Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined by Rule 405 of the Securities Act.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files.)
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.
¨
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.
Indicate by check mark whether the registrant
is a shell company (as defined by Rule 12b-2 of the Exchange Act)
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal
quarter, June 30, 2015 ($0.0025), was $ 80,286.
There were 86,841,190 shares of common stock outstanding as
of March 17, 2016.
PART
I
FORWARD-LOOKING STATEMENTS AND ASSOCIATED
RISKS
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 annual report 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 Florida
corporation (referred to herein as “BWMG”, “the Company”, “we”, or “Brownie’s”),
does business through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation.
The Company designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and Nitrox
Generation Systems, and scuba and water safety products. BWMG sells its products both on a wholesale and retail basis, and does
so from its headquarters and manufacturing facility located at 3001 NW 25
th
Avenue, Suite 1, Pompano Beach, Florida
33069. The Company’s common stock is quoted on the OTC Markets under the symbol “BWMG”. The Company’s website
is
www.Browniesmarinegroup.com
. Information on the website is not a part of this report.
Mr. Robert Carmichael, our Chief Executive
Officer, has operated Trebor as its President since 1986. Since April 16, 2004, Mr. Carmichael has served as President, Acting
Principal Accounting Officer and Acting Chief Financial Officer of the Company. From March 23, 2004 to April 16, 2004, Mr. Carmichael
served as the Company’s Executive Vice-President and Chief Operating Officer. The company was organized under the laws of
the State of Nevada and effective October 22, 2015, the Company reincorporated to the State of Florida pursuant to a plan of conversion,
effective October 22, 2015.
The Company’s diving and marine based
products are generally marketed under the
Brownie’s Third Lung, Brownie’s Tankfill,
and
Brownie’s
Public Safety
trade names.
Executive Summary and Business Strategy
From a garage based business making hookah
diving systems in the late 1960s, the Company has grown into a niche manufacturing and distribution company with dive-oriented
products loosely classified into three categories: Brownie’s Third Lung (low pressure hookah systems), Brownie’s Tankfill
(high pressure and mixed gas systems), and Brownie’s Public Safety (first-responder/emergency personnel systems). The Company
serves middle income boat owners, higher income yacht owners, and recreational, military and public safety divers.
The Company strives for meticulous attention
to detail and high quality product innovation. We believe that within the boating/diving industry Brownie’s Marine Group
is known as the industry standard for surface supplied “family” dive systems and Scuba Tankfill Systems for yacht diving.
Brownie’s products and support services range from shallow-water dive systems and extend into deep-water with mixed gas support
systems for exploration divers and submersibles/submarines.
The Company holds numerous patents and is
dedicated to designing and building the world’s finest and most innovative products, and to setting the industry standard
for the world’s best yacht-based diving systems. While Brownie’s Third Lung hookah diving units were the very first
product sold by the Company, the Company recognized early on that there was a need for tank filling systems and unique diving applications.
This realization was the catalyst for the addition of the two product categories: Brownie’s Tankfill and Brownie’s
Public Safety. Brownie’s Tankfill designs, builds, and sells diving solutions from marine-ready tank filling compressors,
Nitrox Makers™, complete dive lockers, and full submarine support systems. Brownie’s Public Safety features highly
specialized diving gear for rescue and safety professionals and a unique automatic floatation device for body-armor that can also
be integrated into foul weather jackets, traditional load bearing harnesses and other garments, such as the Garment Integrated
Personal Flotation Device (GI-PFD) for use with body armor. The following paragraphs further describe the business and sales models
for each of the categories of products sold:
Brownie’s Third Lung
hookah
systems have long been a dominant figure in gasoline powered, high-performance, and feature rich hookah systems. Taking full advantage
of the proprietary compressor system, a complete series of traditional “fixed speed” electric compressors were developed
for the built-in-boat market in 2005. Prior to 2010, Brownie’s did not offer for sale a floating battery powered hookah due
to the inadequate performance/runtime afforded by previous technology. After years of inventing, testing and development, Brownie’s
introduced multiple battery powered models in 2010 that we believe provide performance and runtimes as great as 300% better than
the best devices previously on the market by utilizing a variable speed technology that controls battery consumption based on diver
demand. Our variable-speed battery powered hookah system provides divers with gasoline-free all day shallow diving experiences.
