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” 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 into 2014.
We have had a working capital deficit since 2009.
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 upon 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, foreclosure, and final settlement.
The Company is behind on payments due for payroll taxes and withholding, matured convertible debentures, related parties notes payable, accrued liabilities and interest related parties, and certain vendor payables.
The Company is handling delinquencies on a case by case basis.
However, there can be no assurance that cooperation the Company has received thus far will continue.
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.
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 future working capital.
To-date neither endeavor 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 first quarter of 2014.
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.
BWMG has issued a number of convertible debentures as an interim measure to finance 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, and obtaining some short term loans.
The Company has paid for legal and consulting services with restricted stock to maximize working capital, and intends to continue this practice when possible. In addition, the Company implemented some cost saving measures and will continue to explore more to reduce operating expenses.
If BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
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.
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 was $
43,583
and $
19,380
for the years ended December 31, 2013, and 2012, 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 other components of 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Description of business and summary of significant ACCOUNTING policies
(continued)
|
Stock-based compensation (continued)
For the years ended December 31, 2013 and 2012, the Company transacted a fair number of stock-based compensation transactions as reflected on face of the Statement of Stockholders’ Deficit.
This included amortized prepaid equity based compensation for personal guarantees of Chief Executive Officer on Company’s bank debt; additional compensation expense to the Chief Executive Officer payable in stock; Board of Directors’ Fees and Bonuses; certain consulting, legal, and other professional fees;
equity based incentive and/or retention bonuses for some employees, and consultants; some accrued payroll settled in stock; and operating expense for exclusivity pursuant to strategic alliance agreement payable.
These transactions, as applicable, are also further discussed in Note 7.
RELATED PARTIES TRANSACTIONS
, Note 13.
EQUITY BASED COMPENSATION FOR CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES,
Note 21.
EQUITY BASED INCENTIVE/RETENTION BONUSES
, and Note 22.
STRATEGIC ALLIANCE AGREEMENT
.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Description of business and summary of significant ACCOUNTING policies
(continued)
|
Fair value of financial instruments
(continued)
At December 31, 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 the Company’s convertible debentures was the principal balance due at December 31, 2013, and December 31, 2012, or $
526,910
, 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 dilutive earnings per share for the three and years ended December 31, 2013, and 2012, since their effect was antidilutive.
New accounting pronouncements
The Company believes there was no new accounting guidance adopted but not yet effective that either has not already been disclosed in prior reporting periods or is relevant to the readers of BWMG’s financial statements.
Inventory consists of the following as of:
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
317,187
|
|
$
|
324,459
|
|
Work in process
|
|
|
--
|
|
|
--
|
|
Finished goods
|
|
|
418,739
|
|
|
279,408
|
|
|
|
$
|
735,926
|
|
$
|
603,867
|
|
|
3.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current assets totaling $
115,440
at December 31, 2013, consists of $
94,990
prepaid inventory, $
14,141
prepaid insurance, $
5,917
receivable from Board of Director in stock associated with forgiveness of Board of Director Fees, and $
392
other current assets.
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.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
4.
|
FURNITURE, FIXTURES, AND EQUIPMENT
|
Furniture, fixtures, and equipment consists of the following as of:
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures, vehicles and equipment
|
|
$
|
204,896
|
|
$
|
181,296
|
|
Less: accumulated depreciation and amortization
|
|
|
(128,631)
|
|
|
(109,015)
|
|
|
|
$
|
76,265
|
|
$
|
72,281
|
|
Other assets of $
27,635
at December 31, 2013 consists of $
24,740
investment in joint venture, and $
2,895
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.
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.
|
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 years ended December 31, 2013 and 2012, represented
29.15
% and
28.08
%, respectively, of total net revenues.
