred stock     Common stock     Common
stock payable
    Additional
paid-in
    Accumulated     Total
stockholders
Equity’
 
    Shares     Amount     Shares     Amount     Shares     Amount     capital     deficit     (deficit)  
                                                       
Balance, January 1, 2016     425,000     $ 425       86,825,138     $ 8,681       195,610     $ 20     $ 8,665,565     $ (8,861,075 )   $ (186,384 )
                                                                         
Payment of related party interest to stock                 124,326       13                   559             572  
Return of prior employee compensation     __     __     (28,403,252 )     (2,840 )     (56,669 )     (6 )     2,840             (6 )
Conversion of employee compensation payable to stock     __     __     360,000       36                   35,964             36,000  
                                                                         
Net Income                                               324,063       324,063  
                                                                         
Balance, September 30, 2016
    425,000     $ 425       58,906,212     $ 5,890       138,941     $ 14     $ 8,704,928     $ (8,537,012 )   $ 174,245  

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

  4  
 

 

BROWNIE’S MARINE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Nine months ended September 30,  
    2016     2015  
             
Cash flows provided by operating activities:                
Net income   $ 324,063     $ 228,678  
Adjustments to reconcile net income (loss) to cash provided by operating activities:                
Depreciation     16,212       16,200  
Amortization of leasehold improvements     10,945       9,819  
Gain on cancellation of debt     (233,825 )      
Shares issued for interest expenses     572        
Shares issued for payroll compensation     36,000        
Change in deferred tax asset, net           43  
Changes in operating assets and liabilities:                
Change in accounts receivable, net     49,506       (72,855 )
Change in accounts receivable - related parties     (14,002 )     19,824  
Change in inventory     41,993       7,288  
Change in prepaid expenses and other current assets     (40,014 )     (75,125 )
Change in other current assets - related parties     3,020       (2,109 )
Change in other assets           (339 )
Change in accounts payable and accrued liabilities     11,693       (55,016 )
Change in customer deposits and unearned revenue     2,679       5,443  
Change in other liabilities     (22,135 )     (956 )
Change in other liabilities and accrued interest - related parties           38,188  
Change in royalties payable - related parties     323       27,175  
Net cash provided by operating activities     187,030       146,258  
                 
Cash flows from investing activities:                
Purchase of fixed assets     (7,586 )     (12,205 )
Net cash used in investing activities     (7,586 )     (12,205 )
                 
Cash flows from financing activities:                
Principal reduction on convertible debentures     (472 )      
Principal payments on loan payable     (5,084 )     (805 )
Principal payments on notes payable           (7,744 )
Proceeds from notes payable – related parties           27,000  
Principal payments on note payable – related parties     (11,098 )     (23,319 )
Net cash (used in) provided by financing activities     (16,654 )     (4,868 )
                 
Net change in cash     162,790       129,185  
                 
Cash, beginning of period     141,822       19,188  
                 
Cash, end of period   $ 304,612     $ 148,373  

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

  5  
 

 

BROWNIE’S MARINE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Nine months ended September 30,  
    2016     2015  
Supplemental disclosures of cash flow information:                
Cash paid for interest   $ 954     $ 3,020  
                 
Cash paid for income taxes   $     $  
                 
Supplemental disclosures of non-cash investing activities and future operating activities:                
                 
Conversion of convertible debentures to stock   $     $ 4,680  
                 
Conversion of accrued payroll to stock - related party   $     $ 40,500  
                 
Conversion of accrued payroll to stock   $ 36,000     $  
                 
Conversion of accrued interest on note payable - related party to stock   $ 572     $ 692  
                 
Conversion of accrued interest and fees on convertible debentures to stock   $     $ 6,280  
                 
Gain on debt cancellation   $ 234,678     $  

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

  6  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Description of business and summary of significant accounting policies

 

Description of business –Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company”, “we” or “BWMG”) designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, and scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. The Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”.

 

Basis of Presentation – The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included.

 

The condensed consolidated financial statements as of September 30, 2016 and for the three and nine month periods ended September 30, 2016 and 2015 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2016, and the results of operations for the three and nine month periods ended September 30, 2016 and 2015, the statement of stockholders’ equity for the nine months ended September 30, 2016 and the statements of cash flows for the nine month periods ended September 30, 2016 and 2015. The condensed consolidated results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the entire year. The condensed consolidated balance sheet as of December 31, 2015 has been derived from the Company’s audited financial statements for the year ended December 31, 2015. While management of the Company believes that the disclosures presented are adequate to make the information not misleading, these condensed consolidated financial statements should be read in conjunction with our audited financial statements and the footnotes thereto for the fiscal year ended December 31, 2015 as filed with the Securities and Exchange Commission as part of the Company’s Form 10-K which was filed on March 29, 2016.

