U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(mark one)
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of Securities
Exchange Act of 1934 |
For the quarterly period ended June 30,
2014
| o | Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For the transition period from _______ to
_______.
Commission File No. 333-99393
Brownie’s
Marine Group, Inc.
(Name of Small Business Issuer in Its Charter)
Nevada |
90-0226181 |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
|
940 N.W. 1st Street, Fort Lauderdale, Florida |
33311 |
(Address of Principal Executive Offices) |
(Zip Code) |
|
|
(954) 462-5570
(Issuer’s Telephone Number, Including
Area Code)
(Former Name, if Changed Since Last Report)
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its Corporate Website, in any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes
x No ¨
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
Accelerated filer ¨ |
|
|
Non-accelerated filer ¨ (Do
not check if a smaller reporting company) |
Smaller reporting
company x |
Indicate by check mark
whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes ¨
No x
There were 30,344,667 shares of common stock outstanding as
of August 14, 2014.
PART I
Item 1. Financial Statements
Financial Information
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| |
June 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
ASSETS | |
| | |
| |
| | | |
| | |
Current assets | |
| | | |
| | |
Cash | |
$ | 37,603 | | |
$ | 70,084 | |
Accounts receivable, net of $38,000 and $39,000 allowance for doubtful accounts, respectively | |
| 28,139 | | |
| 30,298 | |
Accounts receivable - related parties | |
| 96,048 | | |
| 105,942 | |
Inventory | |
| 695,695 | | |
| 735,926 | |
Prepaid expenses and other current assets | |
| 146,211 | | |
| 109,523 | |
Other current assets - related parties | |
| 5,257 | | |
| 5,917 | |
Deferred tax asset, net - current | |
| 233 | | |
| 277 | |
Total current assets | |
| 1,009,186 | | |
| 1,057,967 | |
| |
| | | |
| | |
Furniture, fixtures and equipment, net of accumulated depreciation of $111,393 and $128,631, respectively | |
| 60,535 | | |
| 76,265 | |
| |
| | | |
| | |
Deferred tax asset, net - non-current | |
| 2,330 | | |
| 2,330 | |
Other assets | |
| 27,635 | | |
| 27,635 | |
| |
| | | |
| | |
Total assets | |
$ | 1,099,686 | | |
$ | 1,164,197 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | |
| |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 507,951 | | |
$ | 517,058 | |
Customer deposits and unearned revenue | |
| 37,050 | | |
| 99,610 | |
Royalties payable - related parties | |
| 131,429 | | |
| 137,129 | |
Other liabilities | |
| 250,916 | | |
| 252,009 | |
Other liabilities and accrued interest - related parties | |
| 96,526 | | |
| 90,517 | |
Convertible debentures, net | |
| 475,336 | | |
| 523,576 | |
Notes payable - current portion | |
| 9,114 | | |
| 12,540 | |
Notes payable - related parties - current portion | |
| 63,750 | | |
| 127,619 | |
Total current liabilities | |
| 1,572,072 | | |
| 1,760,058 | |
| |
| | | |
| | |
Long-term liabilities | |
| | | |
| | |
Notes payable - long-term portion | |
| — | | |
| 2,765 | |
| |
| | | |
| | |
Total liabilities | |
| 1,572,072 | | |
| 1,762,823 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' deficit | |
| | | |
| | |
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding | |
| 425 | | |
| 425 | |
Common stock; $0.0001 par value; 5,000,000,000 shares authorized; 70,099,076 and 10,049,140 shares issued, respectively; 23,583,351 and 5,672,051 shares outstanding, respectively | |
| 2,358 | | |
| 567 | |
Common stock payable; $0.0001 par value; 195,610 and 200,795 shares, respectively | |
| 20 | | |
| 20 | |
Additional paid-in capital | |
| 8,555,192 | | |
| 8,478,092 | |
Accumulated deficit | |
| (9,030,381 | ) | |
| (9,077,730 | ) |
Total stockholders' deficit | |
| (472,386 | ) | |
| (598,626 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' deficit | |
$ | 1,099,686 | | |
$ | 1,164,197 | |
See Accompanying Unaudited Notes to Consolidated
Financial Statements
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Net revenues | |
| | | |
| | | |
| | | |
| | |
Net revenues | |
$ | 549,054 | | |
$ | 337,346 | | |
$ | 781,373 | | |
$ | 760,627 | |
Net revenues - related parties | |
| 316,070 | | |
| 255,289 | | |
| 672,135 | | |
| 420,671 | |
Total net revenues | |
| 865,124 | | |
| 592,635 | | |
| 1,453,508 | | |
| 1,181,298 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of net revenues | |
| | | |
| | | |
| | | |
| | |
Cost of net revenues | |
| 544,472 | | |
| 432,159 | | |
| 996,318 | | |
| 905,077 | |
Royalties expense - related parties | |
| 20,411 | | |
| 14,662 | | |
| 33,637 | | |
| 14,283 | |
Total cost of net revenues | |
| 564,883 | | |
| 446,821 | | |
| 1,029,955 | | |
| 919,360 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 300,241 | | |
| 145,814 | | |
| 423,553 | | |
| 261,938 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative | |
| 157,745 | | |
| 333,752 | | |
| 337,712 | | |
| 911,781 | |
Research and development costs | |
| 1,200 | | |
| 16,355 | | |
| 1,579 | | |
| 15,599 | |
Total operating expenses | |
| 158,945 | | |
| 350,107 | | |
| 339,291 | | |
| 927,380 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| 141,296 | | |
| (204,293 | ) | |
| 84,262 | | |
| (665,442 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other (income) expense, net | |
| | | |
| | | |
| | | |
| | |
Other (income) expense, net | |
| 39,342 | | |
| (120,402 | ) | |
| 2,604 | | |
| (28,624 | ) |
Change in derivative liability | |
| — | | |
| (565,689 | ) | |
| — | | |
| — | |
Interest expense | |
| 11,700 | | |
| 56,200 | | |
| 25,252 | | |
| 125,050 | |
Interest expense - related parties | |
| 4,506 | | |
| 271 | | |
| 9,013 | | |
| 928 | |
Total other (income) expense, net | |
| 55,548 | | |
| (629,620 | ) | |
| 36,869 | | |
| 97,354 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) before provision for income taxes | |
| 85,748 | | |
| 425,327 | | |
| 47,393 | | |
| (762,796 | ) |
| |
| | | |
| | | |
| | | |
| | |
Provision for income tax (benefit) expense | |
| — | | |
| (456 | ) | |
| 44 | | |
| 3,327 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | 85,748 | | |
$ | 425,783 | | |
$ | 47,349 | | |
$ | (766,123 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic income (loss) per common share | |
$ | 0.01 | | |
$ | 0.19 | | |
$ | 0.00 | | |
$ | (0.49 | ) |
Diluted income (loss) per common share | |
$ | 0.00 | | |
$ | 0.03 | | |
$ | 0.00 | | |
$ | (0.49 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic weighted average common shares outstanding | |
| 14,097,417 | | |
| 2,191,590 | | |
| 10,665,857 | | |
| 1,570,240 | |
Diluted weighted average common shares outstanding | |
| 69,028,500 | | |
| 13,225,571 | | |
| 65,596,941 | | |
| 1,570,240 | |
See Accompanying Unaudited Notes to Consolidated
Financial Statements
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
DEFICIT
| |
| | |
| | |
| | |
| | |
| | |
| | |
Additional | | |
| | |
Total | |
| |
Common stock | | |
Preferred stock | | |
Common stock payable | | |
paid-in | | |
Accumulated | | |
stockholders' | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
capital | | |
deficit | | |
deficit | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance, December 31, 2013 | |
| 5,672,051 | | |
$ | 567 | | |
| 425,000 | | |
$ | 425 | | |
| 195,610 | | |
$ | 20 | | |
$ | 8,478,092 | | |
$ | (9,077,730 | ) | |
$ | (598,626 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of related party employee compensation payable to stock | |
| 1,223,977 | | |
| 122 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 13,378 | | |
| — | | |
| 13,500 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of accrued interest on convertible debentures to stock | |
| 307,224 | | |
| 31 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,669 | | |
| — | | |
| 1,700 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of convertible debentures to stock | |
| 2,239,007 | | |
| 224 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 9,886 | | |
| — | | |
| 10,110 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Retirement of shares returned by non-employee Board of Director | |
| (14,406 | ) | |
| (1 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,382 | ) | |
| — | | |
| (1,383 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (38,399 | ) | |
| (38,399 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, March 31, 2014 (Unaudited) | |
| 9,427,853 | | |
$ | 943 | | |
| 425,000 | | |
$ | 425 | | |
| 195,610 | | |
$ | 20 | | |
$ | 8,501,643 | | |
$ | (9,116,129 | ) | |
$ | (613,098 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of related party employee compensation payable to stock | |
| 1,696,872 | | |
| 169 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 13,331 | | |
| — | | |
| 13,500 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of convertible debentures to stock | |
| 12,458,626 | | |
| 1,246 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 40,218 | | |
| — | | |
| 41,464 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 85,748 | | |
| 85,748 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2014 (Unaudited) | |
| 23,583,351 | | |
$ | 2,358 | | |
| 425,000 | | |
$ | 425 | | |
| 195,610 | | |
$ | 20 | | |
$ | 8,555,192 | | |
$ | (9,030,381 | ) | |
$ | (472,386 | ) |
See Accompanying Unaudited Notes to Consolidated
Financial Statements
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
Six Months Ended June 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Cash flows provided by (used in) operating activities: | |
| | | |
| | |
Net income (loss) | |
$ | 47,349 | | |
$ | (766,123 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| | | |
| | |
Depreciation | |
| 10,656 | | |
| 9,371 | |
Amortization of security purchase commitment fees | |
| — | | |
| 8,680 | |
Change in deferred tax asset, net | |
| 44 | | |
| 3,327 | |
Equity based compensation for consulting and legal services | |
| — | | |
| 51,800 | |
Equity based compensation for product exclusivity | |
| — | | |
| 6,667 | |
Equity based employee and consultant bonuses | |
| — | | |
| 20,100 | |
Equity based non-employee Board of Director' fees | |
| — | | |
| 15,000 | |
Accretion of convertible debenture discounts | |
| 3,334 | | |
| 88,999 | |
Equity based Chief Executive Officer compensation and bonuses | |
| — | | |
| 172,358 | |
Amortization of prepaid equity based compensation to Chief Executive Officer | |
| — | | |
| 137,494 | |
Loss on disposal of fixed assets | |
| 24,486 | | |
| — | |
Loss on extinguishment of convertible debentures | |
| — | | |
| 93,825 | |
Retirement of certain 2012 year end consultant bonuses | |
| — | | |
| (47,500 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Change in accounts receivable, net | |
| 2,159 | | |
| 17,215 | |
Change in accounts receivable - related parties | |
| 9,894 | | |
| (62,091 | ) |
