UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description of business and summary of significant accounting
policies
|
Description of business
–Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company”, “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 Fort Lauderdale,
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 OTCBB 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.
Definition of fiscal year
– The Company’s fiscal year end is December 31.
Use of estimates
- The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications
–
Certain reclassifications have been made to the 2012 financial statement amounts to conform to the 2013 financial statement presentation.
Effective July 15, 2013 the Company effectuated a reverse stock split (1 -for- 1,350). See Note 19.
CHANGE IN CAPITAL STRUCTURE
for more information. Accordingly, the transactional number of shares referenced throughout the Notes has been retroactively stated
unless otherwise noted.
Cash and equivalents
– Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These
investments are stated at cost, which approximates market value.
Going Concern
–The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which
contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period
following the date of these financial statements. We have incurred losses since 2009, and expect to have losses in 2013. We have
had a working capital deficit since 2009. Although cured effective the fourth quarter 2010, the Company defaulted on its first
mortgage in the third quarter of 2010, which resulted in an automatic default on its second mortgage, and was restructured with
a forbearance agreement with a maturity date of May 22, 2012. The Company was notified of default under the forbearance agreement
on or around April 27, 2012, and the real estate was foreclosed on and purchased at auction by lender on August 16, 2012. See Note
17.
COMMITMENTS AND CONTINGENCIES
for further discussion related to the mortgage, forbearance agreement and foreclosure.
The Company is behind on payments
due for payroll taxes and withholding, 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. Payment delinquencies are further
addressed in Note 7.
RELATED PARTIES TRANSACTIONS
, Note 9.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES,
Note 10.
OTHER
LIABILITIES
, Note 11.
NOTES PAYABLE,
and Note 12.
CONVERTIBLE DEBENTURES
.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description of business and summary of significant accounting
policies
(continued)
|
Going Concern
(continued)
– During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of
2012, purchased the assets of another, with assumption of their retail location lease. The Company accomplished both transactions
predominantly through issuance of restricted common stock in BWMG. The Company believed these transactions would help generate
sufficient working capital in the future. However, to-date neither generated profit or cash-flow. Effective May 31, 2013, the Company
closed and ceased operations at its retail facility. The Company is still involved in the joint venture. See Note 18.
JOINT
VENTURE EQUITY EXCHANGE AGREEMENT
and Note 8.
ASSET PURCHASE
for further discussion of these transactions. As a result,
the Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the third
quarter of 2013. This raises substantial doubt about BWMG’s ability to continue as a going concern. 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 as discussed in Note 12.
CONVERTIBLE DEBENTURES
and may continue
to raise additional capital through sale of restricted common stock or other securities. We are paying for many legal and consulting
services with restricted stock to maximize working capital, and intend to continue this practice. 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 consolidated financial statements do not include any adjustments
that may result from the outcome of this uncertainty.
Inventory
– Inventory
is stated at the lower of cost or fair market value. Cost is principally determined by using the average cost method that approximates
the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods
held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation
adjustments when required.
Furniture, Fixtures, and
Equipment
– Furniture, Fixtures, and Equipment is stated at cost less accumulated depreciation. Depreciation is provided
principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 5 years. The cost
of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized.
Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any
gain or loss is reflected in other income (expense).
The Company periodically evaluates
whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether
the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Revenue recognition
–
Revenues from product sales are recognized when the Company’s products are shipped or when service is rendered. Revenues
from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to
date to estimated total cost of each contract. This method is used because management considers the percentage of cost incurred
to date to estimated total cost to be the best available measure of progress on the contracts.
Contract costs include all direct
material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs,
and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are determined. Change in job performance, job conditions, and
estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are
determined.
Revenue and costs incurred for
time and material projects are recognized as the work is performed.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description of business and summary of significant accounting
policies
(continued)
|
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 June 30, 2013 and 2012, was $5,889 and $9,251, respectively. Advertising
and trade show expense incurred for the six months ended June 30, 2013, and 2012, was $33,161 and 14,264, respectively.
Customer deposits and returns
policy
– The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building
the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision
for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns
of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice.
Income taxes
–
The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets
and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred
tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred
tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination,
the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established
against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would
be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment
to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting
guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on
the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized
initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Comprehensive income
– The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all
periods.
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 has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate
it does not represent the fair value. Under these circumstances, the Company determines fair value through an analysis of its fair
value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations
and industries. Subsequent to the first quarter of 2012, the Company’s trading volume has not been nominal.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description of business and summary of significant ACCOUNTING
policies
(continued)
|
Stock-based compensation
(continued)
– For the three months ended June 30, 2013 and 2012, the Company amortized prepaid equity based compensation
for personal guarantees of related party on Company’s bank debt, and additional compensation expense to the Chief Executive
Officer payable in stock when vested. In addition the Company has paid monthly Board of Director Fee’s for the Company’s
one other Board of Director during 2013. See Note 7.
RELATED PARTY TRANSACTIONS
for further discussion. For the three months
ended June 30, 2013 and 2012, the company granted stock for consulting services. See Note 13.
EQUITY BASED COMPENSATION FOR
CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES
. In addition, effective in the fourth quarter of 2012 and vesting into the
second quarter of 2013, the Company recognized equity based incentive and/or retention bonuses for some employees, and consultants.
See Note 21.
EQUITY BASED INCENTIVE/RETENTION BONUSES
. Similarly, for the three and six months ended months ended June 30,
2013, the Company settled, $18,000 and $27,000 accrued payroll for the period in stock. In addition, for three and six three months
ended June 30, 2013, the Company recognized $667, and $6,667 in operating expense for exclusivity pursuant to strategic alliance
agreement payable, which vested during the second quarter of 2013. See Note 22.
STRATEGIC ALLIANCE AGREEMENT
for further
discussion.
Beneficial conversion features on convertible
debentures
– The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been
determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not
represent the fair value. Under these circumstances, the Company determines fair value through an analysis of its fair value of
net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries.
See Note 12.
CONVERTIBLE DEBENTURES
for further discussion.
Fair value of financial instruments
–
Fair value is defined as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets that are
accessible at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices for similar assets and liabilities
in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Unobservable inputs that are supported
by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities
include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques,
as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Inputs are used in applying the various valuation
techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions
about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment
by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant
market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does
not necessarily correspond to the Company’s perceived risk of that investment.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description of business and summary of significant ACCOUNTING
policies
(continued)
|
Fair
value of financial instruments
(continued)
–
At June
30, 2013, and December 31, 2012, 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. The fair value of our convertible debentures was the
principal balance due at June 30, 2013, and December 31, 2012, or $709,411, and $703,740, respectively, as presented in Note 12.
CONVERTIBLE DEBENTURES
. The principal balance due approximates fair value because of the short maturity of these instruments.
On the face of the balance sheet the convertible debentures are presented net of discount, which is less than fair market value
at period end dates.
Earnings per common share
– Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings
per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings
per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.
Common stock equivalent shares are excluded from the computation if their effect is antidilutive. All common stock equivalent shares
were excluded in the computation for the three months ended June 30, 2012, and the six months ended June 30, 2013 and 2012, since
their effect was antidilutive. All common stock equivalent shares were included in the dilutive earning per share computation for
the three months ended June 30, 2013.
New accounting pronouncements
– In April 2013, the Financial Accounting and Standards Board (FASB) issued Accounting Standards Update (“ASU”)
ASU 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. The ASU requires entities to prepare
its financial statements using the liquidation basis of accounting when liquidation is imminent. The Company adopted this ASU in
the period ended June 30, 2013, without significant impact to financial condition, results of operations, cash flows, or disclosures
to its consolidated financial statements.
In July 2013, the FASB issued
ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rat (or Overnight Index Swap Rate)
as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU permits the Fed Funds Effective Swap Rate or Overnight Index
Swap Rate (OIS) to be used as a U. S. benchmark interest rate for hedge accounting purposes in addition to interest rate on U.S.
Treasury obligations (UST) and London Interbank Offered Rate (LIBOR). The ASU is effective prospectively for qualifying hedging
relationships entered into on or after July 17, 2013. Since the Company does not currently engage in these types of relationships,
the Company does not anticipate significant impact to financial condition, results of operations, cash flows, or disclosures to
its consolidated financial statements.
In July 2013, the FASB issued
ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss (NOL) Carryforward,
a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU’s objective is to eliminate diversity in practice of treating
of unrecognized tax benefit when NOL exists as either a reduction to a deferred tax asset or as a liability. The ASU clarifies
that the unrecognized tax benefit or a portion of an unrecognized tax benefit should be presented in the financial statements as
a reduction to the deferred tax asset for a NOL carrryforward, a similar tax loss, or a tax credit forward with an exception. The
exception is to the extent a NOL carryforward, a similar tax loss, or a tax credit forward is not avaialable at the reporting date
under the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the
deferred tax asset for such purpose, the unrecognized tax benefit should instead be presented as a liability. This ASU is effective
for fiscal year, and interim periods , beginning after December 15, 2013. The Company is currently evaluating the impact if any
of adoption of this ASU on financial condition, results of operations, cash flows, and disclosures to its consolidated financial
statements.
The Company believes there are
no additional new accounting guidance adopted but not yet effective that is relevant to the readers of our financial statements.