Brownie’s Tankfill
designs,
manufactures, sells and installs Scuba tank fill systems for on-board yacht use under the brand “Yacht-Pro™”.
Brownie’s Tankfill provides complete diving packages and dive training solutions for yachts. Brownie’s Tank Fill installs
Nitrox systems which allow yacht owners to fill tanks with oxygen enriched air on board. The Yacht-Pro™ compressor systems
offer a completely marine-prepared, VFD (variable frequency drive)-driven, automated alternative to other compressors on the market.
Brownie’s Tankfill also designs complete dive lockers, mixed gas production and distribution systems, and the unique Nitrox
Maker™. Nitrox is oxygen-enriched air, which reduces the effects of nitrogen on divers; it is the industry standard for dive
professionals. The Nitrox Maker™ continuously generates the oxygen rich breathing gas directly from low-pressure air; no
stored oxygen or other gases are required onboard. We believe a parallel product analogy to this device is the fresh water-maker
that swept through the yachting industry over the last two-decades. While less yacht owners may opt for diving systems then fresh
water-makers, there is a broad market potential for yacht owners that will want to have an uninterrupted supply of the premium
breathing gas. Recently, an increase in commercial NitroxMaker™ system sales has been seen as more diving operations and
operators are responding to the demand from their customers to provide nitrox at diving destinations. In addition to the traditional
yacht-based NitroxMaker™ systems the Company has now established a full line of commercial products to meet this need, the
NMCS series.
Brownie’s Public Safety
designs,
manufactures, distributes, and sells the RES (Rapid Entry System)/ HELO™ system, a complete mini SCUBA system designed for
quick water rescues. The HELO™ system can be donned in less than 60 seconds and stored in a briefcase-size padded bag. Brownie's
Public Safety includes the GI-PFD™ (Garment Integrated Personal Flotation Device™) System for body armor flotation.
This system can reliably support the distressed or unconscious wearer in a true life-saving position. This patented device addresses
a need as law-enforcement, coast guard and military personnel are beginning to wear heavy (life-threatening in the water) body
armor during waterborne patrol, inspection, and surveillance missions. The system helps the personnel float in heavy armor, hopefully
saving their lives. The Company is not currently pursuing aggressive expansion into this market until it has sufficient working
capital to do so.
Some of the Company’s Products in Depth
Surface Supplied Air Systems:
The Company produces a line of Surface Supplied Diving products, commonly called hookah systems. These systems allow one to four
divers to enjoy the marine environment up to a depth of 90 feet/27 meters without the bulk and weight of conventional SCUBA gear.
We believe that hookah diving holds greater appeal to families with children of diving age than does conventional SCUBA. The reduction
of weight by eliminating the tank allows smaller divers, especially children, to participate more actively and enjoyably. The design
of our product also reduces the effort required for both its transport and use. We believe the PELETON™ Hose System revolutionizes
hose management for recreational surface supplied diving. It reduces the work required of any single diver by dispersing the load
over the entire group. We use a single, larger diameter hose as a main downline with up to four individual hoses attached to it.
This configuration not only reduces the weight and bulk of the hose required, but also reduces drag and entanglement. An entire
line of deck-mounted systems is available for commercial applications that demand extremely high performance. In addition to the
gasoline-powered units and the Variable Speed battery powered units mentioned above, a series of electric powered systems is also
available for light to commercial duty. Powered by battery for portability or household current for virtually unlimited dive duration,
these units are used primarily by businesses that work in a marine environment.
E-Reel and Built-in Battery Systems:
The Company developed two surface supplied air products that it believes makes boat diving even easier. The Built-in Battery System
builds a battery powered electric unit into the boat, eliminating the need to transport the compressor/motor assembly. The need
for a flotation tube is also removed, as the boat itself serves in that capacity. The E-Reel advances this idea by adding a reel
system to provide compact storage of up to 150 feet/46 meters of hose. Boaters can perform their own in-water maintenance and inspections,
or just dive for enjoyment. The hose is manually pulled from the reel supporting up to two divers to a depth of 50 feet/15 meters.