Change in inventory | |
| 40,231 | | |
| (56,562 | ) |
Change in prepaid expenses and other current assets | |
| (38,071 | ) | |
| 8,422 | |
Change in other current assets - related parties | |
| 660 | | |
| — | |
Change in other assets | |
| — | | |
| 4,054 | |
Change in accounts payable and accrued liabilities | |
| (24,895 | ) | |
| 102,156 | |
Change in customer deposits and unearned revenue | |
| (62,560 | ) | |
| 79,449 | |
Change in other liabilities | |
| (1,093 | ) | |
| (7,976 | ) |
Change in other liabilities and accrued interest - related parties | |
| 50,509 | | |
| — | |
Change in royalties payable - related parties | |
| (5,700 | ) | |
| 7,886 | |
Net cash provide by (used in) operating activities | |
| 57,003 | | |
| (113,449 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of fixed assets | |
| (19,412 | ) | |
| — | |
Net cash used in investing activities | |
| (19,412 | ) | |
| — | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from borrowing on convertible debentures | |
| — | | |
| 176,750 | |
Proceeds from short-term loans payable | |
| — | | |
| 3,000 | |
Principal payment on convertible debentures | |
| — | | |
| (72,250 | ) |
Principal payments on note payable | |
| (6,203 | ) | |
| (5,885 | ) |
Principal payments on note payable - related parties | |
| (63,869 | ) | |
| (37,442 | ) |
Net cash (used in) provided by financing activities | |
| (70,072 | ) | |
| 64,173 | |
| |
| | | |
| | |
Net change in cash | |
| (32,481 | ) | |
| (49,276 | ) |
| |
| | | |
| | |
Cash, beginning of period | |
| 70,084 | | |
| 69,292 | |
| |
| | | |
| | |
Cash, end of period | |
$ | 37,603 | | |
$ | 20,016 | |
| |
Six Months Ended June 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
| |
| | |
| |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | 3,301 | | |
$ | 1,547 | |
| |
| | | |
| | |
Cash paid for income taxes | |
$ | -- | | |
$ | -- | |
| |
| | | |
| | |
Supplemental disclosures of non-cash investing activities and future operating activities: | |
| | | |
| | |
Discounts on convertible debentures | |
$ | -- | | |
$ | 72,053 | |
| |
| | | |
| | |
Stock issued for Non-Employee Board of Director Fees | |
$ | -- | | |
$ | 15,000 | |
| |
| | | |
| | |
Conversion of convertible debentures to stock | |
$ | 51,574 | | |
$ | 152,079 | |
| |
| | | |
| | |
Conversion of accrued payroll to stock - related party | |
$ | 27,000 | | |
$ | 27,000 | |
| |
| | | |
| | |
Conversion of accrued interest and
fees on convertible debentures to stock | |
$ | 1,700 | | |
$ | 7,398 | |
| |
| | | |
| | |
Conversion of accrued Non-employee Board of Directors fees to stock | |
$ | -- | | |
$ | 15,000 | |
| |
| | | |
| | |
Retirement of shares returned by non-employee Board of Director | |
$ | 1,383 | | |
$ | -- | |
| |
| | | |
| | |
Security purchase commitment fees payable in stock | |
$ | -- | | |
$ | 125,000 | |
See Accompanying
Unaudited Notes to Consolidated Financial Statements
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 1. | Description of business and summary of significant accounting
policies |
Description of business
–Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company” 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 2013 financial statement amounts to conform to the 2014 financial statement presentation.
Effective July 15, 2013 the Company effectuated a reverse stock split (1 -for- 1,350). See Note 18. 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 in 2014. We have had a
working capital deficit since 2009.
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.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 1. | Description of business and summary of significant accounting
policies (continued) |
Going Concern (continued)
– During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of
2012, purchased the assets of another, with assumption of their retail location lease. The Company accomplished both transactions
predominantly through issuance of restricted common stock in BWMG. The Company believed these transactions would help generate
sufficient future working capital. Neither endeavor did or has generated profit or positive cash-flow. Therefore, 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 17. 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 operational cash flow will be sufficient to fund presently anticipated operations
beyond the third 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.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 1. | Description of business and summary of significant accounting
policies (continued) |
Product development costs
– Product development expenditures are charged to expenses as incurred.
Advertising and marketing
costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs,
and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising
and trade show (credit) expense incurred for the three months ended June 30, 2014 and 2013, was $292 and $5,889, respectively.
Advertising and trade show expense incurred for the six months ended June 30, 2014, and 2013, was $620 and $33,161, respectively.
Customer deposits and returns
policy – The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building
the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision
for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns
of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice.
Income taxes –
The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets
and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred
tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred
tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination,
the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established
against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would
be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment
to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting
guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on
the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized
initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Comprehensive income
– The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all
periods.
Stock-based compensation
– The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby
compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which
is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants
issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance
with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The
fair value has been determined either through use of the quoted stock price.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 1. | Description of business and summary of significant ACCOUNTING
policies (continued) |
Stock-based compensation
(continued) – For the three and six months ended June 30, 2014 and 2013, the Company compensated and/or converted all
accrued payroll to stock for one related party employee. In addition, for the three and six months ended June 30, 2014 and 2013,
the Company transacted stock-based compensation transactions as follows: 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;
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; 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 20. EQUITY BASED INCENTIVE/RETENTION
BONUSES, and Note 21. 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. See Note 12. CONVERTIBLE DEBENTURES for further discussion.
Fair value of
financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. An entity is required to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be
used to measure fair value:
Level 1 - Quoted prices in active
markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices for
similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that
are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active
markets.
Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level
3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies,
or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment
or estimation.
Inputs are used in applying
the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions,
including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement. However, the determination of what constitutes “observable”
requires significant judgment by the Company. Management considers observable data to be market data which is readily available,
regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are
actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency
of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 1. | Description of business and summary of significant ACCOUNTING
policies (continued) |
Fair
value of financial instruments (continued) – At June 30, 2014, and December 31,
2013, 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 June 30, 2014, and December 31, 2013, or $475,336, and $516,800, 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 when discount
is not fully accreted.
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 six months ended June 30, 2014, and 2013, 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:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Raw materials | |
$ | 287,879 | | |
$ | 317,187 | |
Work in process | |
| — | | |
| — | |
Finished goods | |
| 407,816 | | |
| 418,739 | |
| |
$ | 695,695 | | |
$ | 735,926 | |
| 3. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current
assets totaling $146,211 at June 30, 2014, consists of $114,115 prepaid inventory, $17,741 prepaid insurance, $13,493 prepaid subcontract
labor; and $862 other current assets and prepaid expenses.
Prepaid expenses and other current
assets totaling $109,523 at December 31, 2013, consists of $94,990 prepaid inventory, $14,141 prepaid insurance, and $392 other
current assets.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 4. | FURNITURE, FIXTURES, AND EQUIPMENT |
Furniture, fixtures,
and equipment consists of the following as of:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Furniture, fixtures, vehicles and equipment | |
$ | 171,928 | | |
$ | 204,896 | |
Less: accumulated depreciation and amortization | |
| (111,393 | ) | |
| (128,631 | ) |
| |
$ | 60,535 | | |
$ | 76,265 | |
5. OTHER ASSETS
| | Other assets of $27,635 at June 30, 2014
and December 31, 2013, consists of $24,740 investment in joint venture, and $2,895 refundable
deposits. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further information
on investment in joint venture. |
| | |
| 6. | CUSTOMER CREDIT CONCENTRATIONS |
The Company sells to three entities
owned by the brother of Robert Carmichael, the Company’s Chief Executive officer, and two Company’s owned by the Chief
Executive Officer as further discussed in Note 7. RELATED PARTIES TRANSACTIONS. Combined sales to these five entities for
three months ended June 30, 2014 and 2013, represented 35.94% and 42.22%, respectively, of total net revenues. Combined sales to
these five entities for six months ended June 30, 2014 and 2013, represented 45.81% and 35.09%, respectively, of total net revenues.
