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.
In August 2017 the Company organized Brownie’s High Pressure Compressor Services, Inc., a wholly-owned subsidiary (“BHP”).
Through BHP we expect to establish sales, distribution and service centers for high pressure air and industrial gas systems in
the dive, fire, CNG, military, scientific, recreational and aerospace industries. 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
unaudited condensed consolidated financial statements as of September 30, 2017 and for the three and nine month periods ended
September 30, 2017 and 2016 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, 2017, and the results of operations
for the three and nine month periods ended September 30, 2017 and 2016, and the statements of cash flows for the nine month periods
ended September 30, 2017 and 2016. The condensed consolidated results of operations for the three and nine months ended September
30, 2017 are not necessarily indicative of the results to be expected for the entire year. The consolidated balance sheet as of
December 31, 2016 has been derived from the Company’s audited financial statements for the year ended December 31, 2016.
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, 2016 as filed with the Securities and Exchange Commission as part of the Company’s
Form 10-K which was filed on April 17, 2017.
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 2016 financial statement amounts and disclosures to conform to
the 2017 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
the Company had net income for the nine months ended September 30, 2017 and the years ended December 31, 2016, 2015 and 2014,
we have otherwise incurred annual losses since 2009, and expect we may have more losses in future periods.
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.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, as
of September 30, 2017, the allowance for bad debts is $22,713.
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,
equipment and leasehold improvements
– Property, equipment and leasehold improvements are stated at cost less accumulated
depreciation or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated
useful lives of the assets or term of 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, when applicable, measured
by the percentage of cost incurred to date to estimated total cost of each contract. This method is used because management considers
the percentage of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts.
As of September 30, 2017, there were no ongoing contracts being accounted for using the percentage of completion method.
Contract
costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance,
job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which
the revisions are determined. Revenue and costs incurred for time and material projects are recognized as the work is performed.
Product
development costs
– Product development expenditures are charged to expenses as incurred.
Advertising
and marketing costs
– The Company expenses the costs of producing advertisements and marketing material at the time
production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which
occur. Advertising and trade show expense incurred for the three months ended September 30, 2017 and 2016, totaled $760 and $313,
respectively.
Advertising and trade show expense incurred for the nine months ended September
30, 2017 and 2016, was $
12,730
and $
3,550
,
respectively.
Research
and development costs
– The Company accounts for research and development costs in accordance with the Accounting Standards
Codification subtopic 730-10,
Research and Development
(“ASC 730-10”). Under ASC 730-10, all research and development
costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party
research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and future products are expensed in the period incurred.
During the three month periods ending September 30, 2017 and 2016 the Company incurred $12,730 and $10, respectively, of expenses
related to research and development costs. During the nine month periods ending September 30, 2017 and 2016 the Company incurred
$13,935 and $1,425, respectively, of expenses related to research and development costs.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. The
Company provides our customers with an industry standard one year warranty on systems sold. Historically, the cost of our warranty
policy has been immaterial, and no reserve has been established.
Income
taxes
– The Company accounts for its income taxes under the assets and liabilities method, which requires recognition
of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements
and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.
The
Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.
In making such determination, the Company considers all available positive and negative evidence, including future reversals of
existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.
A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the
Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded
amount, 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.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Level
2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities
in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are
observable in active markets.
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant
management judgment or estimation.
Inputs
are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make
valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on
the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes
“observable” requires significant judgment by the Company. Management considers observable data to be market data
which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple,
independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy
is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived
risk of that investment.
At
September 30, 2017, and December 31, 2016, the carrying amount of cash, accounts receivable, accounts receivable – related
parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, notes payable,
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 are included in dilutive earnings per share totaled 58,156,862
for the nine months ended September 30, 2017.
New
accounting pronouncements
– In April 2016, the FASB issued ASU No. 2016-15,
“Classification of Certain Cash
Receipts and Cash Payments”
ASU 2016- provides guidance regarding the classification of certain items within the statement
of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted. We
do not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.