Sales to no other customers represented greater than
10
% of net revenues for three and years ended December 31, 2013, and 2012.
|
7.
|
RELATED PARTIES TRANSACTIONS
|
Notes payable related parties
Notes payable related parties consists of the following at December 31, 2013:
Promissory note payable to the Chief Executive Officer of the 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.
|
|
$
|
49,702
|
|
|
|
|
|
|
Promissory note payable to the non-employee Board of Director, secured by up to $200,000 in and to all of the Company’s right, title and interest in its fixed assets, inventory, receivables, and all documents including its books, records, and files; bearing interest at 21.21% per annum, due in monthly principal and interest payments of $8,585, maturing on November 1, 2014.
|
|
|
77,917
|
|
|
|
|
|
|
|
|
|
127,619
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
127,619
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
--
|
|
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
7.
|
RELATED PARTIES TRANSACTIONS
(continued)
|
As of December 31, 2013, principal payments on the notes payable related parties are as follows:
2014
|
|
$
|
127,619
|
|
2015
|
|
|
--
|
|
2016
|
|
|
--
|
|
2017
|
|
|
--
|
|
2018
|
|
|
--
|
|
Thereafter
|
|
|
--
|
|
|
|
|
|
|
|
|
$
|
127,619
|
|
As of December 31, 2013, the Company was approximately nine 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
shares of common stock (restated for reverse stock split, see Note 18. CHANGE IN CAPITAL STRUCTURE) in satisfaction of $
50,000
of note payable related parties.
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.
On October 30, 2013, the Company signed a secured promissory note, with Mikkel Pitzner, the non-employee Board of Director (BOD) for $
85,000
.
In addition to the terms of the Note Payable disclosed in the table above, the Company was to use its best efforts to settle the Branch Banking and Trust (“BBT”) Judgment and terminate all Uniform Commercial Code filings in favor of Mr. Pitzner within 10 business days of the date of the agreement.
As further inducement to make the loan, Mr. Pitzner was granted an option to purchase
1,802,565
shares of the Company’s common stock for $
.01
per share.
The option is exercisable immediately and will continue for a period ending two years from the agreement date with an option for cashless exercise based on a formula within the agreement.
The closing price per share of the Company’s stock closing on the OTCBB on the date of the agreement was $
.025
per share.
As a result of the option granted, the Company recorded approximately $
44,610
stock option expense using the Black-Scholes valuation model on date of the agreement. See Note 17.
COMMITMENTS AND CONTINGENCIES,
for November 20, 2013, Satisfaction of BBT Final Judgment.
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
|
|
$
|
--
|
|
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 years ended December 31, 2013 and 2012, was $
836,872
and $
804,381
, respectively.
Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2013, was $
11,926
, $
6,116
, and $
3,047
, 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 $
27,759
, $
15,226
, and $
8,457
, respectively.
Sales to Pompano Dive Center for the years ended December 31, 2013, and 2012, was $
23,322
and $
11,531
, respectively.
Accounts Receivable from Pompano Dive Center at December 31, 2013, and December 31, 2012, was $
14,029
, 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 years ended December 31, 2013, and December 31, 2012 was $
1,097
and $
50
, respectively.
Sales to Brownie’s Global Logistics. LLC and 940 Associates, Inc., companies owned by the Chief Executive Officer, were $
80,613
and $
4,340
, respectively, for the year ended December 31, 2013, and $
0
, for the year ended December 31, 2012.
Accounts receivable from Brownie’s Global Logistics, LLC at December 31, 2013 was $
70,823
and the receivable related to a sale in the 4
th
quarter of 2013, was paid within terms in January 2014.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
7.
|
RELATED PARTIES TRANSACTIONS
(continued)
|
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 years ended December 31, 2013 and 2012, is disclosed on the face of the Company’s Consolidated Statements of Operations.
As of December 31, 2013, and December 31, 2012, the Company was approximately twenty-six months in arrears 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, loan conversion, and bonus
In April 2011, the Board of Directors approved a director compensation plan whereby each non-employee director would be paid the equivalent of $
2,500
per month by the Company.
One of the two non-employee Board of Directors (“BOD”), of the three person BODs, 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 from first quarter of 2012 to the BOD who resigned, and $
7,500
due Mikkel Pitzner from fourth quarter of 2012.
Because the remaining non-employee BOD, Mr.
Pitzner, now accounts for
50
% of the BODs, the Company reclassified him to related parties as of April 2012.