Sales to no other customers represented greater than 10% of net revenues for three and six months ended June 30, 2014, and 2013.
| 7. | RELATED PARTIES TRANSACTIONS |
Notes payable – related
parties
Notes payable – related
parties consists of the following at June 30, 2014:
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 | |
$ | 63,750 | |
| |
| | |
Less amounts due within one year | |
| 63,750 | |
| |
| | |
Long-term portion of notes payable | |
$ | — | |
As of June 30, 2014, principal
payments on the notes payable – related parties are as follows:
2014 | |
$ | 63,750 | |
2015 | |
| — | |
2016 | |
| — | |
2017 | |
| — | |
2018 | |
| — | |
Thereafter | |
| — | |
| |
| | |
| |
$ | 63,750 | |
During the three months ended
March 31, 2014, the Company fully satisfied the note payable due the Chief Executive Officer for $49,702, which had matured in
September 2013.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 7. | RELATED PARTIES TRANSACTIONS (continued) |
As of June 30, 2014, the Company
was four months in arrears on payments due under the Note payable to the non-employee Board of Director. No notice of default has
been received and the Company plans to make payments as able.
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 | |
$ | — | |
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 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.
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 $44,610 stock option expense using the Black-Scholes valuation model on date of the
agreement.
Net revenues and accounts
receivable – related parties – The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s
Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of
sale are no more favorable than those extended to any of the Company’s other customers. Combined net revenues from these
entities for three months ended June 30, 2014 and 2013, was $265,490 and $250,228, respectively. Combined net revenues from these
entities for six months ended June 30, 2014 and 2013, was $487,231 and $414,473, respectively. Accounts receivable from Brownie’s
SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at June 30, 2014, was $53,414,
$4,799, and $17,042, 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.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 7. | RELATED PARTIES TRANSACTIONS (continued) |
Net revenues and
accounts receivable – related parties (continued) - The Company sells products to Brownie’s Global Logistics,
LLC. (“BGL”) And 940 Associates, Inc., fully owned by the Company’s Chief Executive Officer. Terms of sale
are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended to
Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are
consistent with those extended to Brownie’s strategic partners. Strategic partner terms include promotion of
BWMG’s technologies and “Brownie’s” brand, offered only on product or services not offered for
resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services.. BGL
is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and
“Brownie’s” brand in the yachting and exploration community word-wide through its operations. Combined net revenues from these entities for three months
ended June 30, 2014 and 2013, was $45,447 and $0, respectively. Combined net revenues from these entities for six months
ended June 30, 2014 and 2013, was $178,691 and $0, respectively. Accounts receivable from BGL at
June 30, 2014, and December 30, 2013 was $607 and $70,823, respectively.
Sales to Pompano Dive Center
for the three months ended June 30, 2014, and 2013, was $5,133 and $5,061, respectively. Sales to Pompano Dive Center for the six
months ended June 30, 2014, and 2013, was $6,212 and $6,198, respectively. Terms of sale are no more favorable than those extended
to any of the Company’s other customers. Accounts receivable from Pompano Dive Center at June 30, 2014 and December 31, 2013,
was $20,187, and $14,029, respectively. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further discussion regarding
Pompano Dive Center. .
Royalties expense –
related parties – The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to
as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns. Under
the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing
5% annually. Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”,
“Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based
on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements
for the three and six months ended June 30, 2014 and 2013, is disclosed on the face of the Company’s Consolidated Statements
of Operations. As of June 30, 2014, and December 31, 2013, the Company was approximately twenty-five and twenty-six months in arrears,
respectively, on royalty payments due. No default notice has been received and the Company plans to make payments as able.
Equity based compensation
for Chief Executive Officer – On November 2, 2012, the Board of Directors (BODs) 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. Of the total stock incentive bonuses declared for the key employees
and consultants of $75,150 or 61,852 shares of common stock, the Chief Executive was awarded $45,000 or 37,037 shares. The Company
recorded compensation expense ratably over the vesting period, and for the three months ended June 30, 2013, compensation expense
to the Chief Executive Officer related to this transaction was $22,500. See Note 20. 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 BODs. This amount is included in operating expense for the year
ended December 31, 2012. See table below for inclusion in other liabilities and accrued interest – related parties. Further,
pursuant to a Written Consent of the BODs 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 shares vested. These shares are included in shares payable on the statement
of stockholders’ deficit. These shares are included in shares payable on the statement of stockholders’ deficit.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 7. | RELATED PARTIES TRANSACTIONS (continued) |
Equity based compensation
for Chief Executive Officer – (continued) 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 and 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.
Non-employee Board of Director
fees and bonus – Effective December 23, 2013, the Board of Directors cancelled the $2,500 per month non-employee Board
of Director fee agreement under which Mikkel. Pitzner was being compensated. In addition, Mr. Pitzner forgave the $27,500 BOD fees
due in shares payable and/or paid him monthly through November 2013. Related to the forgiveness of the BOD fees for 2013, the Company
cancelled related 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. During the three months ended June 30, 2014, Mr. Pitzner returned 14,406 shares, or
$1,383 of $5,917.
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. The shares were issued to Mr. Pitzner
during the three months ended June 30, 2013.
Equity based compensation
to employee – During November 2013, Alexander F. Purdon, an employee of the Company, exceeded 10% ownership whereby he
was reclassified to related party. The Company pays Mr. Purdon’s employment compensation in restricted shares of stock in
lieu of cash. The number of shares paid is based on the weighted average price per share during the months the services were rendered.
For the three months ended June 30, 2014 and 2013, stock based compensation to Mr. Purdon was $13,500 and $9,000, respectively.
In addition, of the $129,500 employee bonuses declared payable for 2012 year end, which is payable in stock or cash to be determined
by the Board of Directors, Mr. Purdon is due $17,500. Lastly, of 61,852 total shares of common stock attributable to incentive
retention bonuses declared by the Board of Directors in 2012, which vested as of May 2013, Mr. Purdon received 1,852 shares of
stock, which were valued at $2,250. These shares are included in shares payable on the statement of stockholders’ deficit.
These shares are included in shares payable on the statement of stockholders’ deficit.
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.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 7. | RELATED PARTIES TRANSACTIONS (continued) |
Other liabilities and accrued
interest– related parties
Other liabilities and accrued
interest– related parties consists of the following at:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Year-end 2012 bonus payable to Chief Executive Officer | |
$ | 67,000 | | |
$ | 67,000 | |
Year-end 2012 bonus payable to employee | |
| 17,500 | | |
| 17,500 | |
Accrued interest on note payable non-employee Board of Director | |
| 6,009 | | |
| — | |
Due to Principals of Carleigh Rae Corp., net | |
| 6,017 | | |
| 6,017 | |
| |
$ | 96,526 | | |
$ | 90,517 | |
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 per share with expiration ten years from the
effective date of grant, or March 2, 2019. None of the options have been exercised to-date.
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 was in compliance with all terms of the lease. On May 31, 2013, the Company closed
the dive store and vacated the premises. The $3,200 lease deposit was returned during the year ended December 31, 2013. As of June
30, 2014, the Company had paid Seller $9,643 toward the $22,500 cash purchase price leaving a balance of $12,857 included in other
liabilities.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 9. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
Accounts payable and accrued
liabilities of $507,951 at June 30, 2014, consists of $209,048 accounts payable trade, $42,512 accrued payroll and related fringe
benefits, $45,000 accrued year-end bonuses, $43,249 accrued payroll taxes and withholding, $14,850 accrued loss for debenture settlement
in July 2014, and $153,292 accrued interest. Accrued payroll taxes and withholding were approximately six months in arrears at
June 30, 2014. 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 $517,058 at December 31, 2013, consists of $245,672 accounts payable trade, $50,910 accrued payroll and related
fringe benefits, $45,000 accrued year-end bonuses, $42,093 accrued payroll taxes and withholding, and $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.
Other liabilities of $250,916
at June 30, 2014, consists of $235,000 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement
(Note 8. ASSET PURCHASE), and $3,059 on-line training liability. Other liabilities of $252,009 at December 31, 2013, consists
of $235,000 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement, $3,169 on-line training
liability, and $983 other liabilities. 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.
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 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.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Notes payable consists of the
following as of June 30, 2014:
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. | |
$ | 9,114 | |
| |
| | |
Less amounts due within one year | |
| 9,114 | |
| |
| | |
Long-term portion of notes payable | |
$ | — | |
As of June 30, 2014, principal
payments on the notes payable are as follows:
2014 | |
$ | 6,349 | |
2015 | |
| 2,765 | |
2016 | |
| — | |
2017 | |
| — | |
2018 | |
| — | |
Thereafter | |
| — | |
| |
| | |
| |
$ | 9,114 | |
The unsecured note payable in
the table above and as reflected table below in the December 31, 2013, note payable balance resulted from conversion of a vendor
payable dating back to February 2011. The note payable was restructured once in June 2012 to reduce the monthly payments and to
extend the maturity.