Inventory consists of the following
as of:
|
|
June
30,
2013
|
|
|
December
31,
2012
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
287,255
|
|
|
$
|
324,459
|
|
Work in process
|
|
|
--
|
|
|
|
--
|
|
Finished goods
|
|
|
373,174
|
|
|
|
279,408
|
|
|
|
$
|
660,429
|
|
|
$
|
603,867
|
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
3.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current
assets totaling $140,429 at June 30, 2013, consists of $103,019 prepaid inventory, $11,800 engineering deposit, $16,847 prepaid
insurance, $8,763 prepaid legal and other professional fees.
Prepaid expenses and other current
assets totaling $148,851 at December 31, 2012, consists of $108,823 prepaid inventory, $11,800 engineering deposit, $10,031 employee
advances, $8,457 prepaid insurance, $5,000 prepaid legal, $3,240 prepaid rent, and $1,500 trade show deposit.
|
4.
|
FURNITURE, FIXTURES, AND EQUIPMENT
|
Furniture, fixtures,
and equipment consists of the following as of:
|
|
June
30, 2013
|
|
|
December
31,
2012
|
|
|
|
|
|
|
|
|
Furniture, fixtures, vehicles and equipment
|
|
$
|
181,296
|
|
|
$
|
181,296
|
|
Less: accumulated depreciation and amortization
|
|
|
(118,386
|
)
|
|
|
(109,015
|
)
|
|
|
$
|
62,910
|
|
|
$
|
72,281
|
|
On August 16, 2012 the Company’s
real estate foreclosed upon was sold through a court ordered auction. At the foreclosure sale, the lender was highest bidder with
a bid of $1,300. On July 17, 2012, the Court entered a Final Judgment of Foreclosure against the Company for $1,123,269, plus post-judgment
interest. On December 14, 2012, the lender served the Company with Notice of Final Judgment of Foreclosure. Per the Notice, the
lender seeks Final Judgment including post-judgment interest and costs through date of sale of $1,127,643 plus post-judgment interest
and related expenses. The lender asserts the fair market value of the property on the date of sale was $1,030,000 and is seeking
final judgment against the Company for the shortfall amount between the Final Judgment amount and the fair market value of the
property, or approximately $100,000 plus post-judgment interest and related expenses. Accordingly, the Company recorded a foreclosure
liability of $110,000 to cover the shortfall plus post-judgment expenses. At the time of the sale, carrying value of the building,
building improvements, and land was $1,641,075, mortgage balance was $1,053,997, accrued interest was $15,609, and accrued real
estate taxes was $45,006. After reversing all amounts associated with the foreclosed property and recording $110,000 adjustment
for difference between the sale and final judgment amount the Company recorded $116,539 loss on foreclosure. The adjustment and
loss include $10,000 estimate of post-judgment expenses based on managements’ best judgment, and will be periodically reviewed
and adjusted as applicable, and/or settled.
On November 1, 2012, the Company
entered into a one year lease on the foreclosed real estate, which the Company continues to occupy as it manufacturing facility
and headquarters. The terms of the lease are base rent of $3,750 plus sales tax. Either party can cancel the lease with 90 days
written notice.
|
|
Other assets of $143,901 at June 30,
2013 consists of $116,320 net security purchase commitment fee, $24,740
investment in joint venture, and $2,841 refundable deposits. See Note
18.
JOINT VENTURE EQUITY EXCHANGE AGREEMENT
for further information
on investment in joint venture and Note 24.
SECURITY PURCHASE AGREEMENT
for further information commitment fee.
|
|
|
Other assets of $31,635 at December 31,
2012 consists of $24,740 investment in joint venture, and $6,895 refundable
deposits. See Note 18.
JOINT VENTURE EQUITY EXCHANGE AGREEMENT
for further information on investment in joint venture and Note 24.
SECURITY
PURCHASE AGREEMENT
for further information commitment fee.
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
6.
|
CUSTOMER CREDIT CONCENTRATIONS
|
The Company sells to three entities owned by the
brother of Robert Carmichael, the Company’s Chief Executive officer as further discussed in Note 7 –
RELATED PARTIES
TRANSACTIONS.
Combined sales to these entities for the three months ended June 30, 2013 and 2012, represented 42.22% and 26.65%,
respectively, of total net revenues. Combined sales to these entities for the six months ended June 30, 2013 and 2012, represented
69.94% and 48.10%, respectively, of total net revenues. Sales to one unrelated party during the six months ended June 30, 2013
represented 13.21% of total net revenues. Sales to no other customers represented greater than 10% of net revenues for three and
six months ended June 30, 2013, and 2012.
|
7.
|
RELATED PARTY TRANSACTIONS
|
Notes payable – related
parties
Notes payable
– related parties – consists of the following as of June 30, 2013:
Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on
August 1, 2013.
|
|
$
|
80,942
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
80,942
|
|
|
|
|
|
|
Long-term portion of notes payable – related parties
|
|
$
|
- -
|
|
As of June 30, 2013, principal
payments on the notes payable – related parties are as follows:
2013
|
|
$
|
80,942
|
|
2014
|
|
|
--
|
|
2015
|
|
|
--
|
|
2016
|
|
|
--
|
|
2017
|
|
|
--
|
|
Thereafter
|
|
|
--
|
|
|
|
|
|
|
|
|
$
|
80,942
|
|
As of June 30, 2013, the Company
was approximately thirteen months in arrears on principal payments due under the Note payable to the Chief Executive Officer. On
May 13, 2013, the Company granted the Chief Executive Officer 370,371 (restated for reverse stock split, see Note 18. CHANGE IN
CAPITAL STRUCTURE in satisfaction of $50,000 of the note payable – related party. The shares of stock were issued at the
fair market value, or trading price, on the date of the transaction. No default notice has been received and the Company makes
monthly payments to not fall further behind until it is able address past due payments.
Notes payable – related
parties – consists of the following as of December 31, 2012:
Promissory note payable to the Chief Executive Officer of the Company,unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on
August 1, 2013.
|
|
$
|
168,384
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
168,384
|
|
|
|
|
|
|
Long-term portion of notes payable – related parties
|
|
$
|
--
|
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
7.
|
RELATED PARTY TRANSACTIONS
(continued)
|
As of December 31, 2012, principal
payments on the notes payable – related parties are as follows:
2013
|
|
$
|
168,384
|
|
2014
|
|
|
--
|
|
2015
|
|
|
--
|
|
2016
|
|
|
--
|
|
2017
|
|
|
--
|
|
Thereafter
|
|
|
--
|
|
|
|
|
|
|
|
|
$
|
168,384
|
|
As of December 31, 2012, the
Company was approximately twenty months in arrears on principal payments due under the Note payable to the Chief Executive Officer.
Net revenues and accounts
receivable – related parties
– The Company sells products to three entities, 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. Combined net revenues
from these entities for three months ended June 30, 2013 and 2012, was $164,245 and $198,960, respectively. Combined net revenues
from these entities for six months ended June 30, 2013 and 2012, was $414,473 and $360,976, respectively. Accounts receivable from
Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at June 30, 2013,
was $64,340, $13,352, and $11,473, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s
Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2012, was $24,471, $2,593, and $18,776, respectively. Sales to
Pompano Dive Center for the three months ended June 30, 2013, and 2012, was $5,061 and $1,625, respectively. Sales to Pompano Dive
Center for the six months ended June 30, 2013, and 2012, was $6,198 and $232, respectively. Accounts Receivable from Pompano Dive
Center at June 30, 2013, and December 31, 2012, was $11,860, and $5,863, respectively. See Note 18.
JOINT VENTURE EQUITY EXCHANGE
AGREEMENT
for further discussion regarding Pompano Dive Center. Sales to the Company’s Chief Executive Officer for the
six months ended June 30, 2013, and December 31, 2012 was $0 and $50, respectively.
Royalties expense –
related parties
– The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to
as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns. Under
the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing
5% annually. Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”,
“Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based
on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements
for the three and six months ended June 30, 2013 and 2012, is disclosed on the face of the Company’s Consolidated Statements
of Operations. As of June 30, 2013, and December 31, 2012, the Company was approximately and twenty-two and twenty-one months in
arrears, respectively, on royalty payments due. No default notice has been received and the Company plans to make payments as able.
Non-employee Board of Director
Fees and Bonus
– Non-employee Board of Director (BOD) compensation is $2,500 per month. Non-Employee BOD fees for the
three months ended June 30, 2013 and 2012, was $7,500 and $15,000, respectively. Non-Employee BOD fees for the six months ended
June 30, 2013 and 2012, was $15,000 and $22,500, respectively. One of the two non-employee Board of Directors (“BOD”),
Wesley Armstrong, of the three person BOD, which included the Chief Executive Officer, resigned his position on April 18, 2012.
As of December 31, 2012, $22,500 of the accrued BOD fees had been converted to stock, leaving $15,000 still due and unpaid, $7,500
due to Wesley Armstrong from first quarter of 2012, and $7,500 due Mikkel Pitzner from fourth quarter of 2012. Because the remaining
non-employee BOD, Mikkel Pitzner, now accounts for 50% of the BODs, the Company reclassified him to related party as of April 2012.
See
Other liabilities and accrued interest - related parties
below for inclusion of the $7,500 payable to him as of December31,
2102. Prior to April 2012, the two non-employee BOD were not classified as related parties.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
7.
|
RELATED PARTY TRANSACTIONS
(continued)
|
During the three months ended
June 30, 2013, the liability due both non-employee BODs from 2012 was satisfied with stock. Further, during the three and six months
ended June 30, 2013, BOD fees due Mr. Pitzner for 2013 were satisfied with stock with April’s fee prepaid in March and the
rest of the fees satisfied with stock in the month earned. On June 20, 2012, Mr. Pitzner converted a $20,000 short-term loan to
restricted shares per BOD consent at fair market value of the stock. In addition, on February 23, 2013, the Company declared a
bonus payable for the year ended 2012 for certain employees, service providers, and consultants. As part of this bonus, Mikkel
Pitzner was awarded restricted shares of common stock with $73,000 fair market value. This amount is included on the statement
of stockholders’ deficit as shares payable as of and for the year ended December 31, 2012. The shares were issued to Mr.