See
Other liabilities and accrued interest - related parties
below for inclusion of the $7,500 payable to him as of December 31, 2102.
Prior to April 2012, the two non-employee BOD were not classified as related parties.
Non-Employee Board of Directors’ fees (related and unrelated parties) for the years ended December 31, 2013 and 2012, was $
27,500
and $
37,500
(paid in BWMG stock), respectively.
Effective December 23, 2013, the BODs cancelled the $
2,500
per month non-employee BOD compensation agreement on a go-forward basis.
In addition, Mr. Pitzner forgave the $
27,500
BOD fees due and or paid him through November 2013, for the year ended December 31, 2013.
Related to the forgiveness of the BOD fees for 2013, the Company cancelled stock payable to him, recorded $
5,917
receivable for the stock due back from him, and recorded the $
27,500
as contribution to Additional Paid in Capital.
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 years ended 2012 for certain employees, service providers, and consultants.
As part of this bonus, Mr. 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 years ended December 31, 2012. The shares were issued to Mr. Pitzner during the first quarter ended March 31, 2013.
Equity based compensation to employee
During the year ended December 31, 2013 the Company converted $
54,000
of accrued payroll to
959,870
shares of restricted stock for services rendered by Alexander F. Purdon in 2013 based on the weighted average price per share during the months the services were rendered.
During the year ended December 31, 2012, the Company converted $
99,000
of accrued payroll due him to
16,537
shares of restricted stock payable for services rendered in 2012 and 2011, also based on the weighted average price per share during the months the services were rendered.
Mr. Purdon, owned stock in the Company prior to agreeing to accept stock in lieu of cash for employment compensation.
As a result, Mr. Purdon exceeded 10% ownership in 2013, and is now accounted for as a related party.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
7.
|
RELATED PARTIES TRANSACTIONS
(continued)
|
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:
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
Year-end 2012 bonus payable to Chief Executive Officer
|
|
$
|
67,000
|
|
$
|
67,000
|
|
BOD fee payable to non-employee related parties
|
|
|
--
|
|
|
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. is 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, since 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 years ended December 31, 2013 and 2012, the Company recognized $
137,494
and $
500,004
, respectively, as amortization of prepaid compensation under this agreement.
Prepaid compensation remaining under this agreement as of December 31, 2013, and December 31, 2012, was $
0
and $
137,494
, respectively, and is reflected as a component of Stockholders’ Deficit.
Stock options outstanding from patent purchase
Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued patents. In exchange for the Intellectual Property (“IP), the Company issued Mr. Carmichael
234
stock options (adjusted for 1 for 1,350 reverse stock split) at a $
1,350
exercise price with expiration ten years from the effective date of grant, or March 2, 2019.
None of the options have been exercised to-date.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
7.
|
RELATED PARTIES 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 years 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 BOD of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012, the BOD declared an $
83,333
bonus due the Chief Executive Officer payable in 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 (“incremental salary”). The shares were to vest six months after the last day of each month, continued employment was requirement for vesting, and shares would not be issuable until vested.
The Company recorded $
23,801
operating expense each month related to the incremental salary, which was $
16,667
plus $
7,144
discount added back to record at full monthly weighted average price per market.
On December 23, 2013, the Chief Executive Officer forgave all incremental salary shares payable to him by the Company from 2012 through November 2013.
As a result, the Company recorded $
428,578
contribution to Additional Paid in Capital for the year ended December 31, 2013, for the cancellation of the $
261,904
, and $
166,667
stock payable from 2013 and 2012, respectively.
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 was 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 was 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 monthly rental including CAM at the time of assignment was 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 stock as 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 December 31, 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 ceased operations at the dive store and vacated the premises.
The $
3,200
lease deposit was returned during the year ended December 31, 2013.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable and accrued liabilities of $
534,558
at December 31, 2013, consists of $
245,672
accounts payable trade, $
50,910
accrued payroll and related fringe benefits, $
62,500
accrued year-end bonuses, $
42,093
accrued payroll taxes and withholding, $
133,383
accrued interest.
Accrued payroll taxes and withholding were approximately six months in arrears at December 31, 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.