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 | |
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 12. | CONVERTIBLE DEBENTURES |
Convertible debentures
consist of the following at June 30, 2014:
Origination Date | |
Maturity Date | |
Interest Rate | | |
Origination Principal
Balance | | |
Origination Discount
Balance | | |
Period End Principal
Balance | | |
Period End
Discount Balance | | |
Period End Balance,
Net | | |
Accrued Interest
Balance | | |
Ref. | |
11/27/2010 | |
5/27/2011 | |
| 10 | % | |
| 125,000 | | |
| (53,571 | ) | |
$ | 58,750 | | |
| - | | |
$ | 58,750 | | |
$ | 25,889 | | |
| (2 | ) |
1/7/2011 | |
11/11/2011 | |
| 5 | % | |
| 76,000 | | |
| (32,571 | ) | |
| 48,000 | | |
| - | | |
| 48,000 | | |
| 9,150 | | |
| (3 | ) |
8/8/2012 | |
5/2/2013 | |
| 8 | % | |
| 42,500 | | |
| (27,172 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4 | ) |
10/31/2012 | |
8/2/2013 | |
| 8 | % | |
| 78,500 | | |
| (50,189 | ) | |
| 47,860 | | |
| - | | |
| 47,860 | | |
| 10,255 | | |
| (4 | ) |
5/3/2011 | |
5/5/2012 | |
| 5 | % | |
| 300,000 | | |
| (206,832 | ) | |
| 300,000 | | |
| - | | |
| 300,000 | | |
| 95,000 | | |
| (6 | ) |
8/31/2011 | |
8/31/2013 | |
| 5 | % | |
| 10,000 | | |
| (4,286 | ) | |
| 10,000 | | |
| - | | |
| 10,000 | | |
| 1,427 | | |
| (7 | ) |
2/2/2012 | |
| |
| 10 | % | |
| See
ref (9) for Discussion | | |
| | | |
| - | | |
| - | | |
| 379 | | |
| (9 | ) |
3/14/2012 | |
2/10/2014 | |
| 10 | % | |
| 5,500 | | |
| - | | |
| 472 | | |
| - | | |
| 472 | | |
| 144 | | |
| (10 | ) |
2/10/2012 | |
2/10/2014 | |
| 10 | % | |
| 39,724 | | |
| - | | |
| 2,743 | | |
| - | | |
| 2,743 | | |
| 3,365 | | |
| (11 | ) |
4/8/2013 | |
4/14/2013 | |
| 9.90 | % | |
| 20,000 | | |
| (13,333 | ) | |
| 7,511 | | |
| - | | |
| 7,511 | | |
| 2,357 | | |
| (14 | ) |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| |
| | | |
| | | |
| | | |
$ | 475,336 | | |
| | | |
$ | 475,336 | | |
$ | 147,966 | | |
| | |
Reference numbers in right hand
column of table entitled Ref. refer to paragraphs with corresponding number that immediately follow the next paragraph. The referenced
paragraphs also support the December 31, 2013 table, which appears at the end of this Note. Therefore, it is appropriate that some
of the number references do not appear in the table above (i.e. Ref. 1).
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.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (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 recognized 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. 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 in exchange for convertible debenture exclusive rights for license of certain
intellectual property from an unrelated party. The parties agreed to a royalty of 2.5% of net revenues generated from the sale,
sub-license or use of the technology or a reasonable negotiated rate based on similar invention. The debenture was convertible
to common shares of the Company at May 27, 2011, along with accrued interest at the option of the lender. Conversion price per
share is 30% discount as determined from the weighted average of the preceding 12 trading days’ closing market price. The
Company valued the BCF of the convertible debenture at $53,517, its intrinsic value. The Company accreted the discount to the convertible
debenture and will recognize interest expense through repayment in full or conversion. Because there was no assurance of success
and the invention was still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483,
as research and development expense during the year ended 2010. Both parties agreed to confidentiality regarding the invention
during the pre-prototype stage. In addition, the Company agreed to provide the licensor with design services, as well as assist
in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services. |
On February 10, 2012, the holder
of this debenture entered into an agreement with a third party to sell/assign the $125,000 principal balance, plus accrued interest.
The purchase was to be in installments with transfer/assignment of the debenture upon payment, referred to as “Closings”.
The first Closing was on or about February 15, 2012 for $7,500, with that amount assigned/transferred. The second Closing, occurred
90 days after the first closing for $11,750 paid/assigned. All subsequent Closings were to be for $11,750 and occur in 30 day increments
after the second Closing. This was to continue until the full principal balance of $125,000, plus accrued interest has been purchased/assigned.
See Ref. (9) for discussion of new terms on the assigned portions of the debenture.
| (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 shares of restricted common stock. The lender at their option could 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 16. COMMITMENTS AND CONTINGENCIES
for discussion of litigation involving the technology and license agreement. |
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (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 in 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 could 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 granted a lower price for common stock purchase or conversion to anyone else during the term of the agreement, the
lender’s conversion price would be adjusted downward to the same. The lender could not convert an amount greater than 4.99%
of the outstanding common stock at any one time. The Company could have prepaid 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 was a $2,000 per day penalty for not timely delivering shares upon conversion notice. 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 $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. By December
31, 2013, the lender had 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 could have converted 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.
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 could have converted 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. During the three and six months
ended June 30, 2014, the lender converted $28,975 and $30,640, respectively, of the convertible debenture to shares of common 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.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (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.
| (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. |
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 12. | CONVERTIBLE DEBENTURES (continued) |
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. Since that date the lender has not purchased
or converted any shares pursuant to the sale/assignment agreement.
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 June 30, 2014 and December
31, 2013, the lender had assigned a cumulative $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
in the year ended December 31, 2012. |
| | 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. As of June 30, 2014, the lender still held the third debenture with original principal balance of
$39,724 with net book value of $2,743. |
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (12) | On April, 19, 2012, the original lender discussed in ref (1) above re-assigned the debenture to
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 convertible 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 balance on these two new convertible 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.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 12. | CONVERTIBLE DEBENTURES (continued) |
| (14) | On April 8, 2013, the Company borrowed $20,000 in exchange for a convertible debenture. The lender
at their option may convert all or part of the note plus accrued interest into common stock at a price of 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. During the three and six months ended June 30, 2014, the lender converted $12,489
and $12,489, respectively, of the convertible debenture to shares of common 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. |
Convertible debentures
consist of the following at December 31, 2013:
Origination Date | |
Maturity Date | |
Interest
Rate | | |
Origination
Principal Balance | | |
Origination
Discount Balance | | |
Period End
Principal Balance | | |
Period
End Discount Balance | | |
Period
End Balance, Net | | |
Accrued
Interest Balance | | |
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 | | |
| 22,949 | | |
| (2 | ) |
1/7/2011 | |
11/11/2011 | |
| 5 | % | |
| 76,000 | | |
| (32,571 | ) | |
| 48,000 | | |
| - | | |
| 48,000 | | |
| 7,950 | | |
| (3 | ) |
2/10/2011 | |
1/14/2012 | |
| 8 | % | |
| 42,500 | | |
| (42,500 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4 | ) |
9/12/2011 | |
6/14/2012 | |
| 8 | % | |
| 37,500 | | |
| (37,500 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4 | ) |
12/19/2011 | |
9/21/2012 | |
| 8 | % | |
| 37,500 | | |
| (37,500 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4 | ) |
8/8/2012 | |
5/2/2013 | |
| 8 | % | |
| 42,500 | | |
| (27,172 | ) | |
| 8,445 | | |
| - | | |
| 8,445 | | |
| 3,949 | | |
| (4 | ) |
10/31/2012 | |
8/2/2013 | |
| 8 | % | |
| 78,500 | | |
| (50,189 | ) | |
| 78,500 | | |
| - | | |
| 78,500 | | |
| 7,325 | | |
| (4 | ) |
7/2/2012 | |
4/5/2013 | |
| 8 | % | |
| 78,500 | | |
| (35,268 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (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 | | |
| 80,000 | | |
| (6 | ) |
8/31/2011 | |
8/31/2013 | |
| 5 | % | |
| 10,000 | | |
| (4,286 | ) | |
| 10,000 | | |
| - | | |
| 10,000 | | |
| 1,175 | | |
| (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 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 379 | | |
| (9 | ) |
3/14/2012 | |
2/10/2014 | |
| 10 | % | |
| 5,500 | | |
| - | | |
| 472 | | |
| - | | |
| 472 | | |
| 120 | | |
| (10 | ) |
2/10/2012 | |
2/10/2014 | |
| 10 | % | |
| 39,724 | | |
| - | | |
| 2,743 | | |
| - | | |
| 2,743 | | |
| 3,227 | | |
| (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 | ) |
1/18/2014 | |
10% | |
| 84,500 | | |
| (58,720 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (13 | ) |
1/18/2014 | |
10% | |
| 30,500 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (13 | ) |
1/18/2014 | |
10% | |
| 95,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (13 | ) |
4/8/2013 | |
4/14/2013 | |
| 9.90 | % | |
| 20,000 | | |
| (13,333 | ) | |
| 20,000 | | |
| (3,334 | ) | |
| 16,666 | | |
| 1,440 | | |
| (14 | ) |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| |
| | | |
| | | |
| | | |
$ | 526,910 | | |
| | | |
$ | 523,576 | | |
$ | 128,514 | | |
| | |
Reference numbers in right hand column of table entitled Ref.
refer to paragraphs above the table.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 13. | EQUITY BASED COMPENSATION FOR CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES |
Equity based compensation is
presented on the face of the Statement of Stockholders’ Deficit for the three and six months ended June 30, 2014. More information
on the significant components of the amounts presented for the three and six months ended June 30, 2014 and 2013 follows:
For the three and six months
ended June 30, 2014 and 2013, the Company converted $13,500, and $27,000, respectively, employee compensation payable. This amounted
to 2,920,849 and 88,243 shares of restricted common stock for the six months ended June 30, 2014 and 2013, respectively. For additional
information see Note 7. RELATED PARTIES - Equity based compensation to employee
Pursuant to a consulting agreement
for business advisory services for the three and six months ended June 30, 2013, the Company issued 35,236 and 68,032 shares of
restricted stock, respectively, for $7,200 and $68,032 services, respectively. The stock conversion price under the agreement was
calculated as a weighted average for the month the services were granted at a 30% discount. Operating expense was recorded based
on full weighted average share price of the market for the period in which the services were rendered.