Pitzner during the first quarter ended June 30, 2013.
Patent purchase agreements
– In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the
Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the Company of patents previously
subject to Non-Exclusive License Agreements. Effective September 24, 2010, the Company finalized and executed terms of the purchase
from CRC for payment of $25,500 and nominal shares of the Company’s common stock. In addition, the principals of CRC were
entitled to a percentage of future sales amounting to $8,250 of products the Company is to receive in conjunction with two patent
infringement lawsuits settled in the third quarter of 2010. See
Other liabilities and accrued interest– related parties
below for inclusion of $6,017 remaining from the original $8,250 liability due the Principals of CRC. By acquiring the IP the Company
(i) has an opportunity to further develop the IP, (ii) has the ability to incorporate the IP into current and future products,
and (iii) has the opportunity to license the IP to third parties.
Other liabilities and accrued
interest– related parties
Other liabilities and accrued
interest– related parties consists of the following at:
|
|
June 30, 2013
|
|
|
December
31, 2012
|
|
|
|
|
|
|
|
|
Year-end bonus payable to Chief Executive Officer
|
|
$
|
67,000
|
|
|
$
|
67,000
|
|
BOD fee payable to non-employee – related party
|
|
|
--
|
|
|
|
7,500
|
|
Due to Principals of Carleigh Rae Corp., net
|
|
|
6,017
|
|
|
|
6,017
|
|
Other liabilities – related parties
|
|
$
|
73,017
|
|
|
$
|
80,517
|
|
The $6,017 due to the Principals
of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company and is discussed above
as is the non-employee BOD Fee.
Restricted common stock issued
for personal guarantee
– On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 14,815
shares of restricted common stock in consideration of personal guarantees he provided to secure restatement and consolidation of
the first and second mortgages of the Company. The restrictions on the common stock expired 50% on April 20, 2012, and 50% on April
20, 2013, if Mr. Carmichael continued his full time employment with the Company. The company valued the stock at determined fair
market value per share on the date of the transaction and has recorded $1,000,000 of compensation expense to Mr. Carmichael ratably
over the two-year term in which the restrictions expired. The unearned balance of the compensation was recorded as prepaid compensation
as a component of shareholders’ deficit. For the three months ended June 30, 2013 and 2012, the Company recognized $125,001
and $125,001, respectively, as amortization of prepaid compensation under this agreement. For the six months ended June 30, 2013
and 2012, the Company recognized $137,494 and $250,002, respectively, as amortization of prepaid compensation under this agreement.
Prepaid compensation remaining under this agreement as of June 30, 2013, and December 31, 2012, was $0 and $137,494, respectively,
and is reflected as a component of Stockholders’ Deficit.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
7.
|
RELATED PARTY TRANSACTIONS
(continued)
|
Equity based compensation
for Chief Executive Officer
– On November 2, 2012, the BOD approved a stock incentive bonus to certain key employees and
consultants to vest and pay out on May 2, 2013, contingent upon continued employment or services. The stock bonus price per
share was calculated based on last closing price per the OTCBB on the effective date of the transaction, or for a total
of $75,100. Shares were set aside and reserved for
this transaction.
Of the $75,100 bonus, $45,000 was awarded to the Chief Executive Officer of the Company. The Company recorded compensation expense
ratably over the vesting period. See Note 21.
EQUITY BASED INCENTIVE/RETENTION BONUSES
for further discussion. In addition,
on February 23, 2013 the Company declared a bonus payable for the year ended 2012 for certain employees, service providers, and
consultants. As part of this bonus, the Chief Executive Officer was awarded $67,000 to be paid out in cash or stock based on later
determination by the BOD. This amount is included in operating expense for the year ended December 31, 2012. See table above for
inclusion in other liabilities and accrued interest – related parties. Further, pursuant to a Written Consent of the BOC
of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012, the BOD declared a $83,333 bonus due the Chief Executive
Officer payable shares of restricted stock. The shares vested as of January 2, 2013. The grant price per share was based on the
closing price of the stock on May 31, 2012. For accounting purposes, the Company recognized $83,333 operating expense ratably over
the seven months the share vested. Lastly, the Chief Executive Officer’s monthly salary was increased by $16,667 per month
beginning in June 2012, payable in restricted stock calculated based on a monthly weighted average share factor of .70, or a 30%
discount. The shares will not vest until six months after the last day of each month, continued employment is also a requirement
for vesting, and shares will not be issuable until vested. The Company will record $23,801 operating expense each month related
to the salary increase, which is $16,667 with the discount added back to record at full monthly weighted average price per market.
All equity based compensation to the Chief Executive Officer is reflected on the face of the Statement of Stockholders’ Deficit
On February 3, 2012, the Company
entered into an asset purchase agreement with Florida Dive Industries, Inc. (“Seller”). On March 5, 2012, the same
parties executed an amendment (“Amendment”) to the agreement (collectively, the “Agreement”). Under the
terms of the Agreement, the Company acquired certain diving and related inventory, and Seller provided a three year non-compete
agreement within a 10-mile wide radius. In addition, the Company assumed a commercial lease obligation for a retail dive store
in Boca Raton, Florida beginning in April 1, 2012. The lease is automatically renewable on an annual basis through May 31, 2014,
with 90 days written notice assuming the Lessee is in compliance with all terms of the lease. The lease amount is base rental plus
an allocated amount of common areas maintenance (‘CAM”). Base rental increases annually by the greater of 5% or the
annual consumer price index. The current monthly rental including CAM at the time of assignment is approximately $3,200.
As a purchase price, the Company
agreed to pay Seller, on a monthly basis, beginning April 1, 2012, and thereafter until May 13, 2013, in equal payments, the total
cash purchase price of $22,500. In addition, the Company issued Seller 1,630 restricted shares of stocknas part of the purchase
price as provided for in the Amendment, or $59,400. Both the restricted stock and the monthly payments due Seller were maintained
in an escrow account for six months as a purchase price holdback for contingent liabilities not otherwise settled by Seller. If
such items including rent and any building or zoning code violations had not been paid by Seller during this period, the Company
would have settled said liabilities with the purchase price holdback. On October 26, 2012, the Company issued the seller the 1,630
shares previously heldback. As of June 30, 2013, the Company had paid Seller $9,643 toward the $22,500 cash purchase price leaving
a balance of $12,857.
On May 31, 2013, the
Company closed the dive store and vacated the premises. The Company forfeited its deposit with the landlord for failure to
provide 90 days’ written notice of intent to vacate. As a result, the Company wrote-off as other expense the amount on
deposit with the landlord, or $3,200. However, the Company believes there is still a possibility the deposit will be refunded
per negotiations with the landlord. If this occurs, the Company will recognize as other income in the subsequent period in which the
deposit is refunded.
|
9.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable and accrued
liabilities of $562,632 at June 30, 2013, consists of $290,872 accounts payable trade, $51,616 accrued payroll and related fringe
benefits, $62,500 accrued year-end bonuses, $42,933 accrued payroll taxes and withholding, $114,664 accrued interest, and $47 other
accrued liabilities. Accrued payroll taxes and withholding were approximately six months in arrears at June 30, 2013. Balances
due certain vendors are also due in arrears to varying degrees. The Company is handling all delinquent accounts on a case by case
basis.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Accounts payable and accrued
liabilities of $508,715 at December 31, 2012, consists of $205,915 accounts payable trade, $50,352 accrued payroll and related
fringe benefits, $62,500 accrued year-end bonuses, $96,811 accrued payroll taxes and withholding, $93,096 accrued interest, and
$41 other accrued liabilities. Accrued payroll taxes and withholding were approximately nine months in arrears at December 31,
2012. Balances due certain vendors are also due in arrears to varying degrees.
Other liabilities of $165,851
at June 30, 2013, consists of $110,000 foreclosure liability, $40,000 short-term loans, $12,858 payable for assets purchased pursuant
to Asset Purchase Agreement (Note 8.
ASSET PURCHASE
), and $2,993 on-line training liability. The foreclosure liability is
the difference between the court judgment amount, and amount the Company’s foreclosed property was purchased for by lender.
The $37,000 short-term loans is comprised of three loans due on demand from unrelated parties.
Other liabilities of $170,827
at December 31, 2012, consists of $110,000 foreclosure liability, $37,000 short-term loans, $12,858 payable for assets purchased
pursuant to Asset Purchase Agreement (Note 8.
ASSET PURCHASE
), $7,500 non-employee BOD fee, and $3,469 on-line training
liability. The foreclosure liability is the difference between the court judgment amount, and amount the Company’s foreclosed
property was purchased for by lender. The $37,000 short-term loans is comprised of three loans due on demand from unrelated parties.
Effective July 1, 2005, the
Company began including on-line training certificates 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 an eighteen-month redemption life after which time they expire.
The eighteen-month life of the certificates begins at the time the customer purchases the unit. The Company owes the on-line training
vendor the agreed upon negotiated rate for all on-line certificates redeemed payable at the time of redemption. For certificates
that expire without redemption, no amount is due the on-line training vendor.