 

Definition of fiscal year – The Company’s fiscal year end is December 31.

 

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications – Certain reclassifications may have been made to the 2015 financial statement amounts and disclosures to conform to the 2016 financial statement presentation.

 

Going Concern – The accompanying condensed unaudited consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. Although profitable for the years ended December 31, 2015 and 2014, we have frequently incurred losses since 2009.

 

The Company is behind on payments due for matured convertible debentures, related parties notes payable, accrued liabilities and interest – related parties, and certain vendor payables. The Company is handling delinquencies on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue.

 

Because the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about BWMG’s ability to continue as a going concern within one year from date the financial statements are issued. Therefore, the Company may need to raise additional funds and is currently exploring alternative sources of financing. BWMG has issued a number of convertible debentures in the past as an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or other securities, and obtaining some short term loans. The Company has previously paid for some legal and consulting services with restricted stock to maximize working capital and intends to continue this practice when possible. In addition, the Company implemented some cost saving measures and will continue to explore more to reduce operating expenses.

 

  7  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

If BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

Cash and equivalents – Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.

 

Accounts receivable – Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for doubtful accounts is estimated based on historical customer experience and industry knowledge.

 

Inventory – Inventory is stated at the lower of cost or net realizable value. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when indicated.

 

Property and, Equipment and Leasehold Improvements – Property and, Equipment and Leasehold Improvements are stated at cost less accumulated depreciation and/or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated useful lives of the assets or the lease, which are primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).

 

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

 

Revenue recognition – Revenues from product sales are recognized when the Company’s products are shipped or when service is rendered. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost of each contract. This method is used because management considers the percentage of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts.

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Revenue and costs incurred for time and material projects are recognized as the work is performed.

 

Product development costs – Product development expenditures are charged to expenses as incurred.

 

Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the three months ended September 30, 2016 and 2015, was $313 and $138 respectively. Advertising and trade show expense incurred for the nine months ended September 30, 2016 and 2015, was $3,550 and $2,842, respectively.

 

Customer deposits and returns policy – The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice.

 

  8  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Income taxes – The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

 

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Comprehensive income – The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods presented.

 

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is determined through use of the quoted stock price.

 

Beneficial conversion features on convertible debentures – The fair value of the stock upon which beneficial conversion feature (BCF) computations, as applicable, was determined through use of the quoted stock price.

 

Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

 

Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

  9  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.

 

At September 30, 2016, and December 31, 2015, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments.

 

Earnings per common share – Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings per share are computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive and common stock equivalent shares, if any, outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. Potentially dilutive shares included in dilutive earnings per share totaled 4,845,004 shares for the three months and nine months ended September 30, 2016. Potentially dilutive shares included in dilutive earnings per share totaled 48,965,429 shares and 47,325,387 shares for the three months and nine months ended September 30, 2015, respectively.

 

New accounting pronouncements – The Company believes there was no new accounting guidance adopted, but not yet effective that either has not already been disclosed in prior reporting periods or is relevant to the readers of BWMG’s financial statements.

 

2. INVENTORY

 

Inventory consists of the following as of:

 

    September 30, 2016     December 31, 2015  
             
Raw materials   $ 383,152     $ 422,115  
Work in process            
Finished goods     229,068       232,098  
    $ 612,220     $ 654,213  

 

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

    September 30, 2016     December 31, 2015  
             
Prepaid inventory   $ 37,939     $ 42,076  
Prepaid insurance     9,442       8,819  
Prepaid fixed assets     8,600        
Prepaid legal     35,000        
Prepaid other     6,190       7,117  
    $ 97,171     $ 58,012  


  10  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consists of the following as of:            
             
    September 30, 2016     December 31, 2015  
             
Factory and office equipment   $ 62,633     $ 62,633  
Tooling     59,149       59,149  
Computer equipment and software     31,519       23,932  
Vehicles     44,160       44,160  
Leasehold improvements     43,779       43,779  
      241,240       233,653  
Less: accumulated depreciation and amortization     (175,098 )     (147,941 )
    $ 66,142     $ 85,712  

 

Depreciation and amortization expense totaled $9,197 and $27,157 for the three and nine month periods ending September 30, 2016 and $8,754 and $26,019 for the three and nine month periods ending September 30, 2015, respectively.

 

5. OTHER ASSETS

 

Other assets of $6,649 at September 30, 2016 and December 31, 2015, respectively, consisted solely of refundable deposits.