On March 27, 2013, the Company
entered into a consulting agreement for financial strategic advice for a term of twelve months from the date of the agreement and
may be terminated by either party within 30 days written notice and any monies owed are due upon termination. As initial fee, the
Company paid the consultant $25,000 in restricted stock during the three months ended March 30, 2013. Further, upon obtaining $5,000,000
new capital into the Company, the consultant will be due $500,000, upon successfully obtaining a second $500,000 commitment of
new capital, $50,000 will be due to the consultant, upon successfully obtaining a third $500,000 commitment of new capital, and
the same arrangement through eleven additional commitment of new capital. Amounts due shall be paid in cash and any brokerage commissions,
private placement fees or other fees in connection with obtaining the new capital shall be reduced from the fees due the consultant
on a dollar per dollar basis.
The components of the provision
for income tax expense are as follows for the three months ended:
| |
June 30, 2014 | | |
June 30, 2013 | |
Current taxes | |
| | | |
| | |
Federal | |
$ | — | | |
$ | — | |
State | |
| — | | |
| — | |
Current taxes | |
| — | | |
| — | |
Change in deferred taxes | |
| — | | |
| (29,725 | ) |
Change in valuation allowance | |
| — | | |
| 29,269 | |
| |
| | | |
| | |
Provision for income tax expense | |
$ | — | | |
$ | (456 | ) |
The components of the provision
for income tax expense are as follows for the six months ended:
| |
June 30, 2014 | | |
June 30, 2013 | |
Current taxes | |
| | | |
| | |
Federal | |
$ | — | | |
$ | — | |
State | |
| — | | |
| — | |
Current taxes | |
| — | | |
| — | |
Change in deferred taxes | |
| (39,550 | ) | |
| (35,292 | ) |
Change in valuation allowance | |
| 39,594 | | |
| 38,619 | |
| |
| | | |
| | |
Provision for income tax expense | |
$ | 44 | | |
$ | 3,327 | |
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 14. | INCOME TAXES (continued) |
The following is a summary of
the significant components of the Company’s deferred tax assets and liabilities at June 30, 2014:
Deferred tax assets: | |
| | |
Equity based compensation | |
$ | 97,276 | |
Allowance for doubtful accounts | |
| 12,920 | |
Net operating loss carryforward | |
| 1,094.012 | |
On-line training certificate reserve | |
| 1,071 | |
Total deferred tax assets | |
| 1,205,278 | |
Valuation allowance | |
| (1,202,715 | ) |
| |
| | |
Deferred tax assets net of valuation allowance | |
| 2,563 | |
| |
| | |
Less deferred tax assets – non-current, net of valuation allowance | |
| 2,330 | |
| |
| | |
Deferred tax assets – current, net of valuation allowance | |
$ | 233 | |
The effective tax rate used
for calculation of the deferred taxes as of June 30, 2014 was 34%. The Company has established a valuation allowance against deferred
tax assets of $1,205,278 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.
The significant differences
between the statutory tax rate and the effective tax rates for the Company for the six months ended are as follows:
| |
June 30, 2014 | | |
June 30, 2013 | |
Statutory tax rate | |
| — | % | |
| — | % |
Increase (decrease) in rates resulting from: | |
| | | |
| | |
Net operating loss carryforward or carryback | |
| (35 | )% | |
| (12 | )% |
Equity based compensation and loss | |
| — | % | |
| 7 | % |
Book/tax depreciation and amortization differences | |
| — | % | |
| — | % |
Change in valuation allowance | |
| 36 | % | |
| 5 | % |
Other | |
| — | % | |
| — | % |
Effective tax rate | |
| 1 | % | |
| — | % |
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 | |
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 14. | INCOME TAXES (continued) |
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.
| 15. | AUTHORIZATION OF PREFERRED STOCK |
During the second quarter of
2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s
Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has
such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board
of Directors of the Company from time to time in accordance with the provisions of Chapter 78 of the Nevada Revised Statutes. Before
modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized
the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment
authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to
designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each
series, any or all of which may be greater than the rights of the common stock. As of June 30, 2014, and 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 have approximately
93% of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will
control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.
| 16. | 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. 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, which was the excess of the estimated settlement amount less the actual settlement. 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 probable 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 Company, insurance coverage is deemed adequate to address.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 16. | COMMITMENTS AND CONTINGENCIES (continued) |
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. See Note 23. SUBSEQUENT EVENTS for settlement
of this case, and as a result of knowledge of settlement amount, the Company recorded a $14,850 settlement loss reflected as a
component of accounts payable and accrued liabilities as of June 30, 2014.
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. On June 23, 2014, this case was dismissed with prejudice as to all claims, counterclaims, and
third party claims with all parties to bear their own respective attorneys’ fees and costs.
| 17. | 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 three and
six months ended June 30, 2014 and 2013, and Accounts Receivable balances at June 30, 2014, and December 31, 2013. 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.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 17. | JOINT VENTURE EQUITY EXCHANGE AGREEMENT (continued) |
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. Since inception of the Agreement PDC has reported pre-tax net losses. Therefore, to-date there has been no profit sharing
due the Company under the agreement.
| 18. | 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 three
and six months ended June 30, 2013 to reflect the change in the number of shares, as well as throughout the Note disclosures, as
applicable.
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.
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.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
| 20. | EQUITY BASED INCENTIVE/RETENTION BONUSES |
On November 2, 2012, the Board
of Directors consented to grant equity based bonuses to certain key employees and consultants as an incentive to retain their services.
Stock incentive bonuses were to vest, and be paid out on May 2, 2013, contingent upon continued employment or service. The stock
bonus price per share was calculated based on last closing price as reported on per the OTCBB prior to the grant date for a total
of $75,100. Shares were set aside and reserved for this transaction. As disclosed in Note 7. RELATED PARTIES TRANSACTIONS,
$45,000 and $2,250 of the $75,100 bonuses, or 37,038 and 1,854 shares, were awarded to the Chief Executive Officer and the related
party employee, respectively. The Company accrued operating expense ratably from the time of the awards through May 2, 2013, when
vested. Of the 61,852 vested shares, only 5,185 have been issued to-date. The rest are reflected in shares payable balance on the
Statement of Stockholders’ Deficit and the Balance Sheet.
| 21. | 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 recognized the operating expense ratably over the twelve month vesting
term with corresponding entry to shares payable. For the three and six months ended June 30, 2013, the Company recognized $667
and $6667, respectively, as operating expense under the agreement. As of June 30, 2014, none of the 494 shares have been paid out
and are reflected in shares payable balance on the Statement of Stockholders’ Deficit and the Balance Sheet.
22. INTEREST EXPENSE NON-RELATED
PARTIES AND OTHER EXPENSE (INCOME), NET
For the three months ended June
30, 2014, non-related parties interest expense of $11,700 is comprised of $11,565 interest on convertible debentures and $135 other
interest. For the three months ended June 30, 2013, non-related parties interest expense of $56,200 is comprised of $55,200 interest
on convertible debentures and approximately $290 other interest.
For the six months ended June
30, 2014, non-related parties interest expense of $25,252 is comprised of $24,486 interest on convertible debentures and $766 other
interest. For the six months ended June 30, 2013, non-related parties interest expense of $125,050 is comprised of $123,620 interest
on convertible debentures and $1,430 other interest.
For the three months ended June
30, 2014, $39,342 other expense, net is comprised primarily of $24,486 loss on disposal of fixed assets, $14,850 loss on convertible
debenture settlement, and $6 other expense, net of individually insignificant items. For the three months ended June 30, 2013,
$120,402 other income, net is comprised primarily of approximately $50,000 sales commission, $47,500 return and retirement of year
end 2012 stock bonuses granted to certain consultants, and approximately $22,000 royalty income on licensed patents.
For the six months ended June
30, 2014, $2,604 other expense, net is comprised primarily of $31,463 write off of accrued legal expense from prior years resulting
from resolution of overbilling as identified by Company, $5,144 royalty income on licensed patents, $24,486 loss on disposal of
fixed assets, $14,850 loss on convertible debenture settlement, and $125 other income, net of individually insignificant items.
For the six months ended June 30, 2013, $28,624 other income, net is comprised primarily of $93,826 loss on extinguishment of convertible
debenture, and offset by approximately $72,000 royalty income on licensed patents, $47,500 return and retirement of year end 2012
stock bonuses granted to certain consultants, and approximately $3,000 other income, net of individually insignificant items.
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
On July 1, 2014, the court granted
dismissal of the final remaining complaint asserted by UBS as referenced in Note 16. COMMITMENTS AND CONTINGENCIES. Associated
with the dismissal, the Company reversed in the third quarter of 2014, related prepaid inventory and convertible debenture (ref
3) resulting in a loss on settlement of $14,850, which was accrued as of June 30, 2014.
On July 31, 2014, Mr. Alexander
F. Purdon, was issued 834,061 shares of restricted common stock in lieu of cash for $4,500 employee compensation for the month
of July 2014. The number of shares issued was based on the weighted average share price during the month.
Conversions of debentures to
shares of common stock occurred subsequent to June 30, 2014. 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 July 2, 2014, the lender converted $1,705 of its
debenture to 897,368 shares.
On August 12, 2014, the lender converted $2,580
of its debenture to 1,172,727 shares.
Ref (14) lender –
On July 3, 2014, the lender converted $3,142 of its
debenture to 2,276,812 shares.
On July 25, 2014, the lender converted $3,327 of its
debenture to 1,680,348 shares.