The Company estimates the on-line
training liability based on the historical redemption rate of approximately 10%. The Company continues to monitor and maintain
a reserve for certificate redemption that approximates the historical redemption rate.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Notes payable consists of the
following as of June 30, 2013:
Promissory note payable, unsecured, bearing interest at 5% simple interest per annum, due in weekly principal and interest payments of $250, maturing on March 10, 2015.
|
|
$
|
21,679
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
12,218
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
9,461
|
|
As of June 30, 2013, principal
payments on the notes payable are as follows:
2013
|
|
$
|
6,267
|
|
2014
|
|
|
12,540
|
|
2015
|
|
|
2,872
|
|
2016
|
|
|
--
|
|
2017
|
|
|
--
|
|
Thereafter
|
|
|
--
|
|
|
|
|
|
|
|
|
$
|
21,679
|
|
In February 2011, the Company
converted a vendor payable into an unsecured promissory note as reflected above and below in note payable balances as of June 30,
2013, and December 31, 2012. Principal and interest payments of $2,000 per month were to begin on February 28, 2011, and continue
through August 31, 2012, maturity. Since the Company was in arrears on payments, on June 1, 2012, the Company restructured the
Note with the vendor. Effective June 5, 2012, the Company began making payments under the restructured terms as reflected in both
note payable tables.
Notes payable consisted of the
following as of December 31, 2012:
Promissory note payable, unsecured, bearing interest at 5% simple interest per annum, due in weekly principal and interest payments of $250, maturing on March 10, 2015.
|
|
$
|
27,564
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
12,152
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
15,412
|
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
|
The Company has outstanding
convertible debentures as follows:
Convertible debentures as of June 30, 2013, are as follows:
Origination Date
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Origination Principal Balance
|
|
|
Origination Discount Balance
|
|
|
Period End Principal Balance
|
|
|
Period End Discount Balance
|
|
|
Period End Debenture, Net Balance
|
|
Ref.
|
10/4/2010
|
|
4/4/2011
|
|
|
5
|
%
|
|
$
|
20,635
|
|
|
$
|
(20,635
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
11/27/2010
|
|
5/27/2011
|
|
|
10
|
%
|
|
|
125,000
|
|
|
|
(53,571
|
)
|
|
|
58,750
|
|
|
|
-
|
|
|
|
58,750
|
|
(2)
|
1/7/2011
|
|
11/11/2011
|
|
|
5
|
%
|
|
|
76,000
|
|
|
|
(32,571
|
)
|
|
|
48,000
|
|
|
|
-
|
|
|
|
48,000
|
|
(3)
|
2/10/2011
|
|
1/14/2011
|
|
|
8
|
%
|
|
|
42,500
|
|
|
|
(42,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(4)
|
9/12/2011
|
|
6/14/2012
|
|
|
8
|
%
|
|
|
37,500
|
|
|
|
(37,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(4)
|
3/9/2011
|
|
3/9/2012
|
|
|
10
|
%
|
|
|
50,000
|
|
|
|
(34,472
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(5)
|
5/3/2011
|
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
(6)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
(358
|
)
|
|
|
9,642
|
|
(7)
|
9/8/2011
|
|
9/20/2011
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
(17,016
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(8)
|
2/10, 5/18, 7/17, 11/8/2012
|
|
2/10, 5/18, 7/17, 11/8/2014
|
|
|
10
|
%
|
|
|
42,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(9)
|
3/14/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
5,500
|
|
|
|
-
|
|
|
|
472
|
|
|
|
-
|
|
|
|
472
|
|
(10)
|
12/19/2011
|
|
9/21/2012
|
|
|
8
|
%
|
|
|
37,500
|
|
|
|
(37,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(4)
|
2/7/2012
|
|
2/7/2014
|
|
|
10
|
%
|
|
|
16,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(11)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
-
|
|
|
|
2,743
|
|
|
|
-
|
|
|
|
2,743
|
|
(11)
|
3/9/2012
|
|
3/9/2014
|
|
|
10
|
%
|
|
|
56,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(11)
|
4/19, 8/17, 11/7/2012
|
|
4/4/2011, 2/10, 4/14/2014
|
|
|
5%, 10
|
%
|
|
|
39,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(12)
|
7/2/2012
|
|
4/5/2013
|
|
|
8
|
%
|
|
|
78,500
|
|
|
|
(35,268
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(4)
|
8/8/2012
|
|
5/2/2013
|
|
|
8
|
%
|
|
|
42,500
|
|
|
|
(27,172
|
)
|
|
|
33,500
|
|
|
|
-
|
|
|
|
33,500
|
|
(4)
|
10/31/2012
|
|
8/2/2013
|
|
|
8
|
%
|
|
|
78,500
|
|
|
|
(50,189
|
)
|
|
|
78,500
|
|
|
|
(5,574
|
)
|
|
|
72,926
|
|
(4)
|
1/18/2013
|
|
1/18/2014
|
|
|
10
|
%
|
|
|
84,500
|
|
|
|
(58,720
|
)
|
|
|
84,500
|
|
|
|
(32,196
|
)
|
|
|
52,304
|
|
(13)
|
1/18/2013
|
|
1/18/2014
|
|
|
10
|
%
|
|
|
30,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(13)
|
1/18/2013
|
|
1/18/2014
|
|
|
10
|
%
|
|
|
95,000
|
|
|
|
-
|
|
|
|
72,946
|
|
|
|
-
|
|
|
|
72,946
|
|
(13)
|
4/8/2013
|
|
4/14/2013
|
|
|
9.9
|
%
|
|
|
20,000
|
|
|
|
(13,333
|
)
|
|
|
20,000
|
|
|
|
(10,000
|
)
|
|
|
10,000
|
|
(14)
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
709,411
|
|
|
|
|
|
|
$
|
661,283
|
|
|
Reference numbers in right hand column of table entitled
Ref. refer to paragraphs with corresponding number that immediately follow the next paragraph, which discusses derivative liability.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
During the first quarter of
2013, the Company determined based on closing market price of $.0005 (pre-reverse stock split), and based on terms of convertible
debt, its convertible and/or committed shares were in excess of its authorized common stock of 5,000,000,000. Most of the Company’s
convertible debentures have conversion rates at substantial discount to market price; therefore, a decline in market price impacts
the number of shares convertible. As a result, the Company recorded a derivative liability of $565,689, which represented the amount
of shares convertible or committed in excess of the shares authorized at $.0005 per share, the closing market price at March 30,
2013, and as valued according to the Black-Scholes valuation model. On July 15, 2013, the Company effectuated a reverse stock split
(1 -for- 1,350), which was applied retroactively. See Note 18.
CHANGE IN CAPITAL STRUCTURE
. Accordingly, this transaction
resulted in significant shares authorized in excess of those committed, and the full derivative liability of $565,689 was reversed.
|
(1)
|
The Company converted an accounts payable for legal services to a convertible debenture. At the
option of the lender, the principal amount of the note plus any accrued interest may be converted in whole or in part into Common
Stock at the conversion price per share of $.001 by written notice. The lender will be limited to maximum conversion of 4.99% of
the outstanding Common Stock of the Company at any one time. The debenture and the shares referenced within the debenture may be
assignable in whole or in part to a third party at any time during the term. The Company valued the beneficial conversion feature
(BCF) of the convertible debenture at $20,635, the “ceiling” of its intrinsic value. The Company accreted the discount
to the convertible debenture and recognize interest expense through its maturity. On the maturity date of the debenture, the lender
sold and assigned the debenture to an unrelated third party for the face value of the debenture. See Note 17.
COMMITMENT AND
CONTINCIES
regarding dismissal of lawsuit complaint filed by this party against the Company and the original lender. Because
the original lender asserted default against this party, the original lender re-assigned the debenture to another party. See Ref.
(12) for assignment of the debenture as well as accounting treatment of the assignment.
|
|
(2)
|
The Company purchased 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 is 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 is no assurance of success and the invention is still in design and pre-prototype
phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense in during the
year ended 2010. Both parties have agreed to confidentiality regarding the invention during the pre-prototype stage. In addition,
the Company has 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 will 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 closing’s will be for $11,750 and occur in 30 day
increments after the Second Closing. This will continue until the full principal balance of $125,000, plus accrued interest has
been purchased/assigned. See Ref. (9) for discussion of new terms on the assigned portions of the debenture.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
|
(3)
|
The Company ratified a technology and license agreement with commitment for purchase of inventory
related to an agreement signed in 2010, which set pricing for products if minimum quantity purchases were met. Since the Company
did not purchase the minimum quantities, but desired to maintain the technology and licensing rights along with the pricing, it
agreed to purchase the 2010 balance shortage in 2011, as well as the 2011 minimum quantities. The agreement required the Company
issue a convertible debenture for $76,000, and $38,000 of restricted common stock. 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 $32,571. The Company accreted the discount to the convertible debenture and will recognize interest expense through paid in
full or converted. The Company repaid $28,000 of this debenture in 2011. See Note 17.