When the dive is complete, the hose is automatically recoiled and stowed by the simple activation of a switch.
Brownie’s Integrated Air Systems
(BIAS™):
Compressed air can have many uses on a boat. The E-Reel and Built in Battery Systems discussed above are
just a few examples of BIAS. In addition to supplying air to divers, integrated air systems provide for the inflating fenders,
opening of doors, blowing of air horns, flushing toilets and more.
Kayak Diving Hose Kits:
This
product allows the use of a conventional SCUBA cylinder, but does not require the diver to wear it. The cylinder remains above
the surface, in a kayak or boat, and a hose ranging from 20 feet/6 meters to 150 feet/46 meters allow the diver to explore the
surrounding area.
Drop Weight Cummerbelt:
The
patented Drop Weight Cummerbelt is available with all our diving systems, and brings a new dimension to weighting systems. The
belt will accommodate waist sizes from 24 to 54 inches and is depth compensating. It features two pockets, each capable of holding
up to 10 pounds of block or shot weight. Each pocket can be instantly released by either hand, allowing the diver to achieve positive
buoyancy in an emergency while retaining the belt itself. Additionally, the design of this belt provides for expanded capability.
By adding an optional sleeve that zips onto the back of the belt, an egress, or bailout system, can be added. The Egressor Add-on
Kit contains the sleeve, a 6 or 13 cubic foot SCUBA cylinder, and a SCUBA regulator. In addition to the added safety inherent in
this design, many other uses for this present themselves, such as propeller clearing, overboard item retrieval and pool maintenance,
to name only a few.
Tankfill Compressors:
Many
yacht owners enjoy the convenience and freedom of filling their own diving tanks with air, NITROX or custom mixed gases while out
on cruise, freeing them from carrying extra cylinders or the need to locate a reputable source in various ports-of-call. Brownie’s
Tankfill specializes in the design and installation of high-end custom systems to do just that. From surveying the vessel for installation
requirements to custom fabrication of the necessary components, Tankfill provides all the services necessary to satisfy this market.
We believe that every large vessel currently in service, being re-fitted, or being built is a potential customer. Through OEM relationships
we have expanded our market to reach these customers. Our light duty compressor, the Yacht Pro™25 is specifically designed
and built to withstand the marine environment with all components and hardware impervious to spray from the elements. The Yacht
Pro™ series contains models for both medium-duty applications, such as recreational divers and small groups, and heavy-duty
use as found on research vessels, commercial operations and live-aboard dive boats. All Yacht Pro™ models come with the Digital
Frequency Drive, which is a Brownie’s Tankfill innovation. The Digital Frequency Drive eliminates the spike previously experienced
in starting the compressor, eliminating the need to ration the boat’s electrical usage by shutting down components when the
compressor is needed. Custom design work is done in-house for major product installations and in conjunction with other entities.
NitroxMaker™:
We believe
Nitrox has become the gas of choice for informed recreational divers the world over. What was once only available from land-based
gas mixing facilities is now easily accessible to the yacht diver. With a Brownie’s NitroxMaker™, the user dials-in
a desired oxygen level from 21% to 40%, eliminating the need to transport and handle pure oxygen. The resulting diving gas mix
is monitored with digital oxygen analyzers, removing the calculations required to blend or mix the gas.
Rapid Entry System (RES) and HELO
™
System:
The Brownie’s Public Safety product line exists to address the needs of the public safety dive market. The
inherent speed and ease of donning our patented Drop Weight Cummerbelt with Egressor Add-on Kit identified it as a choice for rapid
response for water-related emergencies. A first-responder or officer on-scene can initiate the location and extraction of victims
while the dive team is en-route, saving valuable time and increasing the chances for survival of victims. The RES is a small SCUBA
system that can be quickly donned over clothes, usually in less than sixty seconds. Its small size allows it to be stored in areas
that do not accommodate a full set of SCUBA gear. The 13 cubic foot aluminum tank can provide up to 15 minutes of air at the surface.