On July 15, 2014, the Company was provided a 90 Day
Lease Termination notice from its Landlord as allowed and in accordance with terms of its lease agreement whereby either party
can provide 90-day notice terminating lease. Accordingly, the Company must vacate the premises by October 15, 2014, and does not
anticipate any issues in vacating. The Company is currently in process of locating a suitable facility for relocation of its headquarters
and operations.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
Introductory Statements
Information included
or incorporated by reference in this filing may contain forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different
from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements,
which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the
words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project” or the negative of these words or other variations on these
words or comparable terminology.
This filing contains
forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability,
(b) our Company’s growth strategies, (c) our Company’s future financing plans and (d) our Company’s
anticipated needs for working capital. These statements may be found under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Business,” as well as in this prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including,
without limitation, the risks outlined under “Risk Factors” and matters described in this filing generally. In light
of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in
fact occur.
Overview
Brownie’s
Marine Group, Inc., a Nevada corporation (referred to herein as “BWMG”,“the
Company”, “we” or “Brownie’s”), does business through its wholly owned subsidiary, Trebor
Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation. The Company designs, tests, manufactures and
distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, and scuba and water
safety products. BWMG sells its products both on a wholesale and retail basis, and does so from its headquarters and
manufacturing facility in Fort Lauderdale, Florida. The Company’s common stock is quoted on the OTCBB under the
symbol “BWMG”. The Company’s website is www.browniesmarinegroup.com. Information contained on the
website is not part of this report.
Mr. Carmichael has
operated Trebor as its President since 1986. Since April 16, 2004, Mr. Carmichael has served as President, Principal Accounting
Officer and Chief Financial Officer of the Company. From March 23, 2004 to April 26, 2004, Mr. Carmichael served as the Company’s
Executive Vice-President and Chief Operating Officer. He is the holder or co-holder of some patents that are used by Trebor and
several other large original equipment manufacturers in the diving industry. Mr. Carmichael is also the holder of trademarks and
tradenames used by the Company.
The Company’s
diving and marine based products are generally marketed under the Brownie’s Third Lung, Brownie’s Tankfill,
and Brownie’s Public Safety trade names.
Results of Operations for the Three
Months Ended June 30, 2014, as Compared to the Three Months Ended June 30, 2013
Net
revenues. For the three months ended June 30, 2014, we had net revenues of $865,124 as compared to net revenues of
$592,635 for the three months ended June 30, 2013, an increase of $272,489, or 45.98%. Sales of tankfill systems and related
was up by approximately $156,000, hookah systems and related was up by approximately $116,000, public safety was up by
approximately $3,000, and increases were partially offset by approximately $3,000 decline in scuba for the three months ended
June 30, 2014, as compared to same period in 2013. The Company attributes the overall increase in sales to increased overall
consumer spending, and to an “early buy” program implemented by the Company in
May/June by to preload dealers for the high season for boating and diving.
Cost of net
revenues. For the
three months ended June 30, 2014, we had cost of net revenues of $564,883 as compared with cost of net revenues of $446,821
for the three months ended June 30, 2013, an increase of $118,062 or 26.42%. The increase is primarily attributable to the
increase in material cost due to increase in net revenues, and partially offset by decrease in payroll due to streamlining
of workforce and 1% reduction in material costs primarily due to sales mix.
Gross profit. For the three
months ended June 30, 2014, we had a gross profit of $300,241 as compared to gross profit of $145,814 for the three months ended
June 30, 2013, an increase of $154,427, or 105.91%. The increase in gross profit is primarily attributable to increase in sales
for the three months ended June 30, 2014, as compared to same period in 2013.
Operating expenses. For
the three months ended June 30, 2014, we had operating expenses of $158,945 as compared to operating expenses of $350,107 for
the three months ended June 30, 2013, a decrease of $191,162, or 54.60%. The $191,162 decrease is comprised of $176,007 decrease
in selling, general and administrative expenses, and $15,155 decrease in research and development costs as compared to the same
period in 2013. The decrease in selling, general and administrative costs of $176,007 is primarily attributable to decrease in
Chief Executive Officer’s compensation of approximately $94,000 (non-cash), approximately $40,000 decrease in consulting
and other professional fees (primarily non-cash), $7,500 decrease in Board of Director Fees (non-cash), approximately $10,000
decrease in bad debts, approximately $9,000 less in employee paid time off fringe benefit, and $16,000 net decrease of individually
insignificant increases and decreases in other operating account balances during the three months ended June 30, 2014 as compared
to the same period in 2013. In the fourth quarter of 2013, the Chief Executive Officer reduced his salary, and the non-employee
Board of Director compensation agreement was cancelled resulting in the decrease from second quarter of 2014 compared to the same
period in 2013. The primary reason for decline in consulting and other professional fees in the second quarter of 2014 is consultants
who accepted equity based compensation arrangements during the three months ended June 30, 2013, had ceased providing services
before the second quarter of 2014. The approximate $9,000 decrease in employee earned paid time off was due to more employees
using their time off fringe benefits (a credit to the related expense account), and less accrual of paid time off during second
quarter of 2014 as compared to same period in 2013 due to streamline/reduction in workforce. The $15,155 decrease in research
and development resulted due to the reduction in Chief Executive Officers salary since a percentage of his salary is allocated
to research and development.
Other (income) expense, net.
For the three months ended June 30, 2014, we had other expense, net of $55,548, as compared to other income, net of $629,620
for the three months ended June 30, 2013, an increase of $685,168 other expense, net, or 108.82%. This account is comprised of
other (income) expense, net; change in derivative liability and interest expense. Other (income) expense, net, increased by $159,744
expense, net for the period and is comprised of transactions that are generally of a non-recurring nature; change in derivative
liability income decreased by $565,689; and interest expense decreased by $40,265 for the period. The $159,744 increase in other
expense, net is primarily attributable to transactions which occurred in either the second quarter of 2014 or 2013, without comparable
transactions in both periods. Primarily, the increase is comprised of second quarter 2013 income, net items not recurring in 2014,
including approximately $50,000 sales commission income, $47,500 return and retirement of 2012 year bonuses granted to certain
consultants, and approximately $22,000 royalty income on licensed patents, in addition to second quarter 2014 other expense, net
items primarily including $24,486 loss on disposal of fixed assets and $14,850 loss on convertible debenture settlement; The $565,689
reduction in derivative liability income is the result of reversal of 100% of the liability in May 2013 as a result of the reverse
stock split during that time period, which cured the shortfall of shares available for conversion that resulted in derivative
liability. The $40,265 decrease in interest expense for the second quarter of 2014 as compared to the second quarter of 2013,
is primarily due to approximately $55,000 less in convertible debenture interest due to fully accreted discounts by second quarter
of 2014, as well as lower convertible debenture balance outstanding during the second quarter of 2014 as compared to the same
period in 2013.
Provision for income tax expense.
For the three months ended June 30, 2014, we had a provision for income tax expense of $0 as compared to a provision for income
tax benefit of $456 for the three months ended June 30, 2013, a decrease of $456, or 100%.
Net income. For the three
months ended June 30, 2014, we had net income of $85,748 as compared to net income of $425,783 for the three months ended June
30, 2013, a decrease of $340,035, or 79.86%. The $340,035 decrease in net income is primarily attributable to the decrease in
other income, net of $685,168, decrease in income tax benefit of $456 and partially offset by increase in gross profit of $154,427
decrease in operating expenses of $191,162 and decrease in provision for income tax expense of $456 for the three months ended
June 30, 2014 as compared to the three months ended June 30, 2013.
Results of Operations for the Six
Months Ended June 30, 2014, as Compared to the Six Months Ended June 30, 2013
Net revenues.
For the six months ended June 30, 2014, we had net revenues of $1,453,508 as compared to net revenues of $1,181,298 for the six
months ended June 30, 2013, an increase of $272,210 or 23.04%. Sales of tankfill systems and related was up by approximately $149,000,
hookah systems and related was up by approximately $140,000, public safety was up by approximately $3,000, and these increases
were partially offset by approximately $20,000 decline in scuba for the six months ended June 30, 2014, as compared to same period
in 2013. The Company attributes the overall increase in sales to increased overall consumer spending, and
to an “early buy” program implemented by the Company in May/June by to preload dealers for the high season for boating
and diving. The Company attributes the decline in Scuba sales to closing its dive store in 2013.
Cost of net revenues.
For the six months ended
June 30, 2014, we had cost of net revenues of $1,029,955 as compared with cost of net revenues of $919,360 for the six months
ended June 30, 2013, an increase of $110,595, or 12.03%. The increase is primarily attributable to the increase in material costs
due to increase in net revenues, decrease in payroll due to streamlining of workforce, and partially offset by 1% increase in
material costs primarily due to sales mix.
Gross profit.
For the six months ended June 30, 2014, we had a gross profit of $423,553 as compared to gross profit of $261,938 for the six months
ended June 30, 2013, an increase of $161,615, or 61.70%. The increase in gross profit is primarily attributable to increase in
net revenues for the six months ended June 30, 2014, as compared to same period in 2013.
Operating expenses.