In
April 2016, the FASB issued ASU 2016–10
Revenue from Contract with Customers (Topic 606)
: identifying Performance
Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather,
the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing
implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on
(a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s
promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied
at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments
in this Update are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement
necessary to comply with Topic 606. We are currently reviewing the provisions of this ASU to determine if there will be any impact
on our results of operations, cash flows or financial condition.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of
the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards
as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2016-09 did
not have a material effect on our condensed consolidated financial statements.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize
(i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of,
a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors;
however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard
will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We
are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash
flows or financial condition.
In
July 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11,
Inventory
(Topic
330),
Simplifying the Measurement of Inventory
. ASU No. 2015-11 does not apply to inventory measurement using the last-in,
last-out (LIFO) or retail methods. ASU No. 2015-11 applies to all other inventory measurement methods, which includes first-in,
first-out (FIFO) or average cost. Previously, inventory valuation was at the lower of cost or fair market value. This ASU changes
the valuation to lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the
ordinary course of the business, less reasonably predictable costs of completion, disposal, and transportation. ASU is effective
for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. ASU 2015-11 should be applied
prospectively with earlier application permitted. The Company opted for early adoption of ASU 2015-11 this period with no impact
to financial condition, results of operations, or cash flows. The Company updated its consolidated financial statements to reflect
inventory valuation at the lower of cost or net realizable value.
The
Company believes there was no other new accounting guidance adopted, but not yet effective that either has not already been disclosed
in prior reporting periods or is relevant to the readers of our financial statements.
BROWNIE’S
MARINE GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Inventory
consists of the following as of:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
558,339
|
|
|
$
|
402,407
|
|
Work
in process
|
|
|
—
|
|
|
|
—
|
|
Finished
goods
|
|
|
148,304
|
|
|
|
270,113
|
|
|
|
$
|
706,643
|
|
|
$
|
672,520
|
|
3.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Prepaid inventory
|
|
$
|
108,383
|
|
|
$
|
30,076
|
|
Prepaid insurance
|
|
|
—
|
|
|
|
6,968
|
|
Prepaid other current assets
|
|
|
142,739
|
|
|
|
47,292
|
|
|
|
$
|
251,122
|
|
|
$
|
84,336
|
|
4.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment consists of the following as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Factory
and office equipment
|
|
$
|
125,832
|
|
|
$
|
121,782
|
|
Computer
equipment and software
|
|
|
27,469
|
|
|
|
31,519
|
|
Vehicles
|
|
|
44,161
|
|
|
|
44,160
|
|
Leasehold
improvements
|
|
|
43,779
|
|
|
|
43,779
|
|
|
|
|
241,241
|
|
|
|
241,240
|
|
Less:
accumulated depreciation and amortization
|
|
|
(204,393
|
)
|
|
|
(184,332
|
)
|
|
|
$
|
36,848
|
|
|
$
|
56,908
|
|
Depreciation
and amortization expense totaled $2,219 and $20,060 for the three and nine month periods ending September 30, 2017, and $9,197
and $27,157 for the three and nine month periods ending September 30, 2016, respectively.
Other
assets of $6,649 at September 30, 2017 and December 31, 2016, 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, 2017 and 2016, represented 27.76% and 28.64%
respectively, of total net revenues. Combined sales to these six (6) entities for the nine months ended September 30, 2017 and
2016, represented 33.76% and 30.65% respectively, of total net revenues.
BROWNIE’S MARINE
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
7.
|
RELATED
PARTIES TRANSACTIONS
|
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, 2017 and 2016, was $220,363 and $234,368,
respectively. Combined net revenues from these entities for nine months ended September 30, 2017 and 2016, was $582,683 and $567,196
respectively. Accounts receivable from Brownie’s Southport Diver’s, Inc., Brownie’s Palm Beach Divers,
and Brownie’s Yacht Toys totaled $51,700 at September 30, 2017 and $58,420, at December 31, 2016,
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, 2017, and 2016, were $223 and $5,734, respectively. Combined net revenues from these entities
for nine months ended September 30, 2017, and 2016, were $3,289 and $7,666, respectively. Accounts receivable from these three
entities at September 30, 2016 was $2,146. Accounts receivable from BGL, 3D Buoy and 940 Associates, Inc. at September 30, 2017
was $3,289, respectively. Accounts receivable from BGL, 3D Buoy and 940 Associates, Inc. at December 31, 2016 was $9,819.