 

6. CUSTOMER CREDIT CONCENTRATIONS

 

The Company sells to three (3) entities owned by the brother of Robert Carmichael, the Company’s Chief Executive Officer, and three (3) companies owned or controlled by the Chief Executive Officer as further discussed in Note 7. RELATED PARTIES TRANSACTIONS. Combined sales to these six (6) entities for the three months ended September 30, 2016 and 2015, represented 28.64% and 25.50% respectively, of total net revenues. Combined sales to these six (6) entities for the nine months ended September 30, 2016 and 2015, represented 30.65% and 30.49% respectively, of total net revenues.

 

7. RELATED PARTIES TRANSACTIONS

 

Notes payable – related parties

 

Notes payable – related parties consists of the following at September 30, 2016 and December 31, 2015:

 

    September 30, 2016     December 31, 2015  
Promissory note payable to Chief Executive Officer, unsecured, payable in twelve monthly principal payments of $2,250 beginning September 15, 2015, with interest at 10% per annum with payments monthly in shares of stock based on the monthly weighted average price of the stock, maturing May 15, 2016.   $     $ 11,098  
                 
Less amounts due within one year           (11,098 )
                 
Long-term portion of notes payable – related parties   $     $  
                 
Current portion of notes payable – related parties   $     $ 11,098  

 

  11  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Effective April 22, 2015, the Company issued Mr. Carmichael, Chief Executive Officer of the Company, an unsecured promissory note in consideration for a $27,000 advance. For the three months ended September 30, 2016 the Company converted 108,274 shares of accrued interest on the note payable. For the nine months ended September 30, 2016 the Company converted $572 of accrued interest on the note payable – related party into 124,326 shares of restricted stock.

 

Net revenues and accounts receivable – related parties – The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers with similar sales volume. Combined net revenues from these entities for three months ended September 30, 2016 and 2015, was $234,367 and $280,786, respectively. Combined net revenues from these entities for nine months ended September 30, 2016 and 2015, was $566,607 and $652,124 respectively. Accounts receivable from these three entities at September 30, 2016, was $53,126 Accounts receivable from the three entities at December 31, 2015, was $32,880.

 

The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”), 3D Buoy and 940 Associates, Inc., affiliated with the Company’s Chief Executive Officer. Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended to Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are consistent with those extended to Brownie’s strategic partners. Strategic partner terms on a per order basis include promotion of BWMG’s technologies and “Brownie’s” brand, offered only on product or services not offered for resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services. BGL is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and “Brownie’s” brand in the yachting and exploration community world-wide through its operations. Combined net revenues from these entities for three months ended September 30, 2016, and 2015, were $5,647 and $1,261, respectively. Combined net revenues from these entities for nine months ended September 30, 2016, and 2015, were $8,255 and $43,649 respectively. Accounts receivable from these three entities at September 30, 2016 was $2,146 Accounts receivable from these three entities at December 31, 2015 was $8,391.

 

Royalties expense – related parties – The Company has an Exclusive License Agreement with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. This license agreement calls for the Company to pay 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three months and nine months ended September 30, 2016 and 2015, is disclosed on the face of the Company’s Condensed Consolidated Statements of Operations. As of September 30, 2016, the Company was approximately 30 months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.

 

Equity based compensation to employee –The Company had an employment compensation agreement with Alexander F. Purdon to pay his salary in restricted shares of the Company’s common stock in lieu of cash. This arrangement went into effect in April of 2016, was retroactive to January 1, 2016, and terminated August 31, 2016. For the nine months ended September 30, 2016, stock based compensation to Mr. Purdon was $36,000.

 

Other liabilities and accrued interest– related parties

 

Other liabilities and accrued interest– related parties consist of the following at:

 

    September 30, 2016     December 31, 2015  
             
Year-end 2012 bonus payable to Chief Executive Officer   $     $ 67,000  
                 
Year-end 2012 bonus payable to employee           17,500  
    $     $ 84,500  

 


On April 29, 2016 the Board of Directors determined that is was not in the best interest of either the Company or the recipients to pay bonuses based on the current and foreseeable share price and cancelled the bonuses payable. The results of this action are included in a reduction of shares payable as reflected on the Statement of Stockholders’ Deficit and the Balance Sheet.

 

  12  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consists of the following as of:

 

    September 30, 2016     December 31, 2015  
             
Accounts payable trade   $ 53,972     $ 59,916  
Accrued payroll & fringe benefits     28,918       27,245  
Accrued year-end bonuses           45,000  
Accrued payroll taxes & withholding     18,267       36,520  
Accrued interest     169,047       181,265  
    $ 270,204     $ 349,946  

 


Balances due certain vendors are in arrears to varying degrees. The Company is handling all delinquent accounts on a case-by-case basis.