For the six months ended June 30, 2014, we had operating expenses of $339,291 as compared to operating expenses of $927,380 for
the six months ended June 30, 2013, a decrease of $588,089, or 63.41%. The $588,089 decrease is comprised of $574,069 decrease
in selling, general and administrative expenses, and $14,020 decrease in research and development costs as compared to the same
period in 2013. The decrease in selling, general and administrative costs of $574,069 is primarily attributable to decrease in
Chief Executive Officer’s compensation of approximately $314,000 (non-cash), approximately $50,000 decrease in legal expense,
approximately $124,000 less consulting and other professional fees (primarily non-cash), $15,000 decrease in Board of Director
Fees (non-cash),approximately $33,000 less trade show and advertising expenses, approximately $17,000 less bad debts, and approximately
$15,000 less in health insurance costs during the six months ended June 30, 2014 as compared to the same period in 2013. In the
fourth quarter of 2013, the Chief Executive Officer reduced his salary, and the non-employee Board of Director compensation agreement
was cancelled resulting in the decrease for the six months ended June 30, 2014 compared to the same period in 2013. The primary
reason for decline in consulting and other professional fees is consultants who accepted equity based compensation arrangements
during the six months ended June 30, 2013, had ceased providing services before the six months ended June 30, 2014. The primary
reason for decline in health insurance expense from six months ended June 30, 2014 compared to six months ended June 30, 2013 is
result of a lower cost policy and less employees on in the plan during the current period. The decline in bad debts and advertising
expenses is further streamlining of expenses and tighter monitoring of accounts receivable balances and collections. The $14,020
decrease in research and development resulted due to the reduction in Chief Executive Officers salary since a percentage of his
salary is allocated to research and development.
Other (income) expense,
net. For the six months ended June 30, 2014, we had other expense, net of $36,869, as compared to other expense, net of $97,354
for the six months ended June 30, 2013, a decrease of $60,485 other expense, net, or 62.13%. This account is comprised of other
(income) expense, net, and interest expense. Other (income) expense, net, increased by $31,228 income, net for the period and is
comprised of transactions that are generally of a non-recurring nature, and interest expense decreased by $91,713 for the period.
The $31,228 increase in other expense, net is primarily attributable to $67,000 decrease in royalty income on licensed patents
from first half of 2013 to first half of 2014; $47,500 return and retirement of year end 2012 stock bonuses granted to certain
consultants during the first half of 2013 without comparable transaction in 2013, $24,486 loss on disposal of fixed assets during
the first half of 2014, and offset almost in entirety by $31,463 write off during first half of 2014 of accrued legal expense from
prior years resulting from resolution of overbilling as identified by Company, and approximately $79,000 decrease in loss on convertible
debenture extinguishment/settlement from six months ended June 30, 2013 to 2014; The $91,713 decrease in interest expense for the
second quarter of 2014 as compared to the second quarter of 2013, is primarily due to approximately $100.000 less in convertible
debenture interest due to fully accreted discounts by second half of 2014, as well as lower convertible debenture balance outstanding
during the first half of 2014 as compared to the same period in 2013; and is partially offset by approximate $8,000 increase in
related party interest for loan provided by non-employee Board of Director in the fourth quarter of 2013.
Provision for income
tax expense. For the six months ended June 30, 2014, we had a provision for income tax expense of $44 as compared to a provision
for income tax expense of $3,327 for the six months ended June 30, 2013, a decrease of $3,283 or 96.68%.
Net income. For
the six months ended June 30, 2014, we had net income of $47,349 as compared to net loss of $766,123 for the six months ended June
30, 2013, an increase in net income of $813,472, or 106.18%. The $813,472 increase in net income is primarily attributable to increase
in gross profit of $161,615, decrease in operating expenses of $588,089 and decrease in other expense, net of $60,485, and decrease
in provision for income tax expense of $3,283 for the six months ended June 30, 2014 as compared to the six months ended June 30,
2013.
Liquidity and Capital Resources
As of June 30, 2014,
the Company had cash and current assets (primarily consisting of inventory) of $1,009,686 and current liabilities of $1,572,072,
or a current ratio of .64 to 1. This represents a working capital deficit of $562,886. As of December 31, 2013, the Company had
cash and current assets of $1,057,967 and current liabilities of $1,760,058, or a current ratio of .60 to 1.
The consolidated financial statements included
herein have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the
satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial
statements. Although we had net income for the three and six months ended June 30, 2014, have incurred losses since 2009, and reasonably
expect to have more losses through 2014. We have had a working capital deficit since 2009.
The Company is behind
on payments due for payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities
and interest – related parties, and certain vendor payables. The Company is handling delinquencies on a case by case basis.
However, there can be no assurance that cooperation the Company has received thus far will continue.
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 in Boca Raton, Florida. 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. Neither endeavor did or has generated profit or positive cash-flow.
Therefore, effective May 31, 2013, the Company closed and ceased operations at its retail facility. As a result, the
Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the third
quarter of 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. We have issued a number of
convertible debentures as an interim measure to finance our working capital needs. We have historically paid for many legal
and consulting services with restricted stock to maximize working capital. We intend to continue this practice in the future
when possible. We have implemented some cost saving measures and will continue to explore more to reduce operating
expenses.
If we fail to raise
additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations,
liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include
any adjustments that may result from the outcome of this uncertainty.
Certain Business Risks
The Company is subject
to various risks, which may materially harm its business, financial condition and results of operations. You should carefully consider
the risks and uncertainties described below and the other information in this filing before deciding to purchase the Company’s
common stock. These are not the only risks and uncertainties that the Company faces. If any of these risks or uncertainties actually
occurs, the Company’s business, financial condition or operating results could be materially harmed. In that case, the trading
price of the Company’s common stock could decline and you could lose all or part of your investment.
Our ability to continue as a going
concern is in substantial doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.
While we
incurred net income of approximately $47,000 for the six months ended June 30, 2014, we incurred net losses of $788,286 and
$2,013,349 for the years ended December 31, 2013 and 2012, respectively. We anticipate these losses will continue for the
foreseeable future. Additionally, the Company has negative cash flows from operations, negative working capital, is behind on
payments due for payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued
liabilities and interest –related parties, a note payable due an unrelated party, and certain vendor payables. The
Company is working out all matters of delinquency on a case by case basis. However, there can be no assurance that
cooperation the Company has received thus far will continue. This raises a
substantial doubt about our ability to continue as a going concern. Our continued existence is dependent upon generating
working capital and obtaining adequate new debt or equity financing. Because of our continuing losses, we may not have
working capital to permit us to remain in business through the end of the year, without improvements in our cash flow from
operations or new financing. Working capital limitations continue to impinge on our day-to-day operations, thus contributing
to continued operating losses.
The optional conversion features of
a series of convertible debentures issued by the Company could require the Company to issue a substantial number of shares of common
stock, which will cause dilution to the Company’s stockholders and a potentially negative effect on our stock price.
Since October 4, 2010
the Company has issued convertible debentures to several lenders and other third parties. At June 30, 2014 the outstanding principal
balance of these debentures was $475,336. The debentures convert under various conversion formulas, all of which are at a significant
discount to market price of our common stock. The conversion of any of the debentures will result in the issuance of a significant
number of shares of our common stock which will cause dilution to our existing shareholders. Furthermore, the conversion at a significant
discount to the market price of our common stock may have a negative effect on our stock price.
Our Common Stock
May Be Affected By Limited Trading Volume and May Fluctuate Significantly
Our common stock is
traded on the Over-the-Counter Bulletin Board. There is a limited public market for our common stock and there can be no assurance
that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’
ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than
common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant
price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall
economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.
Our company
is a voluntary filer with the Securities and Exchange Commission and in the event that we cease reporting under the Exchange Act,
investors would have limited information available to them about the company.
While we are subject to Section 15(d) of the Exchange Act, we do not have a class of securities registered under Section 12(g)
of the Exchange Act. To the extent that our duty to file Exchange Act reports has automatically suspended under Section 15(d)
of the Exchange Act, as a voluntary filer, we may elect to cease reporting under the Exchange Act at such time which would
limit the information available to investors and shareholders about the company.
Our Common Stock
Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For Investors to Sell Their Shares Due To Suitability
Requirements
Our common stock is
deemed to be “penny stock” as that term is defined under the Securities Exchange Act of 1934. Penny stocks generally
are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities
is provided by the exchange or system). Our common stock is covered by an SEC rule that imposes additional sales practice requirements
on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally
institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse.
Broker/dealers dealing
in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers
are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements
may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult
for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price
to decline.
We Depend On
the Services of Our Chief Executive Officer
Our success largely
depends on the efforts and abilities of Robert M. Carmichael, our President and Chief Executive Officer. Mr. Carmichael has been
instrumental in securing our existing financing arrangements. Mr. Carmichael is primarily responsible for the development of our
technology and the design of our products. The loss of the services of Mr. Carmichael could materially harm our business because
of the cost and time necessary to recruit and train a replacement. Such a loss would also divert management attention away from
operational issues. We do not presently maintain a key-man life insurance policy on Mr. Carmichael.
We Require Additional
Personnel and Could Fail To Attract or Retain Key Personnel
Our continued growth
depends on our ability to attract and retain a Chief Financial Officer, a Chief Operations Officer, and additional skilled associates.
We are currently utilizing the services of two professional consultants in the absence of a Chief Financial Officer and Chief Operations
Officer. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or
Chief Operations Officer may have a material adverse effect upon us. Also, there can be no assurance that we will be able to retain
our existing personnel or attract additional qualified associates in the future.
Our Failure to
Obtain Intellectual Property and Enforce Protection Would Have a Material Adverse Effect on Our Business
Our success depends
in part on our ability, and the ability of our patent and trademark licensors, entities owned and controlled by Robert M. Carmichael,
our President and Chief Executive Officer, to obtain and defend our intellectual property, including patent protection for our
products and processes, preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing
the proprietary rights of third parties, both in the United States and in other countries. Despite our efforts to protect our intellectual
proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection.
Our industry is characterized
by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. Although we
are not aware of any intellectual property claims against us, we may be a party to litigation in the future.
We May Be Unable
To Manage Growth
Successful implementation
of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management and financial
resources. If we fail to manage our growth effectively, our business, financial condition or operating results could be materially
harmed, and our stock price may decline.