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 ended September 30, 2017 and 2016, is disclosed on the face of the Company’s
Condensed Consolidated Statements of Operations totaled $12,761 and $20,714, respectively, and for the nine months and ended September
30, 2017 and 2016 totaled $42,247 and $46,332, respectively. In November 2016, the Company entered into a conversion agreement
under which the Company issued 10,000,000 shares of restricted common stock in satisfaction of $88,850 past due and payable to
940A. As of the date of the conversion agreement, the Company was more than 31 months in arrears on its royalty payments totaling
approximately $151,000. In addition, 940A agreed to forebear on any default under the License Agreement due to the Company’s
remaining past due amount for a period of three months from the effective date of the conversion agreement. The shares issued
were valued at $0.008885 per share, the closing price of the stock on the effective date of the conversion agreement. No default
notice had been received prior to the conversion agreement.
On
March 1, 2017, the Company and 940A entered into a second conversion agreement. Under the agreement the Company issued
940A 4,587,190 shares of restricted common stock in satisfaction of $63,303, which represented all past due and payable amounts
to 940A under the Exclusive License Agreement as of March 1, 2017. As of the date of the agreement the Company was more
than 3 months in arrears on royalty payments due under the Exclusive License Agreement. The shares were issued at a price per
share of $0.0138, which exceeded the closing price of the Company’s common stock as reported on the OTC Markets on the date
immediately preceding the closing.
BROWNIE’S MARINE
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Stock
options outstanding from patent purchase
– Effective March 3, 2009, the Company entered into a Patent Purchase Agreement
with Robert M. Carmichael, the Chief Executive Officer of the Company. The Company purchased several patents it had previously
been paying royalties on and several related unissued patents. In exchange for the Intellectual Property (“IP), the Company
issued Mr. Carmichael 234 stock options at a $1,350 exercise price expiring ten years from the effective date of grant, or
March 2, 2019. None of the options have been exercised to-date.
8.
|
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
|
Accounts
payable and accrued liabilities consists of the following as of:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Accounts
payable trade and other
|
|
$
|
142,275
|
|
|
$
|
110,020
|
|
Accrued
payroll & fringe benefits
|
|
|
24,589
|
|
|
|
20,416
|
|
Accrued
payroll taxes & withholding
|
|
|
19,417
|
|
|
|
16,400
|
|
Accrued
interest
|
|
|
199,827
|
|
|
|
176,742
|
|
|
|
$
|
386,108
|
|
|
$
|
323,578
|
|
Balances
due certain vendors are in arrears to varying degrees. The Company is handling all delinquent accounts on a case-by-case basis.
Other
liabilities consist of the following as of
:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
139,429
|
|
|
$
|
160,782
|
|
Asset
purchase agreement payable
|
|
|
—
|
|
|
|
12,857
|
|
On-line
training liability
|
|
|
—
|
|
|
|
2,975
|
|
|
|
$
|
139,429
|
|
|
$
|
176,614
|
|
Notes
payable consists of the following as of September 30, 2017 and December 31, 2016
:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Promissory
note payable, secured by vehicle underlying loan having carrying value of $2,002 and $6,133 at September 30, 2017 and December 31,
2016, respectively, bearing interest at 1.9% per annum, due in monthly principal and interest payments of $523, maturing on
December 5, 2017
|
$
|
2,002
|
|
|
$
|
6,133
|
|
|
|
|
|
|
|
|
|
|
Less
amounts due within one year
|
|
|
(2,002
|
)
|
|
|
(6,133
|
)
|
|
|
|
|
|
|
|
|
|
Long-term
portion of notes payable
|
|
$
|
—
|
|
|
$
|
—
|
|
BROWNIE’S MARINE
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2017, principal payments on the notes
payable are as follows
:
2017
|
|
$
|
2,002
|
|
|
$
|
6,133
|
|
2018
|
|
|
—
|
|
|
|
—
|
|
2019
|
|
|
—
|
|
|
|
—
|
|
2020
|
|
|
—
|
|
|
|
—
|
|
2021
|
|
|
—
|
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,002
|
|
|
$
|
6,133
|
|
11.