The air cell remains stowed under the protective cover and can be partially inflated to achieve positive flotation. The cover’s
specially designed break-away zipper bursts open to provide instant inflation yet “heals” and can be repacked and fastened
quickly in the field. The HELO offers all the same features, but has been specially designed and modified for rescue divers working
from helicopters. By placing the cylinder in the front and adding leg straps, the HELO allows divers to use the standard seating
configurations. The advantages of this system over full sized SCUBA rigs are increased mobility for the diver and diminished space
requirements for the gear. Since the bottle is mounted at the diver’s waist, the diver can more easily control his gear during
deployment, further adding to the comfort and safety.
The Dive Industry and Growth Strategy
Currently, we believe that no company in
the dive industry offers a complete line of products and services to serve all divers’ needs. The dive equipment manufacturing
industry is highly fragmented with multiple manufacturers producing very similar products. The top-ten volume leaders in the dive
manufacturing industry provide the same product mix: Scuba BC’s (buoyancy compensators), regulators, gauges, masks, fins,
snorkels, wetsuits, and a few of the necessary accessories. These mature companies offer the product selection to the “diving”
market.
New markets and classes of divers have developed
over the years. The sport sector of Third Lung and Kayak diving have emerged as a result of snorkel divers that wanted to sustain
depth or Scuba divers that wanted more time in shallow waters with enhanced efficiency.
Diving and Boating Markets
The diving and boating markets are key to
the expansion of the Brownie’s brand. Each of these industries has experienced growth over the past several decades, but
we believe each industry also has significant weaknesses. The dive industry has focused on the initial certification of divers
for revenue. According to industry data, follow up has been poor; causing many divers to quit diving after their first experience.
When the Company’s working capital reaches a sufficient level, BWMG intends to implement a follow-up program, facilitate
proper selection of equipment for divers, and institute mentoring programs.
The boating industry was hard hit a couple
years ago by the economic downturn coupled with the increase in fuel prices. We continue to work with boaters to enhance their
on-water experience by exploiting the diving activities that they can easily add as an accessory to their investment in boating.
Brownie’s OEM BIAS program will improve the overall value at the manufacturing level and consumer experience by elimination
of waste during the design/build phase. They can blow their horns, open air-powered doors and dive directly from a BIAS package.
Statistics
According to Global Certification and Membership
Statistics as updated February 2014 on the Professional Association of Diver Instructors (PADI) website, www.padi.com, worldwide
PADI certifications of divers has grown annually from over 500,000 certifications in 1992, to consistently over 900,000 annual
certifications annually from 2003 to 936,149 certifications in 2013. There are other scuba training organizations also issuing
scuba dive training certifications, but PADI is the training organization issuing the largest number of certifications annually.
(source: PADI)
Approximately 88.5 million people went boating
in the US in 2013; this represents approximately 37% of the adult population in the United States. There were approximately 15.9
million boats in use in 2013, down slightly from approximately 16.0 million in use in 2012. (source: National Marine Manufacturers
Association)
Trade names and Patents
The Company has a product development and
intellectual property program. It holds numerous patents and trademarks on its own and/or through licensing agreements with its
chief executive officer and his affiliates.
Trade names
The Company either owns or has licensed
from an entity, which the Chief Executive Officer has an ownership interest, the use of the following registered and unregistered
trade names, trademarks and service marks for the terms of their indefinite lives: Brownie’s Third Lung™, browniedive.com,
Brownie’s, Brownie’s Third Lung oval symbol, browniedive, NitroxMaker™, HELO, RES, fast float rescue harness,
tankfill.com, browniestankfill, browniestankfill.com, browniespublicsafety.com, and browniespublicsafety, Peleton Hose System,
Twin-Trim, Kayak Diving Hose Kit, Bell Bottom Flag Bag, Brownie’s Dogsnare. SHERPA, BC keel, and Garment integrated personal
flotation device (GI-PFD). Use of these trade names, trademarks, and service marks is exclusive to the Company and the Company’s
related parties.