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 were also due in arrears to varying degrees.
Other liabilities of $
251,653
at December 31, 2013, consists of $
235,000
short-term loans, $
12,858
payable for assets purchased pursuant to Asset Purchase Agreement (Note 8.
ASSET PURCHASE
), $
3,169
on-line training liability, and $
626
other liabilities. The foreclosure liability is the final court judgment amount, see Note 25.
SUBSEQUENT EVENTS
, which represents the shortfall between the mortgage and fees owed and value of the property foreclosed upon. The $235,000 short-term loans is comprised of three loans due on demand from unrelated parties.
The loans have no other stated terms except one for $
200,000
indicated it was for settlement of debenture debt.
Therefore, the Company used the proceeds from that loan toward settlement of convertible debentures referenced in (13) of Note 12.
CONVERTIBLE DEBENTURES
.
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.
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 from the time customer purchases the unit before expiration. The Company owes the on-line training vendor an agreed upon negotiated rate for on-line certificates redeemed prior to expiration, and payment is due upon redemption. The Company estimates the on-line training liability based on 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes payable consists of the following as of December 31, 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.
|
|
$
|
15,305
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
12,540
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
2,765
|
|
As of December 31, 2013, principal payments on the notes payable are as follows:
2014
|
|
$
|
12,540
|
|
2015
|
|
|
2,765
|
|
2016
|
|
|
--
|
|
2017
|
|
|
--
|
|
2018
|
|
|
--
|
|
Thereafter
|
|
|
--
|
|
|
|
|
|
|
|
|
$
|
15,305
|
|
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 December 31, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
|
The Company has outstanding convertible debentures as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End
|
|
|
|
|
|
|
|
|
|
Origination
|
|
Origination
|
|
Period End
|
|
Period End
|
|
Debenture,
|
|
|
|
Origination
|
|
Maturity
|
|
Interest
|
|
Principal
|
|
Discount
|
|
Principal
|
|
Discount
|
|
Net
|
|
|
|
Date
|
|
Date
|
|
Rate
|
|
Balance
|
|
Balance
|
|
Balance
|
|
Balance
|
|
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
|
|
|
-
|
|
|
10,000
|
|
(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)
|
|
|
8,445
|
|
|
-
|
|
|
8,445
|
|
(4)
|
|
10/31/2012
|
|
8/2/2013
|
|
8%
|
|
|
78,500
|
|
|
(50,189)
|
|
|
78,500
|
|
|
-
|
|
|
78,500
|
|
(4)
|
|
1/18/2013
|
|
1/18/2014
|
|
10%
|
|
|
84,500
|
|
|
(58,720)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(13)
|
|
1/18/2013
|
|
1/18/2014
|
|
10%
|
|
|
30,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(13)
|
|
1/18/2013
|
|
1/18/2014
|
|
10%
|
|
|
95,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(13)
|
|
4/8/2013
|
|
4/14/2013
|
|
9.9%
|
|
|
20,000
|
|
|
(13,333)
|
|
|
20,000
|
|
|
(3,334)
|
|
|
16,666
|
|
(14)
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
$
|
526,910
|
|
$
|
(3,334)
|
|
$
|
523,576
|
|
|
|
Reference numbers in right hand column of table entitled Ref. refer to paragraphs with corresponding
number
that immediately follow the next two paragraphs, which discuss derivative liability.
BROWNIE’S MARINE GROUP, INC.
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 19.
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 years 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.
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 beneficial conversion features (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 years ended December 31, 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 was 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 year ended December 31, 2013, the lender converted $
34,055
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.
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 was 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)
|
On March 9, 2011, the Company borrowed $
50,000
in exchange for a convertible debenture.
The lender could 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 could have prepaid 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 $
337.50
and $
472.50
per share (after restatement for
1 for -1,350
- reverse stock split) , respectively.
As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $
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)
|
On May 3, 2011, the Company borrowed $
300,000
in exchange for a convertible debenture.
The Debenture bears
10
% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a
30
% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion.
The Company may prepay the debenture plus accrued interest at any time before maturity.