COMMITMENTS AND CONTINGENCIES
for
discussion of litigation involving the technology and license agreement.
|
|
(4)
|
In 2011, the Company borrowed $42,500, $37,500, and $37,500, respectively, in exchange for three
convertible debentures from a lender. The Company valued the related BCF at $42,500, $37,500 and
$37,500, respectively. On February 7, 2012, the lender sold/assigned all rights and interest on the first debenture having net book
value of $11,000 plus accrued interest of $3,328. On March 9, 2012, the lender sold/assigned all rights and interest on the second
debenture having a net book value of $24,500, plus $1,448 of accrued interest. See reference (11) which discusses the terms and
conditions surrounding the new debentures issued upon extinguishment of the two originals as well as accounting treatment of the
transactions. During the third quarter of 2012, the lender converted to stock the third convertible debenture with $37,500 principal
and $1,500 accrued interest outstanding in full satisfaction of the convertible debenture. The stock was issued without restrictive
legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date
of conversion and did not pay any additional consideration for the shares.
|
On July 2, 2012, the Company
borrowed $78,500 from this same lender in exchange for a convertible debenture maturing on April 5, 2013. Beginning 180 days after
the date of the debenture, lender may convert the note to common shares at a 39% discount of the “Market Price” of
the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition,
if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the
lender’s conversion price will be adjusted downward to the same. The lender cannot convert an amount greater than 4.99% of
the outstanding common stock at any one time. The Company may prepay the debenture at any time before maturity at graduated amounts
depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest. There
is a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company is also required to maintain a
reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture. The Company
valued the BCF of the convertible debenture at $35,268. Accordingly, the $78,500 debenture was discounted by the amount of the
BCF and accreted to the convertible debenture through its maturity, and interest was recognized until converted. During the six
months ended June 30, 2013, the lender converted $78,500 principal plus accrued interest on the convertible debenture in full satisfaction
of the debt. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued
by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.
On August 8, 2012, the Company
borrowed $42,500 from this same lender in exchange for a convertible debenture maturing on May 10, 2013. Beginning 180 days after
the date of the debenture, lender may convert the note to common shares at a 39% discount pursuant to the same terms and conditions
discussed in preceding paragraph. The Company valued the BCF of the convertible debenture at $27,172. Accordingly, the $42,500
debenture is discounted by the amount of the BCF. The Company accreted the discount to the convertible debenture through its maturity
and will recognize interest expense until paid in full or converted. During the six months ended June 30, 2013, the lender converted
$9,000 principal on the convertible debenture. The stock was issued without restrictive legend pursuant to Rule 144, as the holder
acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional
consideration for the shares.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
On October 31, 2012, the Company
borrowed $78,500 from this same lender in exchange for a convertible debenture maturing on August 2, 2013. Beginning 180 days after
the date of the debenture, lender may convert the note to common shares at a 39% discount pursuant to the same terms and conditions
discussed in two paragraphs preceding this one. The Company valued the BCF of the convertible debenture at $50,189. Accordingly,
the $78,500 debenture is discounted by the amount of the BCF. The Company is accreting the discount to the convertible debenture
through its maturity and will recognize interest expense until paid in full or converted.
|
(5)
|
The Company borrowed $50,000 in exchange for a convertible debenture. 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 50,000 and 100,000 warrants at $.25 and $.35 per
share (before restatement for 1,350 -for- 1 split) , respectively. As a result, the Company allocated fair market value
(“FMV”) to both the BCF and to the warrants, or $34,472, which was recorded as a discount against the debenture.
The Company accreted the discount to the convertible debenture through its maturity and recognized interest expense until
both the debenture and accrued interest were converted to stock in full satisfaction of amounts due, in the first and second
quarter of 2012, respectively. Before discount, the Company determined the FMV of the warrants as $7,500 using the
Black-Scholes valuation model.
|
|
(6)
|
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 $.25 and $.35 per share (before restatement for 1,350 -for- 1 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
recognize 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.
|
|
(7)
|
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. The Company is accreting the discount to the convertible debenture and will recognize interest
expense until paid in full or converted.
|
|
(8)
|
The Company converted a note payable and related accrued interest of $39,724 into 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 $17,025. Because the debenture was issued and matured in the third
quarter of 2011, the full amount of the discount, $17,025 was accreted and recognized as interest expense during the period.
|
On February 10, 2012, the lender
sold/assigned all rights and interest on the debenture having a net book value of $39,724, plus $1,552 of accrued interest. See
reference (11) which discusses the terms and conditions surrounding the new debenture issued upon extinguishment of the original
as well as accounting treatment of the transaction.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
|
(9)
|
The Company entered a new debenture agreement upon sale/assignment of the original lender under
the debenture as discussed in reference (2) above. Because the stated terms of the new debenture agreement are significantly different
from the original debenture, including analysis of value of the beneficial conversion feature at the assignment/purchase date,
the transaction is treated as extinguishment of the old debenture and recording of the new for accounting purposes. Because the
debenture is being assigned/sold in installments, the Company is calculating and recognizing gain or loss on the extinguishment
as it occurs. On February 10, 2012, the new holder (lender) purchased $7,500 of the original $125,000 principal balance, and based
on this transaction, the Company recorded a $4,286 loss on extinguishment. On May 18, 2012, the lender purchased another $11,750,
and the Company recorded a $6,714 loss on extinguishment related to this transaction. On July 17, 2012, the lender purchased another
$11,750, and the Company recorded a $6,714 loss on extinguishment related to this transaction. On November 8, 2012, the lender
purchased another $11,750, and the Company recorded a $6,714 loss on the extinguishment related to this transaction.
|
The Company may prepay at any
time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debenture is $.000275 per
share, or $.37125 adjusted for 1 for 1,350 split, 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. The debenture and
the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term.
As of June 30, 2013, the lender
had assigned $5,500 under the debenture to four separate parties, and $23,500 to another party. See reference (10) and (12), respectively,
related to the assignments.
|
(10)
|
This line is comprised of the assignment of $5,500 of the convertible debenture from reference
(9) above with the same stated terms and conditions equally to four separate parties. Due to the smaller transaction amounts, these
four debenture holders have been combined for presentation purposes.
|
|
(11)
|
The Company entered into three new debenture agreements upon sale/assignment of the original lenders
under the debentures as discussed in references (4) and (8) above. Because the stated terms of the new debenture agreement and
principal amounts were significantly different from the original debenture, including analysis of value of the beneficial conversion
feature at the assignment/purchase date, the transactions are treated as extinguishment of the old debentures and recorded as new
for accounting purposes. As a result of these three transactions, the Company recognized a combined loss on extinguishment of $71,577.
|
|
|
The new debentures were issued with the same following terms and conditions: The Company may prepay
at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debentures is $.000275
per share, or $.37125 adjusted for 1 for 1,350 split, 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. During the six months
ended June 30, 2013, the lender converted $3,211 of the debenture with original principal balance of $39,724 to stock. The stock
was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more
than six months prior to the date of conversion and did not pay any additional consideration for the shares.
|
|
|
On January 18, 2013, the lender sold/assigned all rights and interest on one of its three debentures
having net book value of $16,000 plus accrued interest of $1,512. On the same day, the lender sold/assigned all rights and interest
on another of its three debentures having a net book value of $56,250, plus $4,825 of accrued interest. See reference (13) which
discusses the terms and conditions surrounding the new debentures issued upon extinguishment of the two originals as well as accounting
treatment of the transactions. The lender still held the third debenture with original principal balance of $39,724 with net book
value of $2,743 at June 30, 2013.
|
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
|
(12)
|
On April, 19, 2012, the original lender discussed in ref (1) above re-assigned the debenture to
another party asserting default against the first assignee. The amount of assignment was the balance remaining per the original
lender’s records, or $16,347. The Company recognized a $3,700 loss on this transaction. Terms of the assigned debenture are
the same as the original debenture as stated in ref (1). During the year ended December 31, 2012, the new holder converted $16,347
of the debenture principal plus $162 of accrued interest in fully satisfaction.
|
During the year ended December 31, 2012, the lender
accepted assignment of $23,500, of a convertible debenture from the lender discussed in (9) above. See reference (2) for terms
surrounding the original convertible debenture. In addition, the Company converted $2,125 of the assignments to stock during the
six months ended June 30, 2013, plus $202 of accrued interest in full satisfaction of the amount due this lender under the assignments.
The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company
more than six months prior to the date of conversion and did not pay any additional consideration for the shares.
|
(13)
|
On January 18, 2013, the Company entered into three new debenture agreements: one new lending and
two upon sale/assignment of two debentures as discussed in reference (11). Because the stated terms of the new debenture agreements
and principal amounts are significantly different from the original debentures that were sold/assigned, including analysis of value
of the beneficial conversion feature at the assignment/purchase date, the sale/assignment transactions are treated as extinguishment
of the old debentures and recorded as new for accounting purposes. As a result of the sale/assignment transactions, the Company
recognized a combined loss on extinguishment of $93,826. Principal balances on these two new debentures was $30,500 and $95,000,
respectively. The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to
common stock of the total amount of the debentures.
|
The Company borrowed $84,500,
the third debenture referred to above with this lender. The interest rate on the debenture is 10% per annum, and the conversion
price is 59% of the lowest closing bid price per share in the ten trading days prior to the conversion notice. The lender will
not convert an amount that would cause it or any of its affiliates to beneficially own in excess of 4.99% of the Company. The Company
may prepay the debenture within 90 days after the effective date at 140% multiplied by outstanding principal and accrued interest.
The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock
of the total amount of the debenture. The Company valued the BCF of the convertible debenture at $58,720, its intrinsic value.
Accordingly, the $84,500 debenture is discounted by the amount of the BCF. The Company is accreting the discount to the convertible
debenture through its maturity and will recognize interest expense until paid in full or converted. Further, the denture agreement
provides for post-closing expenses, which the lender has noted is $1,000 per conversion and approximately one time $700 in other
fees per debenture. The Company will accrue these fees on each debenture and per conversion. Any events of default defined in the
agreement shall result in 150% of balances due immediately.