 

9. OTHER LIABILITIES

 

Other liabilities consist of the following as of:

 

    September 30, 2016     December 31, 2015  
             
Short-term loans   $ 190,787     $ 215,782  
Asset purchase agreement payable     12,857       12,857  
On-line training liability     5,777       2,912  
    $ 209,421     $ 231,551  

 

The short-term loans are comprised of two (2) loans due on demand from unrelated parties. The loans have no other stated terms except one for $200,000 indicated it was for settlement of debenture debt. Therefore, the Company used the proceeds from that loan toward settlement of convertible debentures.

 

On-line training certificates are provided with all hookah units sold. The training certificates entitle the holder to an on-line interactive course at no additional charge to the holder. The number of on-line training certificates issued per unit is the same as the number of divers the unit as sold is designed to accommodate (i.e., a three diver unit configuration comes with three on-line training certificates). The certificates have eighteen-month redemption from the time customer purchases the unit before expiration. The Company owes the on-line training vendor an agreed upon negotiated rate for on-line certificates redeemed prior to expiration, and payment is due upon redemption. The Company estimates the on-line training liability based on a historical redemption rate of approximately 10%. The Company continues to monitor and maintain a reserve for certificate redemption that approximates the historical redemption rate.

 

10. NOTES PAYABLE

 

Notes payable consists of the following as of September 30, 2016 and December 31, 2015:

 

    September 30, 2016     December 31, 2015  
Promissory note payable, secured by vehicle underlying loan having carrying value of $11,385 and $14,117 at September 30, 2016 and December 31, 2015, respectively, bearing interest at 1.9% per annum, due in monthly principal and interest payments of $523, maturing on December 5, 2017   $ 7,157     $ 12,232  
                 
Less amounts due within one year     (5,675 )     (6,099 )
                 
Long-term portion of notes payable   $ 1,482     $ 6,133  

 


  13  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2016, principal payments on the notes payable are as follows:

 

2016   $ 1,025  
2017     6,132  
2018      
2019      
2020      
Thereafter      
         
    $ 7,157  

11. CONVERTIBLE DEBENTURES

 

Convertible debentures consist of the following at September 30, 2016 and December 31, 2015:

 

Origination Date   Maturity Date   Interest Rate     Origination Principal     Origination Discount     September 30, 2016 Debenture Balance     September 30, 2016 Accrued Interest     December 31, 2015 Debenture Balance     December 31, 2015 Accrued Interest     Ref.  
11/27/2010   5/27/2011     10 %     125,000       (53,517 )   $     $     $ 58,750     $ 34,709       (1 )
5/3/2011   5/5/2012     10 %     300,000       (206,832 )     300,000       162,500       300,000       140,000       (2 )
8/31/2011   8/31/2013     5 %     10,000       (4,286 )     10,000       2,561       10,000       2,183       (3 )
2/10/2012   2/10/2014     10 %     5,500                         472       216       (4 )
2/10/2012   2/10/2014     10 %     39,724             2,743       3,986       2,743       4,157       (4 )
                                $ 312,743     $ 169,047     $ 371,965     $ 181,265          

 

Reference numbers in right hand column of table entitled Ref. refer to paragraphs with corresponding numbers that immediately follow this paragraph.

 

(1) The Company purchased in exchange for convertible debenture exclusive rights for license of certain intellectual property from an unrelated party. The parties agreed to a royalty of 2.5% of net revenues generated from the sale, sub-license or use of the technology or a reasonable negotiated rate based on similar invention. The debenture was convertible to common shares of the Company at May 27, 2011, along with accrued interest at the option of the lender. Conversion price per share is 30% discount as determined from the weighted average of the preceding 12 trading days’ closing market price. The Company valued the BCF of the convertible debenture at $53,517, its intrinsic value. The Company accreted the discount to the convertible debenture and will recognize interest expense through repayment in full or conversion. Because there was no assurance of success and the invention was still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense during the year ended 2010. Both parties agreed to confidentiality regarding the invention during the pre-prototype stage. In addition, the Company agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services.

 

On February 10, 2012, the holder of this debenture entered into an agreement with a third party to sell/assign the $125,000 principal balance, plus accrued interest. The purchase was to be in installments with transfer/assignment of the debenture upon payment, referred to as “Closings”. The first Closing was on or about February 15, 2012 for $7,500, with that amount assigned/transferred. The second Closing, occurred 90 days after the first closing for $11,750 paid/assigned. All subsequent Closings were to be for $11,750 and occur in 30 day increments after the second closing. This was to continue until the full principal balance of $125,000, plus accrued interest is purchased or assigned. The holder of the convertible note has voluntarily dissolved and ceased operation. In February 2016 both parties agreed to cancel the agreement and all remaining principal and interest balances.