|
CONVERTIBLE
DEBENTURES
|
Convertible
debentures consist of the following at September 30, 2017 and December 31, 2016:
Origination
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Origination
Principal
|
|
|
Origination
Discount
|
|
|
September
30, 2017 Debenture Balance
|
|
|
September
30, 2017 Accrued Interest
|
|
|
December
31, 2016 Debenture Balance
|
|
|
December
31, 2016 Accrued Interest
|
|
|
Ref.
|
|
5/3/2011
|
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
177,500
|
|
|
|
300,000
|
|
|
|
170,000
|
|
|
|
(1
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
2,813
|
|
|
|
10,000
|
|
|
|
2,687
|
|
|
|
(2
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
4,124
|
|
|
|
2,743
|
|
|
|
4,055
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
312,743
|
|
|
$
|
199,827
|
|
|
$
|
312,743
|
|
|
$
|
176,742
|
|
|
|
|
|
Reference
numbers in right hand column of table entitled Ref. refer to paragraphs with corresponding numbers that immediately follow this
paragraph.
(1)
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 the 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 the discount, the Company determined the FMV of the warrants as $45,000 using the Black-Scholes
valuation model.
(2)
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.
(3)
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. As of September 30, 2017, the principle amount was $2,743.
The
conversion price under the debentures is $0.37125 and the lender may convert at any time until the debenture plus accrued interest
is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender
will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time.
BROWNIE’S MARINE
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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, 2017,
and December 31, 2016, 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 fulfill the sales terms of some of our customers, which require the insurance coverage. As of August 15, 2017, the
Company has obtained Product Liability Insurance, although prior claims are not covered under the new policy. The policy is already
prepaid and will remain in effect until its renewal date of August 14, 2018.
As
previously disclosed, the Company and Trebor were co-defendants under an action filed by an individual in September 2013 in the
Circuit Court of Broward County claiming personal injury resulting from use of a Brownie’s Third Lung. Plaintiff claimed
damages in excess of $1,000,000. This matter was settled during the three months ended September 30, 2016 by the Company’s
insurance carrier at no additional cost to the Company.
In
addition, as previously disclosed, the Company, Trebor and other third parties, are each named as co-defendants under an action
filed in March 2015 in the Circuit Court of Broward County under Case No. CACE15-03238 by the Estate of Ernesto Rodriguez, claiming
wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung
product. This claim falls outside the Company’s period of insurance coverage. Plaintiff has claimed damages exceeding $1,000,000.
A default judgment was entered against Trebor in 2015 due to its failure to timely respond to the complaint. The Company has obtained
different legal representation in this matter and attempted to have the default set aside. On November 2, 2016, the court granted
plaintiff’s motion for sanctions against our company for frivolous litigation relating to our attempt to have the matter
dismissed and granted the plaintiff’s motion to strike our motion for summary judgment due to our initial default. The Company
believes the claim to be a Workers Compensation claim relating exclusively against other non-affiliated defendants and without
merit, and will aggressively defend this action and to appeal the default judgment. In the event Trebor is unable to overturn
the default judgment and the defendants are determined to be at fault, we would seek to allocate damages among all of the other
parties, including the plaintiff. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated due to
the undetermined validity of any claim or claims made by plaintiff and the mitigating factors among the parties. Therefore, the
Company has not recorded reserves and contingent liabilities related to this matter. However, in the future, as the case progress,
the Company may be required to record a contingent liability or reserve for these matters.
On
August 14, 2014, the Company entered into a new lease commitment. Terms of the new lease include thirty-seven-month term commencing
on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease
plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), which is approximately $2,000
per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing
on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased
to $4,626 per month with a 3% annual escalation throughout the amended term. We believe that the facilities are suitable for their
intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.