The $95,000 and $30,500 debentures contain the same
terms and conditions as the $84,500 debenture except there is no prepayment clause and the conversion price is 44% of the lowest
closing bid price per share in the ten trading days prior to the conversion notice. During the six months ended June 30, 2013,
the Company converted $30,500 plus $191 of accrued interest in full satisfaction of the $30,500 debenture, and $22,500 toward the
$95,000 debenture. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note
issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the
shares.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
(continued)
|
|
(14)
|
On April 8, 2013, the Company borrowed $20,000 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 forty percent (40%)
discount as determined from the lowest trading price for the 5 trading days prior to the conversion notice. The Company valued
the BCF of the convertible debenture at $13,333 and is accreting the discount to the convertible debenture, and will recognize
interest expense until paid in full or converted.
|
Convertible debentures as of December 31, 2012, are as follows:
Origination Date
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Origination Principal Balance
|
|
|
Origination Discount Balance
|
|
|
Period End Principal Balance
|
|
|
Period End Discount Balance
|
|
|
Period End Debenture, Net Balance
|
|
Ref.
|
10/4/2010
|
|
4/4/2011
|
|
|
5
|
%
|
|
$
|
20,635
|
|
|
$
|
(20,635
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
11/27/2010
|
|
5/27/2011
|
|
|
10
|
%
|
|
|
125,000
|
|
|
|
(53,571
|
)
|
|
|
58,750
|
|
|
|
-
|
|
|
|
58,750
|
|
(2)
|
1/7/2011
|
|
11/11/2011
|
|
|
5
|
%
|
|
|
76,000
|
|
|
|
(32,571
|
)
|
|
|
48,000
|
|
|
|
-
|
|
|
|
48,000
|
|
(3)
|
2/10/2011
|
|
1/14/2011
|
|
|
8
|
%
|
|
|
42,500
|
|
|
|
(42,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(4)
|
9/12/2011
|
|
6/14/2012
|
|
|
8
|
%
|
|
|
37,500
|
|
|
|
(37,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(4)
|
3/9/2011
|
|
3/9/2012
|
|
|
10
|
%
|
|
|
50,000
|
|
|
|
(34,472
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(5)
|
5/3/2011
|
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
(6)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
(1,427
|
)
|
|
|
8,573
|
|
(7)
|
9/8/2011
|
|
9/20/2011
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
(17,016
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(8)
|
2/10, 5/18, 7/17, 11/8/2012
|
|
2/10, 5/18, 7/17, 11/8/2014
|
|
|
10
|
%
|
|
|
42,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(9)
|
3/14/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
5,500
|
|
|
|
-
|
|
|
|
472
|
|
|
|
-
|
|
|
|
472
|
|
(10)
|
12/19/2011
|
|
9/21/2012
|
|
|
8
|
%
|
|
|
37,500
|
|
|
|
(37,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(4)
|
2/7/2012
|
|
2/7/2014
|
|
|
10
|
%
|
|
|
16,000
|
|
|
|
-
|
|
|
|
16,000
|
|
|
|
-
|
|
|
|
16,000
|
|
(11)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
-
|
|
|
|
12,643
|
|
|
|
-
|
|
|
|
12,643
|
|
(11)
|
3/9/2012
|
|
3/9/2014
|
|
|
10
|
%
|
|
|
56,250
|
|
|
|
-
|
|
|
|
56,250
|
|
|
|
-
|
|
|
|
56,250
|
|
(11)
|
4/19, 8/17, 11/7/2012
|
|
4/4/2011, 2/10, 4/14/2014
|
|
|
5%, 10
|
%
|
|
|
39,847
|
|
|
|
-
|
|
|
|
2,125
|
|
|
|
-
|
|
|
|
2,125
|
|
(12)
|
7/2/2012
|
|
4/5/2013
|
|
|
8
|
%
|
|
|
78,500
|
|
|
|
(35,268
|
)
|
|
|
78,500
|
|
|
|
(11,754
|
)
|
|
|
66,746
|
|
(4)
|
8/8/2012
|
|
5/2/2013
|
|
|
8
|
%
|
|
|
42,500
|
|
|
|
(27,172
|
)
|
|
|
42,500
|
|
|
|
(12,856
|
)
|
|
|
29,644
|
|
(4)
|
10/31/2012
|
|
8/2/2013
|
|
|
8
|
%
|
|
|
78,500
|
|
|
|
(50,189
|
)
|
|
|
78,500
|
|
|
|
(39,036
|
)
|
|
|
39,464
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
703,740
|
|
|
|
|
|
|
$
|
638,667
|
|
|
Reference numbers in right hand column of table entitled Ref.
refer to paragraphs above the table.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
13.
|
EQUITY BASED COMPENSATION FOR CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES
|
Equity based compensation including
bonuses for consulting, legal, and other professional services is presented on the face of the statement of stockholders’
deficit for the three and six months ended June 30, 2013. More information on the significant components of the amounts presented
for the three and six months ended June 30, 2013 and 2012, follows:
Pursuant to a consulting agreement
for business advisory services, the Company issued or declared payable for the three months ended June 30, 2013, and 2012, 35,236
and 668, respectively, for $7,200 and $20,000 services, respectively. Pursuant to a consulting agreement for business advisory
services, the Company issued or declared payable for the six months ended June 30, 2013, and 2012, 68,032 and 2,333, respectively,
for $26,800 and $34,600 services, respectively. The stock conversion price under the agreement is calculated as a weighted average
for the month the services were granted at a 30% discount. Up until the end of the first quarter 2012, operating expense was recorded
at invoice value due to nominal trading volume. However, beginning in the second quarter of 2012, operating expense was recorded
based on full weighted average share price of the market for the period in which the services were rendered.
On March 27, 2013, the Company
entered into a consulting agreement for financial strategic advice for a term of twelve months from the date of the agreement and
may be terminated by either party within 30 days written notice and any monies owed are due upon termination. As initial fee, the
Company paid the consultant $25,000 in restricted stock during the three months ended June 30, 2013. Further, upon obtaining $5,000,000
new capital into the Company, the consultant will be due $500,000, upon successfully obtaining a second $500,000 commitment of
new capital, $50,000 will be due to the consultant, upon successfully obtaining a third $500,000 commitment of new capital, and
the same arrangement through eleven additional commitment of new capital. Amounts due shall be paid in cash and any brokerage commissions,
private placement fees or other fees in connection with obtaining the new capital shall be reduced from the fees due the consultant
on a dollar per dollar basis.
On May 18, 2012, the Company
issued restricted shares for business advisory and strategic services. The invoice amount was $3,400 and the number of shares
issued was based on a 30% discount to market weighted average share price for period services were performed. However, the Company
recorded operating expense at the full market weighted average share price for the period in which services were rendered, or
$4,857.
On February 2, 2012, the Company
entered into a consulting agreement for financial and public relations services. The term of the agreement is for twelve (12) months
and either party may cancel the agreement with 30 days written notice. Payment was to be monthly beginning in March 2012, in the
form of $10,000 cash, or $20,000 worth of common stock based on the weighted average of the Company’s stock for the month
at a 30% discount. Payment in cash or stock was at the option of the Company. In addition, upon signing of the agreement, the Company
was to issue 2,500,000 shares (pre reverse stock split) for services previously provided during the first quarter of 2012. The
Company recognized $29,750 operating expense under this agreement for the first quarter of 2012 and 3,910 shares payable. Due to
the guarantee stock value clause in the Agreement, the Company compared the value at the time the stock was granted with the value
at the end of the quarter, and determined there was no need for accrual of additional shares payable to achieve the $20,000 market
value to guarantee. After March 31, 2012, this agreement and compensation under this agreement ceased. Accordingly, no expense
related to this agreement was recorded beyond the first quarter of 2012.
On March, 6, 2012, the Company
converted $16,200 in design services payable into 445 restricted shares of common stock based on the market value of the stock
on the date of conversion.
|
14.
|
CONVERSION OF ACCRUED PAYROLL TO STOCK
|
During the three and six months
ended June 30, 2013, the Company converted $18,000 and $27,000 of accrued payroll to restricted stock for services during
the first half of 2013, based on the weighted average price per share during the months the services were rendered.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The components of the provision
for income tax expense are as follows for the three months ended:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
Current taxes
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
--
|
|
|
$
|
--
|
|
State
|
|
|
--
|
|
|
|
--
|
|
Current taxes
|
|
|
--
|
|
|
|
--
|
|
Change in deferred taxes
|
|
|
(29,725
|
)
|
|
|
(79,717
|
)
|
Change in valuation allowance
|
|
|
29,269
|
|
|
|
80,097
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
$
|
(456
|
)
|
|
$
|
380
|
|
The components of the provision
for income tax expense are as follows for the six months ended:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
Current taxes
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
--
|
|
|
$
|
--
|
|
State
|
|
|
--
|
|
|
|
--
|
|
Current taxes
|
|
|
--
|
|
|
|
--
|
|
Change in deferred taxes
|
|
|
(35,292
|
)
|
|
|
(173,415
|
)
|
Change in valuation allowance
|
|
|
38,619
|
|
|
|
186,911
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
$
|
3,327
|
|
|
$
|
13,496
|
|
The following is a summary of
the significant components of the Company’s deferred tax assets and liabilities at June 30, 2013:
Deferred tax assets:
|
|
|
|
Equity based compensation
|
|
$
|
181,617
|
|
Allowance for doubtful accounts
|
|
|
13,260
|
|
Depreciation and amortization timing differences
|
|
|
--
|
|
Net operating loss carryforward
|
|
|
1,160,376
|
|
On-line training certificate reserve
|
|
|
1,048
|
|
Total deferred tax assets
|
|
|
1,356,301
|
|
Valuation allowance
|
|
|
(1,349,543
|
)
|
|
|
|
|
|
Deferred tax assets net of valuation allowance
|
|
|
6,758
|
|
|
|
|
|
|
Less deferred tax assets – non-current, net of valuation allowance
|
|
|
6,496
|
|
|
|
|
|
|
Deferred tax assets – current, net of valuation allowance
|
|
$
|
262
|
|
The effective tax rate used
for calculation of the deferred taxes as of June 30, 2013 was 34%. The Company has established a valuation allowance against deferred
tax assets of $1,349,543 or 99%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve against the
net operating carryforward, 100% reserve against the allowance for doubtful accounts, and 96% reserve against the deferred tax
assets attributable to the equity based compensation.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
15.