 

(2) On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 300,000 and 600,000 warrants at $337.50 and $472.50 per share (after restatement for 1 for -1,350- reverse stock split), respectively. As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $206,832, which was recorded as a discount against the debenture. The Company accreted the discount to the convertible debenture through maturity and will accrue interest expense until paid in full or converted. Before discount, the Company determined the FMV of the warrants as $45,000 using the Black-Scholes valuation model.

 

  14  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(3) The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $4,286, which was accreted to interest expense.

 

(4) The Company entered into three new debenture agreements upon sale or assignment by the original lender. Because the stated terms of the new debenture agreement and principal amounts were significantly different from the original debenture, including analysis of the value of the beneficial conversion feature at the assignment or purchase date, the transactions are treated as extinguishment of the old debentures and recorded as new for accounting purposes.

 

12. AUTHORIZATION OF PREFERRED STOCK

 

During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business Corporation Act. Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock. As of September 30, 2016, and December 31, 2015, the 425,000 shares of preferred stock are owned by the Company’s Chief Executive Officer. The preferred shares have 250 to 1 voting rights over the common stock, and are convertible into 31,481 shares of common stock. The preferred stock votes with the Company’s common stock, except as otherwise required under Florida law. Accordingly, Mr. Carmichael will have approximately 55% of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.

 

13. COMMITMENTS AND CONTINGENCIES

 

From time to time the Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability insurance, which provided coverage for each claim up to $1,000,000. During the third quarter of 2014, the Company did not renew its product liability insurance since the renewal policy amount was cost prohibitive. The Company is currently seeking a new insurance carrier or alternative means to satisfy this potential liability exposure, as well as to fulfil the sales terms of some of our customers, which require the insurance coverage. The Company was a co-defendant under an action filed by an individual in June 2013 in the Circuit Court of Broward County claiming personal injury resulting from use of a Brownie’s Third Lung. Plaintiff claimed damages in excess of $1,000,000. This matter was settled during the three months ended September 30, 2016 by the Company’s insurance carrier.

 

As previously disclosed, we are co-defendants under an action filed March 2015, in the Circuit Court of Broward County claiming personal injury resulting from the use of a Brownie’s Third Lung product. This claim falls outside the Company’s period of insurance coverage. As a result of a miscommunication with legal counsel a default has been entered against the Company in this action for failing to file a timely response. The Company has obtained different legal representation in this matter and is now attempting to have the default set aside. The Company still believes the claim to be a Workers Compensation claim relating exclusively against another defendant and without merit, and plans to aggressively defend this action. See “Foot Note 17. Subsequent Events.”

 

On August 14, 2014, the Company entered into a new lease commitment. Terms of the new lease include thirty-seven month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment.

 

  15  
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Base rent expense attributable to the Company’s headquarters facility totaled approximately $12,000 and $12,000 for the three-month periods ending September 30, 2016 and 2015 and $36,000 and $36,000 for the nine-month periods ending September 30, 2016 and 2015, respectively.

 

Future minimum rental payments required under our operating lease agreement are as follows:

 

Year 1   $ 48,000  
Year 2      
Year 3      
Year 4      
Year 5      
    $ 48,000  

 

14. EQUITY INCENTIVE PLAN

 

On August 22, 2007, the Company adopted an Equity Incentive Plan (the “Plan”). Under the Plan, Stock Options may be granted to employees, directors, and consultants in the form of Incentive Stock Options or Nonstatutory Stock Options. Stock Purchase Rights, time vested and/performance invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan. The initial maximum number of shares that may be issued under the Plan shall be 297 shares, and no more than 75 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period. Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company. The term of the Plan shall be ten years. The Board of Directors may amend, alter, suspend, or terminate the Plan at any time. All 297 options were issued under the plan prior to January 1, 2010, and to-date all remain outstanding.

 

15. EQUITY BASED INCENTIVE/RETENTION BONUSES

 

On November 2, 2012, the Board of Directors consented to grant equity based bonuses to certain key employees and consultants as an incentive to retain their services. Stock incentive bonuses were to vest, and be paid out on May 2, 2013, contingent upon continued employment or service. The stock bonus price per share was calculated based on last closing price as reported on per the OTCBB prior to the grant date for a total of $75,100. Shares were set aside and reserved for this transaction. The Company accrued operating expense ratably from the time of the awards through May 2, 2013, when vested. Of the 61,852 vested shares, only 5,185 have been issued to-date. On April 29, 2016 the Board of Directors determined that is was not in the best interest of either the Company or the recipients to pay bonuses based on the current and foreseeable share price and cancelled the bonuses payable. The results of this action are included in a reduction of shares payable as reflected on the statement of stockholders’ deficit and the balance sheet.