In addition, as further inducement for loaning the Company the funds, the Company granted the lender
300,000
and
600,000
warrants at $
337.50
and $
472.50
per share (after restatement for
1 for -1,350
- reverse stock split), respectively.
As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $
206,832
, which was recorded as a discount against the debenture.
The Company accreted the discount to the convertible debenture through maturity and will 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 accreted 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.
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 were significantly different from the original debenture, including analysis of value of the beneficial conversion feature at the assignment/purchase date, the transaction was 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 $
.37125
(adjusted for
1-for-1,350
reverse stock 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 December 31, 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 $
.37125
(adjusted for
1-for-1,350
reverse stock 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 years ended December 31, 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 December 31, 2013.
BROWNIE’S MARINE GROUP, INC.
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 this 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 full satisfaction.
|
During the years 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 year ended December 31, 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 the 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 was 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 was
10
% per annum, and the conversion price was
59
% of the lowest closing bid price per share in the ten trading days prior to the conversion notice.
Per terms of the debenture agreement, the lender was not to 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 could prepay the debenture within 90 days after the effective date at 140% multiplied by outstanding principal and accrued interest.
The Company was 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 was discounted by the amount of the BCF.
The Company accreted discount to the convertible debenture and interest expense through its settlement on August 12, 2013 as discussed below.
Further, the debenture agreement provided for post-closing expenses, which the lender noted was $
1,000
per conversion and approximately $
700
in other fees per each debenture.
The Company accrued these fees on each debenture and per conversion.
The $
95,000
and $
30,500
debentures contained the same terms and conditions as the $84,500 debenture except there were no prepayment clause, and the conversion price was 44% of the lowest closing bid price per share in the ten trading days prior to the conversion notice.
During the years ended December 31, 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.
On August 12, 2013, the Company fully settled the two debentures outstanding with $
157,446
principal and $
8,794
accrued interest totaling $
166,240
with this lender for $
170,000
.
All pre-payment penalties were waived and the Company recognized the difference between the $166,240 and $170,000, or $
3,760
, as other expense for the year ended December 31, 2013.
BROWNIE’S MARINE GROUP, INC.
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 thirty 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End
|
|
|
|
|
|
|
|
|
|
Origination
|
|
Origination
|
|
Period End
|
|
Period End
|
|
Debenture,
|
|
|
|
Origination
|
|
Maturity
|
|
Interest
|
|
Principal
|
|
Discount
|
|
Principal
|
|
Discount
|
|
Net
|
|
|
|
Date
|
|
Date
|
|
Rate
|
|
Balance
|
|
Balance
|
|
Balance
|
|
Balance
|
|
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
|
|
$
|
(65,073)
|
|
$
|
638,667
|
|
|
|
Reference numbers in right hand column of table entitled Ref. refer to paragraphs above the table.
BROWNIE’S MARINE GROUP, INC.
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 years ended December 31, 2013 and 2012. More information on the significant components of the amounts presented for the years ended December 31, 2013 and 2012 follows:
During the fourth quarter of 2013, the Company engaged a vendor to provide research and development services.
As part of the arrangement, the vendor agreed to take $
6,810
in shares of the Company’s stock based on the weighted average price of the Company’s stock. The $
6,810
is included in shares payable December 31, 2013, for consulting, legal, and other professional services on the Statement of Stockholders’ Deficit.
Pursuant to a consulting agreement for business advisory services, the Company issued for the years ended December 31, 2013, and 2012,
68,032
and
8,588
, respectively, for $
26,800
and $
46,571
, respectively, in services.
The brother of this consultant performed engineering services under the same terms and conditions of the agreement and the Company issued
47
restricted shares and recorded operating expense of $
2,571
for the years ended December 31, 2012.