Reliance on Vendors
and Manufacturers
We deal with suppliers
on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued supply or pricing.
In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production facility
capacity. Historically, we have purchased enough inventories of products or their substitutes to satisfy demand. However, unanticipated
failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us
to curtail or cease operations.
Dependence on
Consumer Spending
The success of the
our business depends largely upon a number of factors related to consumer spending, including current and future economic conditions
affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In times of economic
uncertainty, consumers tend to defer expenditures for discretionary items, which affect demand for our products. Any significant
deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and
adversely affect our financial results. The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher
fuel prices; declines in the value of investments and residential real estate; and increases in federal and state taxation can
all negatively affect our results. There can be no assurance that in this type of environment consumer spending will not decline
beyond current levels, thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely
affected by continuing or future downturns in the economy, boating industry, or dive industry. If declines in consumer spending
on recreational marine accessories and dive gear are other than temporary, we could be forced to curtail operations.
Government Regulations
May Impact Us
The SCUBA industry
is self-regulating; therefore, Brownie’s is not subject to government industry specific regulation. Nevertheless, Brownie’s
strives to be a leader in promoting safe diving practices within the industry and is at the forefront of self-regulation through
responsible diving practices. Brownie’s is subject to all regulations applicable to “for profit” companies as
well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to
operate its facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive
regulations in the future, which could force us to curtail or cease operations.
Bad Weather Conditions
Could Have an Adverse Effect on Operating Results
Our business is significantly
impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably rough surf, may decrease
boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may not be indicative
of results of any future period.
Investors Should
Not Rely On an Investment in Our Stock for the Payment of Cash Dividends
We have not paid any
cash dividends on our capital stock and we do not anticipate paying cash dividends in the future. Investors should not make an
investment in our common stock if they require dividend income. Any return on an investment in our common stock will be as a result
of any appreciation, if any, in our stock price.
The Manufacture
and Distribution of Recreational Diving Equipment Could Result In Product Liability Claims
We, like any other
retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk
of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among
other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper
use and/or side effects, if any. We do not anticipate obtaining contractual indemnification from parties-supplying raw materials,
manufacturing our products or marketing our products. In any event, any such indemnification if obtained will be limited by
our terms and, as a practical matter, to the creditworthiness of the indemnifying party. In the event that we do not have adequate
insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect
on our operations and financial conditions, which could force us to curtail or cease our business operations.
| Item 3. | Quantitative and Qualitative Disclosures About Market
Risk. |
Not Applicable to Smaller Reporting Company.
| Item 4. | Controls and Procedures |
Evaluation of
Disclosure Controls and Procedures
Our management carried
out an evaluation with the participation of our Chief Executive Officer who serves as our principal executive officer and principal
financial and accounting officer, required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”)
of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act.
Based on this evaluation,
our Chief Executive Officer and principal financial and accounting officer concluded that as of the end of the period covered by
this report, our disclosure controls and procedures were not effective such that the information relating to our company required
to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC
rules and forms and (ii) is accumulated and communicated to our management to allow timely decisions regarding required disclosures.
Our management concluded that our disclosure controls and procedures were not effective as described in more detail below. Our
management concluded that a significant deficiency exists regarding timely disclosure controls and procedures as described in more
detail below. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting
that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the
registrant’s financial reporting.
The specific weakness
identified by our management was a lack of personnel with an appropriate level of SEC reporting and accounting experience and training
in the application of U.S. Generally Accepted Accounting Principles (“GAAP”) commensurate with our financial reporting
requirements and business environment. The weakness is principally due to lack of working capital to retain qualified employees,
which are integral to the Company’s process for timely disclosure and financial reporting. Furthermore, our chief executive
officer and chief financial officer, Mr. Robert Carmichael, lacks experience in U.S. GAAP and financial accounting. We rely extensively
on outside service providers to comply with our financial reporting requirements. Since our inception we have relied on an outside
consultant with experience in this area to assist us prepare our financial statements and disclosures in accordance with U.S. GAAP.
Until such time as we have a chief executive officer and/or chief financial officer with the requisite expertise in U.S. GAAP,
there are no assurances that the significant deficiency in our internal control over financial reporting will not result in errors
in our financial statements which could lead to a restatement of those financial statements. This deficiency resulted in the failure
of the Company to timely file Form 8-K current reports relating to significant debenture conversions during the period, and conversion
of related party employee compensation payable to restricted stock during the period covered by this report. These transactions
are disclosed in the notes to the Company’s Financial Statements for the period covered by this report included herein.
To mitigate the chance
for reoccurrence of this noted deficiency, as disclosed in the Liquidity and Capital Resources section of this Form 10-Q
Quarterly Report, the Company is currently in the process of addressing its working capital shortfall whereby this would provide
the needed funds to retain the legal, accounting, and external services required for timely disclosure and financial reporting.
Changes in Internal
Controls over Financial Reporting
There were no changes
in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during
the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1a. Risk Factors
Not Applicable to Smaller
Reporting Company.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
During the period covered
by this report, the Company sold securities without registration under the Securities Act of 1933 (the “Securities Act”)
in reliance upon the exemption provided in Section 4(a)(2) as described below or as otherwise previously disclosed on Form 8-K.
The securities were issued with a legend restricting their transferability absent registration of applicable exemption.
During
the three months ended June 30, 2014, two lenders converted $41,464 of their convertible debentures to 12,458,626 shares
of stock. The stock was issued without restrictive legend because the Rule 144 holding period had been
met at time of issuance. Terms of conversion as per the debenture were 61% of weighted average stock price five trading days
prior to conversion notice per share consistent with terms of the debenture.
During the three months
ended June 30, 2014, $13,500 related party employee compensation payable was converted to 1,696,872 shares of restricted stock.
Item 3. Defaults Upon
Senior Securities
None
Item 4. MINE SAFETY
DISCLOSURE
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit
No. |
|
Description |
|
Location |
|
|
|
|
|
31.1 |
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) |
|
Provided herewith. |
|
|
|
|
|
31.2 |
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) |
|
Provided herewith. |
|
|
|
|
|
32.1 |
|
Certification Pursuant to Section 1350 |
|
Provided herewith. |
|
|
|
|
|
32.2 |
|
Certification Pursuant to Section 1350 |
|
Provided herewith. |
|
|
|
|
|
101 |
|
XBRL Interactive Data File * |
|
|
*
Attached as Exhibit 101 to this report are the following financial statements from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets,
(ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders’ Deficit (iv) the Consolidated
Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text. The XBRL-related information
in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed "filed" or a part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
SIGNATURES
In accordance with
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 18, 2014 |
Brownie’s Marine Group, Inc. |
|
|
|
|
By: |
/s/ Robert M. Carmichael |
|
|
Robert M. Carmichael |
|
|
President, Chief Executive Officer, |
|
|
Chief Financial Officer/ |
|
|
Principal Accounting Officer |
EXHIBIT
31.1
OFFICER’S
CERTIFICATE
PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Robert Carmichael,
Chief Executive Officer, certify that:
1. I
have reviewed this Form 10-Q for the quarter ended June 30, 2014, of Brownie’s Marine Group, Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods
presented in this report;
4. I
am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15 (e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed
in this report any change in the small business issuer’s internal control over financial reporting that occurred during the
small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s
internal control over financial reporting; and
5. I
have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s
auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent
functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial
information; and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s
internal control over financial reporting.
Date: August 18, 2014 |
By: |
/s/ Robert M. Carmichael |
|
Name: |
Robert M. Carmichael |
|
Title: |
Chief Executive Officer |
EXHIBIT
31.2
OFFICER’S
CERTIFICATE
PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Robert Carmichael,
Chief Financial Officer, certify that:
1. I
have reviewed this Form 10-Q for the quarter ended June 30, 2014, of Brownie’s Marine Group, Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods
presented in this report;
4. I
am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15 (e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant issuer and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed
in this report any change in the small business issuer’s internal control over financial reporting that occurred during the
small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s
internal control over financial reporting; and
5. I
have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s
auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent
functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial
information; and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s
internal control over financial reporting.
Date: August 18, 2014 |
By: |
/s/ Robert M. Carmichael |
|
Name: |
Robert M. Carmichael |
|
Title: |
Chief Financial Officer |
EXHIBIT
32.1
CERTIFICATION PURSUANT
TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with
the Quarterly Report of Brownie’s Marine Group, Inc. (the “Company”) on Form 10-Q for the quarter ended
June 30, 2014 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”),
the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operation
of the Company.
Date: August 18, 2014 |
By: |
/s/ Robert M. Carmichael |
|
Name: |
Robert M. Carmichael |
|
Title: |
Chief Executive Officer |
A signed original of this written statement
required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in
typed form within the electronic version of this written statement required by Section 906, has been provided to Brownie’s
Marine Group, Inc. and will be retained by Brownie’s Marine Group, Inc. and furnished to the United States Securities and
Exchange Commission or its staff upon request.
EXHIBIT
32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with
the Quarterly Report of Brownie’s Marine Group, Inc. (the “Company”) on Form 10-Q for the quarter ended
June 30, 2014 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”),
the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operation
of the Company.
Date: August 18, 2014 |
By: |
/s/ Robert M. Carmichael |
|
Name: |
Robert M. Carmichael |
|
Title: |
Chief Financial Officer |
A
signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906,
has been provided to Brownie’s Marine Group, Inc. and will be retained by Brownie’s Marine Group, Inc. and furnished
to the United States Securities and Exchange Commission or its staff upon request.
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