 

16. INTEREST EXPENSE NON-RELATED PARTIES AND OTHER EXPENSE (INCOME), NET

 

For the three months ended September 30, 2016, non-related parties interest expense of $7,734 is comprised of $7.695 interest on convertible debentures and $39 interest on notes payable and other interest. For the three months ended September 30, 2015, non-related parties interest expense of $9,269 is comprised of $9,177 interest on convertible debentures and $77 interest on notes payable and other interest.

 

For the nine months ended September 30, 2016, non-related parties interest expense of $23,251 is comprised of $23,093 interest on convertible debentures and $158 interest on notes payable and other interest. For the nine months ended September 30, 2015, non-related parties interest expense of $27,800 is comprised of $27,531 interest on convertible debentures and $269 interest on notes payable and other interest.

 

For the three months ended September 30, 2016, $3,173 other income, net is comprised primarily of $2,273 from the expiration of online training liability certificates and no other individually significant items. For the three months ended September 30, 2015, $6,494 other income, net is comprised of $7,200 legal settlement receivable and no other individually significant items.

 

For the nine months ended September 30, 2016, $233,825 was recognized in debt settlement and was comprised primarily of $93,459 cancelation of a convertible debenture and its interest, $140,366 cancelation of an employee bonus payable, other income of $40,292 consisted primarily of $14,970 royalty income, $13,605 from the expiration of online training liability certificates, $2,009 insurance premium refund, $6,617 reconciliation adjustments and no other individually significant items. For the nine months ended September 30, 2015, $4,264 other income, net is comprised primarily of $7,200 legal settlement, $3,471 royalty income on licensed patents, $1,800 sales of fixed assets, $2,930 other income, net of individually insignificant items and is partially offset by $11,137 insurance expense audit adjustments.

 

17. SUBSEQUENT EVENTS

 

As discussed under Footnote 13 “Commitments and Contingencies”, we are co-defendants under an action filed March 2015, in the Circuit Court of Broward County claiming personal injury resulting from the use of a Brownie’s Third Lung product. As a result of a miscommunication with legal counsel a default has been entered against the Company in this action for failing to file a timely response. The Company has obtained different legal representation in this matter and attempted to have the default set aside. On November 2, 2016, the court granted plaintiff’s motion for sanctions against our company for frivolous litigation relating to our attempt to have the matter dismissed and granted the plaintiff’s motion to strike our motion for summary judgment due to our initial default. The Company still believes the claim to be a Workers Compensation claim relating exclusively against another defendant and without merit, and plans to aggressively defend this action.

 

  16  
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Introductory Statements

 

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.

 

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 in Pompano Beach, Florida. The Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”. The Company’s website is www.browniesmarinegroup.com . Information contained on the website is not 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.

 

Results of Operations for the Three Months Ended September 30, 2016, as Compared to the Three Months Ended September 30, 2015

 

Net revenues . For the three months ended September 30, 2016, we had net revenues of $837,984 as compared to net revenues of $1,105,915 for the three months ended September 30, 2015, a decrease of $267,931 or 24% The decrease is primarily attributable to a decline in high pressure sales. Overall sales of hookah systems and related products were up approximately $21,000 for the third quarter of 2016, compared to the third quarter of 2015. Sales in tankfill systems and related products were down by approximately $298,000 for the three months ended September 30, 2016 as compared to same period in 2015. The decline in tankfill sales is primarily attributable to a single large tankfill sale in 2015 not repeated in 2016.

 

Cost of net revenues . For the three months ended September 30, 2016, we had cost of net revenues of $537,837 as compared with cost of net revenues of $660,614 for the three months ended September 30, 2015, a decrease of $122,777 or 19%. The decrease during the third quarter ended September 30, 2016 compared to third quarter ended September 30, 2015, is primarily attributable to a decrease in net revenues as discussed above coupled with the decrease in royalties expense.

 

Gross profit . For the three months ended September 30, 2016, we had a gross profit of $300,147 as compared to gross profit of $445,301 for the three months ended September 30, 2015, a decrease of $145,154 or 33%. The decrease in gross profit is primarily attributable to the decline in total net revenues for the three months ended September 30, 2016, as compared to same period in 2015.

 

Operating expenses . For the three months ended September 30, 2016, we had operating expenses of $161,929 as compared to operating expenses of $194,539 for the three months ended September 30, 2015, a decrease of $32,600 or 17%. The decrease is predominantly a result of a reduction of the workforce and associated taxes, insurances and benefits between the third quarter of 2016 and the third quarter 2015.