|
INCOME TAXES
(continued)
|
The significant differences
between the statutory tax rate and the effective tax rates for the Company for the three months ended are as follows:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
Statutory tax rate
|
|
--
|
%
|
|
--
|
%
|
Increase (decrease) in rates resulting from:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward or carryback
|
|
|
(12
|
)%
|
|
|
(23
|
)%
|
Equity based compensation and loss
|
|
|
7
|
%
|
|
|
--
|
%
|
Book/tax depreciation and amortization differences
|
|
|
--
|
%
|
|
|
--
|
%
|
Change in valuation allowance
|
|
|
5
|
%
|
|
|
25
|
%
|
Other
|
|
|
--
|
%
|
|
|
--
|
%
|
Effective tax rate
|
|
|
--
|
%
|
|
|
2
|
%
|
The following is a summary of
the significant components of the Company’s deferred tax assets and liabilities at December 31, 2012:
Deferred tax assets:
|
|
|
|
Equity based compensation
|
|
$
|
236,145
|
|
Allowance for doubtful accounts
|
|
|
12,240
|
|
Depreciation and amortization timing differences
|
|
|
--
|
|
Net operating loss carryforward
|
|
|
1,071,409
|
|
On-line training certificate reserve
|
|
|
1,215
|
|
Total deferred tax assets
|
|
|
1,321,009
|
|
Valuation allowance
|
|
|
(1,310,924
|
)
|
|
|
|
|
|
Deferred tax assets net of valuation allowance
|
|
|
10,085
|
|
|
|
|
|
|
Less deferred tax assets – non-current, net of valuation allowance
|
|
|
9,781
|
|
|
|
|
|
|
Deferred tax assets – current, net of valuation allowance
|
|
$
|
304
|
|
The effective tax rate used
for calculation of the deferred taxes as of December 31, 2012 was 34%. The Company established a valuation allowance against deferred
tax assets of $1,310,924, or 99%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve against the
net operating carryforward, 100% reserve against the allowance for doubtful accounts, and 95% reserve against the deferred tax
assets attributable to the equity based compensation.
|
16.
|
AUTHORIZATION OF PREFERRED STOCK
|
During the second quarter of
2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s
Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has
such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board
of Directors of the Company from time to time in accordance with the provisions of Chapter 78 of the Nevada Revised Statutes. Before
modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized
the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment
authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to
designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each
series, any or all of which may be greater than the rights of the common stock. As of June 30, 2013, 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.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
On June 28, 2013 the Company
received notice of claim for damages in excess of $15,000 claiming personal injury due to product defect. The Company believes
the case is without merit and will aggressively defend. The claim is being handled by the Company’s product liability insurance
carrier. In the less than probably chance that any liability will be assigned the Company, insurance coverage is deemed adequate
to address.
On March 14, 2013, the Company
received notice from The Depository Trust Company (“DTC”) that they had imposed a restriction on physical deposit and
Deposit/Withdrawal At Custodian (“DWAC”) electronic deposit transactions, referred to as a “Deposit Chill”.
The Deposit Chill was issued by DTC as a result of large deposits of shares, or 243,782,328 ( pre reverse split) shares, of the
Company’s common stock during the period from August 24, 2011 to November 6, 2012. Since this was a substantial percentage
of the Company’s outstanding float deposited at DTC during the period, the matter resulted in the Deposit Chill until DTC
is assured that the shares deposited were tradeable without restriction under the Securities Act of 1933. The Company filed an
“objection” and engaged independent Counsel to provide legal opinion that all shares deposited were tradeable without
restriction under the Securities Act of 1933. The action was successful, and on June 26, 2013, DTC advised the Company that it
had lifted the Deposit Chill.
On January 12, 2013, the Company
received notice of claim for damages in excess of $15,000 claiming personal injury due to product defect. The Company believes
the case is without merit and will aggressively defend. The claim is being handled by the Company’s product liability insurance
carrier. In the less than probable chance that any liability is assigned the Company, insurance coverage is deemed adequate to
address.
On December 18, 2012, Undersea
Breathing Systems, Inc. (“UBS”) filed an amended complaint against the Company compelling purchase of Medal Model No.
4241 membranes or equivalent pursuant to pricing agreement in 2011. UBS is the holder of the convertible debenture referenced in
Note 12.
CONVERTIBLE DEBENTURES
Ref (3). Under the complaint, UBS asserts the Company was to purchase no less than 24 membranes
from the company per year for $2,000 and $1,000, cash and Company stock, respectively, per membrane. The Company took delivery,
paid cash, and issued stock for 14 Medal Model No 4241 membranes pursuant to the stated pricing in 2011, plus issued an additional
$24,000 stock toward future purchases of 24 membranes. However, the Company has not purchased or taken delivery of additional membranes.
At the same time the stock was issued the Company granted UBS a convertible debenture of $76,000 and reduced its balance to $48,000
when the Company paid $28,000 cash and took delivery of the 14 membranes. Therefore, UBS currently has $24,000 worth of stock and
a $48,000 convertible debenture for which the Company took no membrane deliveries. If judgment or settlement were to go in favor
of UBS, there would be no financial impact to the statement of operations or net impact on financial position. This is because
there would be corresponding decreases in amounts to convertible debenture, prepaid inventory, cash, and increase in inventory,
all netting to zero. In addition any future compelled purchases would result in a decrease in cash with corresponding increase
in inventory. As a result, no accrual is warranted, and the Company will await legal advisement and decision on the matter.
On or about May 3, 2012, the
Company received notice of filing of an action for breach of contract, conspiracy to commit securities fraud and injunctive relief
against the Company and the first party named in Note 12.
CONVERTIBLE DEBENTURES
Ref (1). The Plaintiff, Eventus Capital,
Inc., is the second party referenced in Note 12.
CONVERTIBLE DEBENTURES,
Ref (1) who purchased the original debenture from
the first party. The net book value, excluding interest, on the debenture as of December 31, 2012 was approximately $12,700. The
amount named in the original lawsuit was “damages in excess of $15,000”, plus other fees. On July 16, 2012, the Palm
Beach County Court issued an Order on the Company’s Motion to dismiss this complaint. The motion was granted without prejudice
to allow the plaintiff 15 days to file an amended complaint with substantiating documentation. The plaintiff amended its complaint
as required, asserted it incurred a loss of $735,616 in damages. The other Defendant in the action has asserted counter and third
party claims against the plaintiff. Per the opinion of the Company’s legal counsel, the plaintiff has failed to establish
any legal or factual basis for claim, and judgment or settlement against the Company is not probable.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
17.
|
COMMITMENTS AND CONTINGENCIES
(continued)
|
On or about April 27, 2012,
the Company received a default notice from Branch Banking Trust (“BBT”) under its Forbearance Agreement on the mortgage
underlying the Company’s real estate. The Company subsequently received judgment of foreclosure,
as the 17th Judicial Circuit of the Circuit Court of Broward County awarded BBT a final judgment in the amount of $1,123,269. On
August 16, 2012 the Company’s real estate foreclosed upon was sold through a court ordered auction. At the foreclosure sale,
the lender was highest bidder with a bid of $1,300. On December 14, 2012, the lender served the Company with Notice of Final Judgment
of Foreclosure. Per the Notice, the lender seeks Final Judgment including post-judgment interest and costs through date of sale
of $1,127,643 plus post-judgment interest and related expenses. The lender asserts the fair market value of the property on the
date of sale was $1,030,000 and is seeking final judgment against the
Company for the shortfall between
the Final Judgment amount and the fair market value of the property, or approximately $100,000 plus post-judgment interest and
related expenses. Until the entire final judgment amount is satisfied, there can be no assurance that BBT will not take possession
of certain of the Company’s assets to satisfy the judgment. On or about February 11, 2013, the Company extended an offer
to settle Final Judgment and awaits response on its offer.
On November 1, 2012, the Company
entered into a one year lease on the real estate foreclosed upon, which the Company continues to occupy as it manufacturing facility
and headquarters. The terms of the lease are base rent of $3,750 plus sales tax, and either party can cancel the lease with 90
days written notice.
|
18.
|
JOINT VENTURE EQUITY EXCHANGE AGREEMENT
|
On November 7, 2011, the Company
entered into a Joint Venture Equity Exchange Agreement (“Agreement”) with Pompano Dive Center, LLC. (“PDC”).