Patents
The Company owns multiple
patents issued and in process related to the following:
|
·
|
Water safety and survival
|
|
·
|
Garment integrated flotation devices or life jacket
|
|
·
|
Collar for improved life jacket performance
|
|
·
|
Combined signaling and ballast for personal flotation device
|
|
·
|
Inflatable dive marker and collection bag.
|
|
·
|
Three dimensional dive flag
|
|
·
|
Novel dive raft and float system for divers
|
|
·
|
Drop weight Cummerbelt
|
|
·
|
Buoyancy compensator
|
|
·
|
Utility backpack
|
|
·
|
Transport harness or like garment with adjustable one size component for use by a wide range of individuals
|
|
·
|
Active control releasable ballast
|
Marketing
Print Literature, Public Relations,
and Advertising
We have in-house graphic
design capability to create and maintain product support literature, catalogs, mailings, web-based advertising, newsletters, editorials,
advertorials, and press releases. We also, from time-to-time, target specific markets by selectively advertising in journals and
magazines that we believe reach our potential customers. In addition, we strive to issue press releases, newsletters, and social
media postings periodically to keep the public informed of our latest products and related endeavors.
Tradeshows
In 2014 and 2015, the Company was represented either through their own presence or by a dealer at the following
annual trade shows: The Miami Yacht and Brokerage Show, The Fort Lauderdale International Boat Show, the Palm Beach Boat Show,
and the Seattle Boat Show.
Websites
The Company’s main website is www.browniesmarinegroup.com.
Additionally, many of our products are marketed on some of our customers’ websites. In addition, to these websites, numerous
other websites have quick links to the Company’s website. Our products are available both domestically and internationally.
Internet sales and inquiries are also supported by the Company.
Distribution
Our products are distributed to our customers
primarily by common carrier.
Product Research and Development (R&D)
We continuously work to provide our customers
with both new and improved products. We offer research and development services to not only the related entities we license our
patents and trademarks from, but also to other customers as well. R&D services for customers and the related entities are invoiced
in the normal course of business. In addition, we are working on internal research and development projects as well as collaborating
with others toward the goal of developing some of our own patentable products. Research and development costs for the year ended
December 31, 2015 and 2014, were $8,739 and $4,087, respectively.
Government Regulations
The SCUBA industry is self-regulating; therefore,
the Company is not subject to government industry specific regulation. Nevertheless, the Company strives to be a leader in promoting
safe diving practices within the industry and believes it is at the forefront of self-regulation through responsible diving practices.
The Company 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 the Company’s operation and profitability will not be subject to more restrictive regulation
or increased taxation by federal, state, or local agencies in the future.
Customers
We are predominantly a wholesale distributor
to retail dive stores, marine stores, and shipyards. This includes approximately 160 active independent Brownie dealers. We retail
our products to including, but not limited to, boat owners, recreational divers and commercial divers. 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. Combined sales to these five entities for the years ended December 31, 2015 and 2014, represented
31.75% and 43.34%, respectively, of total net revenues. A single non-related party entity represented 18.7% of revenues for 2015.
Sales to no other customers for the year ended December 31, 2014 represented greater than 10% of net revenues.
Raw Materials
Principal raw materials for our business
include machined parts such as rods, pistons, bearings; hoses; regulators; compressors; engines; high-pressure valves and fittings;
sewn goods; and various plastic parts including pans, covers, intake staffs, and quick release connections. Most materials are
readily available from multiple vendors. Some materials require greater lead times than other materials. Accordingly, we strive
to avoid out of stock situations through careful monitoring of these inventory lead times, and through avoiding single source vendors
whenever possible.
Competition
We consider the most significant
competitive factors in our business to be fair prices, feature advantages, shopping convenience, the variety of available of
products, knowledgeable sales personnel, rapid and accurate fulfillment of orders, and prompt customer service. We currently
recognize one significant competitor in hookah sales and a variety of competitors in high-pressure tankfill systems sales.
Products from the hookah competitor and those from one of the tankfill competitors appear to be very similar to ours at first
glance, but lack many of what we believe are our patently superior feature advantages. Brownie’s competitors in the
high pressure tankfill market are typically focused on traditional dive stores and fire department air service. Several are
large multi-national companies that do not offer adaptation to the yacht market or Nitrox integration; both areas that
Brownie’s long-term investments rise to a level to suit the buyer’s needs.
Overall, we are operating in a moderately
competitive environment. We believe that the price structure for all the products we distribute compares favorably with the majority
of our competitors based on quality and available features.