 

  17  
 

 

Other (income) expense, net . For the three months ended September 30, 2016, we had other expense, net of $5,060 as compared to other expense, net of $3,264 for the three months ended September 30, 2015, an increase of $1,796. This account is comprised of other (income) expense, net; and interest expense. Other (income) expense, net, is comprised of transactions that are generally of a non-recurring nature. The $1,796 overall difference between periods is primarily comprised of no individually significant items in the third quarter of 2016. Other income of $3,264 in the third quarter of 2015 was comprised of no individually significant items. Interest expense decreased by $1,535 reflecting a decline in notes payable between the periods.

 

Net Income . For the three months ended September 30, 2016, we had net income of $133,148 as compared to net income of $247,498 for the three months ended September 30, 2015, a decrease in net income of $114,350 or 46%. The decrease in net income is primarily attributable to the decrease in net revenues as discussed above.

 

Results of Operations for the Nine months ended September 30, 2016, as Compared to the Nine months ended September 30, 2015

 

Net revenues . For the nine months ended September 30, 2016, we had net revenues of $1,875,276 as compared to net revenues of $2,281,636 for the nine months ended September 30, 2015, a decrease of $406,360 or 18%. While sales of hookah systems were relatively flat for the period, the decrease is primarily attributable to a single large tankfill sale in 2015. There was no similar tankfill transaction in 2016. Overall sales of hookah systems and related products were up approximately $8,700 for the first three quarters of 2016, compared to the first three quarters of 2015. Sales in tankfill systems and related products were down by approximately $403,000 for the nine months ended September 30, 2016 as compared to same period in 2015 primarily due to a single large tankfill sale in 2015 not repeated in 2016.

 

Cost of net revenues . For the nine months ended September 30, 2016, we had cost of net revenues of $1,325,138 as compared with cost of net revenues of $1,494,807 for the nine months ended September 30, 2015, a decrease of $169,669 or 11%. The decrease during the first three quarters ended September 30, 2016 compared to first three quarters ended September 30, 2015, is primarily attributable to a decrease in material costs of approximately $159,863 due to the decrease in net revenues and a sales related reduction in royalty expense.

 

Gross profit . For the nine months ended September 30, 2016, we had a gross profit of $550,138 as compared to gross profit of $786,829 for the nine months ended September 30, 2015, a decrease of $236,691 or 30%. The decrease in gross profit is primarily attributable to the decline in total net revenues for the nine months ended September 30, 2016, as compared to same period in 2015.

 

Operating expenses . For the nine months ended September 30, 2016, we had operating expenses of $476,369 as compared to operating expenses of $533,879 for the nine months ended September 30, 2015, a decrease of $57,510 or 11%. The decrease is predominantly a result of a reduction of the workforce and associated taxes, insurances and benefits between the first three quarters of 2016 and the first three quarters of 2015.

 

Other (income) expense, net . For the nine months ended September 30, 2016, we had other income, net of $250,294 as compared to other expense, net of $24,229 for the nine months ended September 30, 2015, an increase of $274,523. This account is comprised of other (income) expense, net; and interest expense. Other (income) expense, net, is comprised of transactions that are generally of a non-recurring nature. The $274,523 overall difference between periods is primarily comprised of the $93,459 debt settlement of a convertible debenture and its associated interest and the $140,366 from the cancelation of incentive bonuses payable in the second quarter of 2016. Other (income) expense of $24,229 for the nine months ended September 30, 2015, was comprised of no individually significant items. Interest expense decreased by $4,670 reflecting a decline in notes payable between the periods.

 

Net Income . For the nine months ended September 30, 2016, we had net income of $324,063 as compared to net income of $228,678 for the nine months ended September 30, 2015, an increase in net income of $95,385. The increase in net income is primarily attributable to the $93,459 in other income recognized in the write-off of a convertible debenture and $140,366 cancelation of incentive bonuses as described above.

 

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Liquidity and Capital Resources

 

Changes in the Company’s working capital at September 30, 2016 from December 31, 2015 are predominately due to the cancelation of debt from convertible debentures and incentive retention bonuses. As of September 30, 2016, the Company had cash and current assets (primarily consisting of inventory) of $1,079,244 and current liabilities of $978,828 or a current ratio of 1.1 to 1. This represents a working capital surplus of $100,416. This compares to a working capital deficit of $274,942 at December 31, 2015.

 

The condensed unaudited 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, 2014 and 2015 and for the three and nine-month periods ending September 30, 2016, we have otherwise incurred annual losses since 2009, and expect we may have more losses in future periods.

 

The Company is behind on payments due for matured convertible debentures; related party 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.