PDC owns a retail store, several dive boats, and has a classroom for training divers. Under the terms of the Agreement, the Company
will provide PDC with an assortment of Brownie’s Third Lung products on consignment, and PDC will act as a training and demonstration
site for Brownie’s Third Lung products. Beginning in 2012, both parties ceased operating under the consignment inventory
arrangement. Inventory not sold was returned and inventory was purchased for sale. See Note: 7
RELATED PARTY TRANSACTIONS
-
Net revenues and accounts receivable – related parties
for further information on sales to PDC for the period ended
June 30, 2013, and related Accounts Receivable balance. Terms of sale to PDC are no more favorable than those granted other dealers
of the Company’s products.
In addition, the Agreement provides
for a non-binding letter of intent for the possible acquisition of PDC in exchange for BWMG’s stock for the yet to be agreed
upon value of PDC. In anticipation of a possible purchase, the Agreement provides BWMG with a 33% interest in PDC. As part of the
transaction, BWMG issued 3,394 restricted shares (pre-reverse split of its common stock with fair market value on the date of the
transaction of $24,740 to PDC, reflected in other assets in the long-term portion of the Company’s balance sheet.
If BWMG purchases PDC, the stock
issued by BWMG will be credited to the purchase price. Further, PDC is required to remit no later than 45 days from the end of
each quarter, a 33% share in pre-tax net profits. At least 50% of the total pre-tax profits are required for distribution under
the Agreement, and BWMG is not required to share in losses. If PDC decides to sell any inventory provided by the Company, the purchase
price will be the same as that offered to other Dealers of the Company’s products.
If this Agreement is terminated
by either party and/or a written purchase and sales agreement is not entered into by the parties, then the parties’ respective
interests in each other’s business will revert back to the original party. Accordingly, if this should happen, PDC will relinquish
the interest acquired in BWMG through this Agreement and BWMG will do the same. All property at PDC owned by BWMG would be returned
to BWMG at that time as well. Because the joint venture is cancellable at any time by either party with return of respective interest
transferred to each as per the joint venture agreement, possible acquisition of PDC is in the form of a non-binding letter of intent,
each entities assets and liabilities remain their own, BWMG will not share in any of PDC losses or additional expenses unless otherwise
approved, and the management and operation of PDC remains with PDC, the Company accounted for the investment in PDC under the Cost
basis.
For the three and six months
ended June 30, 2013 and 2012, PDC reported pre-tax net losses. Therefore, there was no profit sharing due the Company under the
agreement.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
19.
|
CHANGE IN CAPITAL STRUCTURE
|
Effective July 15, 2013, the
Company effectuated a reverse split of all outstanding shares of Common Stock by a factor of one-for-one thousand three hundred
fifty (1 -for- 1,350). Fractional shares were rounded up to the nearest whole share. The reverse split became effective as of July
15, 2013. In accordance with Securities and Exchange Commissions’ Staff Accounting Bulletin Topic 4C, when a change in capital
structure occurs after the period reporting date, but before release of the financial statements the Company must apply retroactive
treatment to the financial statements to reflect the change. Accordingly, the Company restated the financial statements for the
three and six months ended June 30, 2013, and 2012, to reflect the change in the number of shares, as well as at June 30, 2013,
and December 31, 2012.
Effective February 22, 2012,
also with retroactive restatement, the Company increased the number of authorized shares of common stock from 250,000,000 to 5,000,000,000,
and decreased the par value per share of Common Stock from $.001 to $.0001.
|
20.
|
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 15 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.
|
21.
|
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 will 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 per the OCBB for a total of $75,100. Shares were set aside and reserved
for this transaction. As disclosed in Note 7.
RELATED PARTY TRANSACTIONS
, $45,000 of the $75,100 bonuses was awarded to
the Chief Executive Officer. The Company accrued operating expense ratably from the time of the awards through May 2, 2013, when
vested.
|
22.
|
STRATEGIC ALLIANCE AGREEMENT
|
On April 10, 2012, the Company
entered into a strategic alliance agreement with Precision Paddleboards, Inc. The agreement provides for 12 month exclusivity granted
for $24,000 in one year restricted stock, or 666,667 (pre-reverse stock split). Price per share was calculated as the weighted
average per share for 30 days preceding the agreement or $.036 per share. The Company will recognize the operating expense ratably
over the twelve month vesting term with corresponding entry to shares payable. For the three and six months ended June 30, 2013,
the Company recognized $667 and $6,667 operating expense under the agreement. For the three and six months ended June 30, 2012,
the Company recognized $5,333, and $5,333 operating expense under the agreement.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
23.
INTEREST EXPENSE AND OTHER EXPENSE
(INCOME), NET
For the three months ended June
30, 2013, non-related party interest expense of $56,200 is comprised of $55,910 interest on convertible debentures, and $290 interest
on notes payable. For the three months ended June 30, 2012, non-related party interest expense of $68,754 is comprised of $47,538
interest on convertible debentures, and $21,216 interest on notes payable.
For the three months ended June
30, 2013, $120,402 other income, net is comprised primarily of approximately $50,000 sales commission, $47,500 return and retirement
of year end 2012 stock bonuses granted to certain consultants, and approximately $22,000 royalty income on licensed patents. For
the three months ended June 30, 2012, $3,830 other income, net is primarily comprised of approximately $8,000 loss on extinguishment
of convertible debentures offset by approximately $12.000 individually insignificant, net other income transactions.
For the six
months ended June 30, 2013, non-related party interest expense of $125,050 is comprised of $123,620 interest on convertible debentures,
$660 interest on notes payable, and $770 other interest. For the six months ended June 30, 2012, non-related party interest expense
of $185,529 is comprised of $144,719 interest on convertible debentures, and $40,810 interest on notes payable.
For the six months ended June
30, 2013, $28,624 other income, net is comprised primarily of $93,826 loss on extinguishment of convertible debenture, and offset
by approximately $72,000 royalty income on licensed patents, $47,500 return and retirement of year end 2012 stock bonuses granted
to certain consultants, and approximately $3,000 other income, net of individually insignificant items. For the six months ended
June 30, 2012, $978 other expense, net is primarily comprised of approximately $80,000 loss on extinguishment of convertible debentures,
$34,730 write-off as obsolete or down to fair market value some of the merchandise acquired in asset purchase discussed in Note
8.
ASSET PURCHASE
, and almost completely offset by $95,054 gain on forgiveness of legal accrual, and approximately $19,000
other income, net of individually insignificant transactions.
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24.
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SECURITIES PURCHASE AGREEMENT
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On April 9, 2013, the Company
entered into a security purchase agreement for $5,000,000. Funding under the agreement is subject to certain conditions prior to
closing and registration statement on Form S-1. Under the agreement, a purchase commitment fee of 5% of the commitment amount,
or $250,000, is payable in three tranches of restricted shares of common stock. The first tranche representing 50%, or $125,000,
of the commitment fee was payable upon execution of the security purchase agreement. The second tranche of 25%, or $75,000, is
payable 90 days after issuance of the first tranche. The third tranche of 25%, or $75.000, is payable 90 days after issuance of
the second tranche. Per the agreement, at no time shall the investor be issued shares of common stock in excess of 9.99% ownership
of the outstanding shares of common stock of the Company. Upon successful registration on Form S-1 by the Company, the investor
will purchase $5,000,000 in stock from the Company in accordance with terms and conditions of the agreement. Purchase price per
the agreement is 85% of market price calculated using the volume weighted average stock price for five consecutive trading days
after the Company provides advance notice of purchase request. Advance notices cannot be delivered sooner than ten trading days
apart, and at no time my advances result in the investor beneficially owning in excess of 9.99% outstanding shares of common stock
of the Company.
As of the three months ended
June 30, 2013, the Company had not issued the first tranche of the commitment fee payable in restricted common stock. As a result,
462,963 shares of restricted common stock, or $125,000, are included in stock payable as presented on the face of the statement
of stockholders’ deficit at June 30, 2013. The Company capitalized the $125,000 commitment fee, and will amortize over the
life of the agreement, or 36 months. For the three months ended June 30, 2013, $8,680 was amortized. The net commitment fee is
included in other assets on the balance sheet.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
On August 5, 2013, the Company
issued 2,058 shares of restricted common stock, to the non-employee Board of Director in payment of $2,500 Board of Director Fee
for July 2013 at the weighted average price during the month.
On August 5, 2013, the Company
issued 33,333 shares of restricted common stock to satisfy $4,500 in accrued payroll at the weighted average price for the period
earned.
On July 16, 2013, the Company
issued 462,963 shares of restricted common stock representing 50%, or $125,000, of the commitment fee as discussed in NOTE. 25
.
SECURITIES PURCHASE AGREEEMENT
. Prior to the reverse stock split, which become effective on July 15, 2013, as discussed in
Note 19.
CHANGE IN CAPITAL STRUCTURE,
the Company did not have enough authorized shares remaining to satisfy the commitment
fee. As a result, the investor waited until after the effective date of the reverse stock split to request payment of the first
tranche of commitment fee. After issuance of the restricted shares of stock to the investor, The Company noted that the issuance
of the shares violated terms of the agreement in that the number of shares issued exceeded 9.99% of the outstanding shares of common
stock of the Company rendering the investor an affiliate. As a result, the Company in consultation with legal counsel is determining
best course of action to resolve.
On July 7, 2013,
the Company borrowed $200,000 from a lender. The loan is due upon demand, and further terms may be defined at a later date.
The loan was granted to facilitate satisfaction and cancellation of some debentures. Toward that end the Company is currently
in negotiation with one lender on settlement of all outstanding debt with them. The Company believes settlement is imminent
and terms and conditions will be in the best interest of the Company.