The stock conversion price under the agreement was 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, or
37,038
shares, during the years ended December 31, 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,
76
, 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
1,852
shares 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.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the provision for income tax expense are as follows for the years ended:
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Current taxes
|
|
|
|
|
|
|
|
Federal
|
|
$
|
--
|
|
$
|
--
|
|
State
|
|
|
--
|
|
|
--
|
|
Current taxes
|
|
|
--
|
|
|
--
|
|
Change in deferred taxes
|
|
|
85,065
|
|
|
331,211
|
|
Change in valuation allowance
|
|
|
(77,587)
|
|
|
(292,880)
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
$
|
7,478
|
|
$
|
38,231
|
|
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2013:
Deferred tax assets:
|
|
|
|
|
Equity based compensation
|
|
$
|
97,276
|
|
Allowance for doubtful accounts
|
|
|
13,260
|
|
Depreciation and amortization timing differences
|
|
|
--
|
|
Net operating loss carryforward
|
|
|
1,124,299
|
|
On-line training certificate reserve
|
|
|
1,109
|
|
Total deferred tax assets
|
|
|
1,235,944
|
|
Valuation allowance
|
|
|
(1,233,337)
|
|
|
|
|
|
|
Deferred tax assets net of valuation allowance
|
|
|
2,607
|
|
|
|
|
|
|
Less deferred tax assets non-current, net of valuation allowance
|
|
|
2,330
|
|
|
|
|
|
|
Deferred tax assets current, net of valuation allowance
|
|
$
|
277
|
|
The effective tax rate used for calculation of the deferred taxes as of December 31, 2013 was
34
%.
The Company has established a valuation allowance against deferred tax assets of $
1,235,879
or
99.8
%, due to the uncertainty regarding realization, comprised primarily of a
100
% reserve against the net operating carryforward, 100% reserve against the allowance for doubtful accounts, and
97
% reserve against the deferred tax assets attributable to the equity based compensation.
BROWNIE’S MARINE GROUP, INC.
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:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
Statutory tax rate
|
|
--
|
%
|
|
--
|
%
|
|
Increase (decrease) in rates resulting from:
|
|
|
|
|
|
|
|
Net operating loss carryforward or carryback
|
|
(7)
|
%
|
|
28
|
%
|
|
Equity based compensation and loss
|
|
18
|
%
|
|
(11)
|
%
|
|
Book/tax depreciation and amortization differences
|
|
--
|
%
|
|
--
|
%
|
|
Change in valuation allowance
|
|
(10)
|
%
|
|
(15)
|
%
|
|
Other
|
|
--
|
%
|
|
--
|
%
|
|
Effective tax rate
|
|
1
|
%
|
|
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 December 31, 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.
The preferred stock votes with the Company’s common stock, except as otherwise required under Nevada law. Accordingly, Mr. Carmichael will own
93
% of the combined voting power of the Common Stock and Series A Covertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
On August 16, 2012, the Company’s real estate foreclosed upon by Branch Banking and Trust (“BBT”) was sold through a court ordered auction.
At the foreclosure sale, BBT 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, BBT served the Company with Notice of Final Judgment of Foreclosure.
Per the Notice, the lender sought 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 asserted the fair market value of the property on the date of sale was $
1,030,000
and was 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 was periodically reviewed and adjusted as applicable.
On October 14, 2013, BBT. brought before the court a Motion for Deficiency Final Judgment (the “Motion”) against Trebor Industries, Inc., fully owned subsidiary of the Company, and Robert M. Carmichael, the Company’s Chief Executive Officer, and received a final judgment of $
103,026
, plus interest.
As part of the Motion, a Fact Information sheet was to be provided the defendants for completion including all required attachments within forty-five days of delivery from plaintiff, unless the Final Judgment is satisfied or post-judgment discovery is stayed.
During November 2013, the Company settled the Final Judgment with BBT for $
85,000
.
Accordingly, BWMG recorded $
18,026
to other income for the period.
The 17th Judicial Circuit of the Circuit Court of Broward County recorded Satisfaction of Final Judgment on November 20, 2013.
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 were base rent of $
3,750
plus sales tax. Either party could cancel the lease with
90
days written notice.
Effective on the date of expiration, the lease was renewed with the same terms and conditions.
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 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.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
17.
|
COMMITMENTS AND CONTINGENCIES
(continued)
|
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.
|
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 PARTIES TRANSACTIONS
-
Net revenues and accounts receivable related parties
for further information on sales to PDC for the period ended December 31, 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 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 years ended December 31, 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.