 

The Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations. This raises substantial doubt as to our 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 and 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.

 

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 condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

Certain Business Risks

 

The Company is subject to various risks, which may materially harm its business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this report before deciding to purchase the Company’s common stock. These are not the only risks and uncertainties that the Company faces. 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.

 

Although we had net income of $324,063 (inclusive of $250,294 in non-recurring other income) and $229,610 for the nine months ended September 30, 2016 and year ended December 31, 2015, respectively, we anticipate that losses may occur in the foreseeable future. Additionally, the Company has negative cash flows from operations, is behind on payments due for matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, 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. This raises a substantial doubt about our ability to continue as a going concern. Our continued existence is dependent upon generating working capital and obtaining adequate new debt or equity financing. Because of our historical operational losses, we may not have working capital to permit us to remain in business during the twelve- month period following the date of the financial statements included herein, without improvements in our cash flow from operations or new financing. Working capital limitations continue to impinge on our day-to-day operations, thus contributing to continued operating losses.

 

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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 September 30, 2016, the outstanding principal balance of these debentures was $312,743. The debentures convert under various conversion formulas, many of which may be 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 Over-the-Counter 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.

 

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We require additional personnel and could fail to attract or retain key personnel

 

We are currently utilizing the services of professional consultants in the absence of a Chief Financial Officer and Chief Operations Officer. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or Chief Operations Officer 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 intellectual property and enforce protection would 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 affect 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 beyond current levels, 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 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.

 

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Bad weather conditions 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 credit worthiness 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. As previously disclosed, we are co-defendants under an action filed March 2015, in the Circuit Court of Broward County claiming personal injury resulting from the use of a Brownie’s Third Lung product. This claim falls outside the Company’s period of insurance coverage.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not Applicable to Smaller Reporting Company.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. The Company’s management, under the supervision and with the 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 September 30, 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 September 30, 2016, based on the criteria established in 2013 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 September 30, 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.

 

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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 Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting as defined in Rule 13a-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.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

See Note 13 - Commitments and Contingencies to the financial statements included in this report for a discussion of outstanding litigation proceedings.

 

As disclosed under Note 13, we are co-defendants under an action filed March 2015, in the Circuit Court of Broward County claiming personal injury resulting from the use of a Brownie’s Third Lung product. As a result of a miscommunication with legal counsel a default has been entered against the Company in this action for failing to file a timely response. We have attempted to have the default set aside. On November 2, 2016, the court granted plaintiff’s motion for sanctions against our company for frivolous litigation relating to our attempt to have the matter dismissed and granted the plaintiff’s motion to strike our motion for summary judgment due to our initial default. The Company still believes the claim to be a Workers Compensation claim relating exclusively against another defendant and without merit, and plans to aggressively defend this action.

 

Item 1a. Risk Factors

 

Not Applicable to Smaller Reporting Company.

 

Item 2. Unregistered sales of equity securities and use of proceeds

 

During the period covered by this report, the Company sold securities without registration under the Securities Act of 1933 (the “Securities Act”) in reliance upon the exemption provided in Section 3(a)(9) or Section 4(a)(2) as described below or as otherwise previously disclosed on Form 8-K. The securities issued with a legend restricting their transferability absent registration of applicable exemption.

 

During the period covered by this report, $572 related party interest payable to Robert Carmichael, our Chief Executive Officer, was converted to 124,326 shares of restricted stock.

 

Effective April 15, 2016 Trebor entered into an employment agreement with a former employee of Trebor and affiliate of the Company. Under the terms of the agreement the employee agreed to provide business and sales services to the Company through August 31, 2016. Wages due to the employee are payable at the sole discretion of the Company in shares of its restricted common stock. During the period covered by this report the Company issued the employee 360,000 shares of restricted stock in satisfaction of services valued at $1,761.

 

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Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. MINE SAFETY DISCLOSURE

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No.   Description   Location
         
31.1   Certification Pursuant to Rule 13a-14(a)/15d-14(a)   Provided herewith.
         
31.2   Certification Pursuant to Rule 13a-14(a)/15d-14(a)   Provided herewith.
         
32.1   Certification Pursuant to Section 1350   Provided herewith.
         
32.2   Certification Pursuant to Section 1350   Provided herewith.
         
101   XBRL Interactive Data File *    

 

* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders’ Equity (Deficit) (iv) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text.

 

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SIGNATURES

 

In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: November 14, 2016 Brownie’s Marine Group, Inc.
     
  By: /s/ Robert M. Carmichael
    Robert M. Carmichael
    President, Chief Executive Officer,
    Chief Financial Officer/
    Principal Accounting Officer

 

  25  
 

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