BROWNIE’S MARINE
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Base
rent expense attributable to the Company’s headquarters facility totaled approximately $30,000 and $12,000 for the three-month
periods ending September 30, 2017 and 2016 and $54,000 and $36,000 for the nine-month periods ending September 30, 2017 and 2016,
respectively.
The
following is an estimate of future minimum rental payments required under our lease agreement on August 14, 2014 and as amended
December 1, 2016 :
|
|
Operating lease
|
|
year 1
|
|
$
|
24,239
|
|
year 2
|
|
|
49,931
|
|
year 3
|
|
|
51,429
|
|
year 4
|
|
|
52,972
|
|
year 5 and thereafter
|
|
|
96,710
|
|
|
|
$
|
275,281
|
|
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 Non-statutory 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 maximum number of shares that may be issued under the Plan was 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 was ten years. The Plan expired on August 22, 2017. All 297
options issued under the Plan 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 were issued.
On April 29, 2016, the Board of Directors determined it was not in the best interest of either the Company or the recipients to
pay bonuses based on the current and foreseeable share price and cancelled the bonuses payable.
On
August 1, 2017, Mikkel Pitzner, was appointed by the Company’s board of directors to serve on the Company’s board
of directors, filling a vacancy on the board. Mr. Pitzner shall serve on the board of directors and shall hold office until the
next election of directors by stockholders and until his successor is elected and qualified or until his earlier resignation or
removal. The Company has agreed to pay Mr. Pitzner an annual fee of $6,000 and has issued Mr. Pitzner 2,000,000 shares of restricted
common stock valued at $25,000.
On
August 1, 2017 the Company entered into six month advisory agreement with Wesley P. Siebenthal to provide certain advisory services
to the Company and serve as its Chief Technology Advisor. As compensation for the services, the Company issued him 2,000,000 shares
of its common stock valued at $25,000.
BROWNIE’S MARINE
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
On
August 1, 2017, the Company entered into a six month employment agreement with Blake Carmichael, the son of the Company’s
chief executive officer and an electrical engineer, to serve as the Company’s products development manager, electrical engineer
and marketing team member. Under the terms of the employment agreement, in addition to a monthly salary of $3,600, the Company
issued Mr. Carmichael 2,000,000 shares of common stock valued at $25,000. Mr. Carmichael is also entitled to performance bonuses
at the discretion of the board of directors.
Effective
August 1, 2017, the board of directors issued Mr. Robert Carmichael, the Company’s chief executive officer, chief financial
officer and member of the Company’s board of directors, 2,000,000 shares of restricted common stock valued at $25,000 in
consideration of serving on the Company’s board of directors.
As of September 30, 2017, a total of $66,393 share-based compensation was recorded.
The share-based compensation of $50,000 was for the two directors, Robert Carmichael and Mikkel Pitzner. The remaining
$16,393 share-based compensation was for two service contracts with an employee and an advisor. Since the Company
has six months agreements with each share recipient
,
a prepaid compensation of $33,607 was recorded as of September 30, 2017.
16.
|
INTEREST
EXPENSE NON-RELATED PARTIES AND OTHER EXPENSE (INCOME), NET
|
For
the three months ended September 30, 2017, non-related parties interest expense of $7,750 is comprised of interest on convertible
debentures. 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 nine months ended September 30, 2017, non-related parties interest expense of $23,140 is comprised of interest on convertible
debentures. 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 three months ended September 30, 2017, $6,712 other expense, net is comprised primarily of $7,750 of interest expense, and
$1,038 of other income. 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 nine months ended September 30, 2017, $20,895 other expense, net is comprised primarily of $23,140 of interest expense, and
$2,245 of other income. For the nine month ended September 30, 2016, is comprised primarily of $23,823 of interest expense, and
$274,117 of other income.
Subsequent
to the third quarter of 2017, the Company received gross proceeds of $60,000 pursuant to the sale of 1,304,348 Units at $0.046
per Unit, each Unit consisting of four shares of common stock, par value $0.0001 per share and one two year common stock purchase
warrant exercisable at $0.0115 per share.