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 years ended December 31, 2013, and 2012, to reflect the change in the number of shares, as well as at December 31, 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
75
Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period.
Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company.
The term of the Plan shall be ten years.
The Board of Directors may amend, alter, suspend, or terminate the Plan at any time.
All
297
options were issued under the plan prior to January 1, 2010, and to-date all remain outstanding.
|
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 as reported on per the OTCBB prior to the grant date for a total of $
75,100
. Shares were set aside and reserved for this transaction. As disclosed in Note 7.
RELATED PARTIES 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
494
shares.
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 years ended December 31, 2013 and 2012, the Company recognized $
6,667
, and $
17,333
, respectively, operating expense under the agreement.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
23.
|
INTEREST EXPENSE NON-RELATED PARTIES AND OTHER EXPENSE (INCOME), NET
|
For the year ended December 31, 2013, non-related parties interest expense of $
198,342
is comprised of approximately $
194,000
interest on convertible debentures and approximately $
4,000
interest on notes payable and other interest.
For the year ended December 31, 2012, non-related parties interest expense of $
264,243
is comprised of $
233,148
interest on convertible debentures, $
26,337
interest on notes payable, and $
4,758
other interest.
For the year ended December 31, 2013, $
73,731
other income, net is comprised primarily of $
106,000
in sales commissions, approximately $
22,000
royalty income on licensed patents, $
47,500
return and retirement of year end 2012 stock bonuses granted to certain consultants, approximately $
25,000
downward adjustment of BBT foreclosure liability from settlement of Final Judgment, $
15,841
other income, net of individually insignificant items, and partially offset by approximately $
98,000
loss on extinguishment of convertible debentures, and $
44,610
stock option expense.
See Note 7.
RELATED PARTIES
for further information regarding the stock options granted Mr. Pitzner, BOD, in conjunction with note payable issued to him by Company for $
85,000
. For the year ended December 31, 2012, the $
81,655
other expense, net is comprised primarily of $
116,539
loss on foreclosure of real estate, $
106,421
loss on extinguishment of convertible debentures, and partially offset by $
95,054
gain on forgiveness of legal debt dated prior to April 2004, $
29,940
product license royalty income, and $
16,311
other income net of individually insignificant transactions.
|
24.
|
SECURITIES PURCHASE AGREEMENT
|
Effective December 31, 2013, the Company entered into an agreement to terminate the $
5,000,000
security purchase agreement it had entered into on April 9, 2013.
As part of the original agreement, the Company had paid a $
125,000
commitment fee in shares of stock.
As part of the termination, the $
125,000
shares were returned and cancelled as of December 31, 2013.
Accordingly, the $
125,000
commitment fee, which had been fully expensed during 2013, was reversed at December 31, 2013 when the shares were returned.
On January 31, 2014, and February 28, 2014, Mr. Alexander F. Purdon, was issued
387,530
and
402,610
shares of restricted common stock, respectively, in lieu of cash for $
4,500
employee compensation for each of the two months ended February 28, 2014.
The number of shares issues was based on the weighted average share price during the months in which the services were rendered.
Conversions of debentures to shares of common stock occurred subsequent to December 31, 2013.
The stock was issued upon partial conversion of a convertible note 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.
Conversions were as follows (ref. number corresponds to lender reference number in Note 12.
CONVERTIBLE DEBENTURES
):
Ref (4) lender
On March 13, 2014, the lender converted $1,040 of its debenture to 196,226 shares.
On March 5, 2014, the lender converted $
980
of its debenture to
196,000
shares.
On February 26, 2014 the lender converted $
960
of its debenture to
195,918
shares.
On February 7, 2014, the lender converted $
865
of its debenture to
196,591
shares
On February 4, 2014, the lender converted $
960
of its debenture to
195,918
shares.
On January 28, 2014, the lender converted $
645
of its debenture to
195,455
shares.
On January 24, 2014, the lender converted $
645
of its debenture to
195,455
shares.
On January 17, 2014, the lender converted $
648
of its debenture to
196,364
shares.
On January 7, 2014, the lender converted $
727
of its debenture to
196,486
shares.