Personnel
We currently have eleven (11) full time
employees and three (3) part time employees at our facility in Pompano Beach, Florida. Three (3) are classified as exempt sales
and administrative or management, and eleven (11) are classified as nonexempt factory or administrative support. We utilize consultants
when needed in the absence of available in-house expertise. Our employees are not covered by a collective
bargaining
agreement.
Seasonality
The main product categories of our business,
Brownie’s Third Lung and Brownie’s Tankfill, are seasonal in nature. The peak season for Brownie’s Third Lung’s
products is the second and third quarters of the year. The peak season for Brownie’s Tankfill’s products is the fourth
and first quarters of the year. Since the seasons complement one another, we are able to shift cross-trained factory and warehouse
personnel between the two product categories as needed. Thus, the Company is able to avoid the down time normally associated with
seasonal business.
Not applicable to smaller reporting companies.
However, our principal risk factors are described under Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
|
Item 1B.
|
Unresolved Staff Comments
|
Not applicable to
smaller reporting companies.
Our Pompano Beach facilities are comprised
of approximately 8,541 square feet of leased space the bulk of which is factory and warehouse space. Terms of the lease include
a thirty-seven month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000
per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance),
which is approximately $2,000 per month subject to periodic adjustment. We believe that the facilities are suitable for their intended
purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.
|
Item 3.
|
Legal Proceedings.
|
From time to time we are subject to legal
proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability
claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability
insurance, which provided coverage for each claim up to $1,000,000. We currently do not have product liability coverage. See “Risk
Factors” below.
As previously disclosed, we are co-defendants
under an action filed by an individual in June 2013 in the Circuit Court of Broward County claiming personal injury resulting from
use of a Brownie’s Third Lung. Plaintiff has claimed damages in excess of $1,000,000. The insurance carrier’s legal
counsel indicates unfavorable outcome is possible, but not probable. We believe such claim is without merit and intend to continue
to aggressively defend such action. In addition, as previously disclosed, we are also co-defendant under an action filed March
2015, in the Circuit Court of Broward County claiming personal injury resulting from the use of a Brownie’s Third Lung product.
This claim falls outside the Company’s period of insurance coverage. The Company believes the claim to be a Workers Compensation
claim relating exclusively against other defendant and without merit, and has retained counsel to aggressively defend this action.
On September 24, 2015, all claims and counterclaims by and between Undersea Breathing Systems, Inc. (“UBS”)
and the Company were settled in full in the Circuit Court of the 15
th
Judicial Circuit in and for Palm Beach County,
FL, in the third quarter of 2015. The settlement included no payment or compensation due by the Company, UBS owing the Company
certain tangible property within 14 days, mutual execution of general release, and stipulation for dismissal with prejudice with
all parties to bear their own attorneys’ fees and costs.
|
Item 4.
|
Mine Safety Disclosure
|
None.
PART II
|
Item 5.
|
Purchases of Equity Securities.
|
The Company’s common stock is quoted on the OTC Markets under the symbol “BWMG”. The Company’s
high and low closing bid prices by quarter during 2014 and 2015, as provided by the OTC Markets (Pink) are provided below. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual
transactions. On March 17, 2016, the quoted closing price of our common stock was $0.005 per share.
|
|
Calendar Year 2014
|
|
|
|
High Bid
|
|
|
Low Bid
|
|
First Quarter
|
|
$
|
.015
|
|
|
$
|
.005
|
|
Second Quarter
|
|
$
|
.034
|
|
|
$
|
.003
|
|
Third Quarter
|
|
$
|
.005
|
|
|
$
|
.003
|
|
Fourth Quarter
|
|
$
|
.004
|
|
|
$
|
.002
|
|
|
|
Calendar Year 2015
|
|
|
|
High Bid
|
|
|
Low Bid
|
|
First Quarter
|
|
$
|
.004
|
|
|
$
|
.002
|
|
Second Quarter
|
|
$
|
.003
|
|
|
$
|
.002
|
|
Third Quarter
|
|
$
|
.003
|
|
|
$
|
.001
|
|
Fourth Quarter
|
|
$
|
.007
|
|
|
$
|
.002
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Holders of Common Stock
As of March 17, 2016,
the Company had in excess of 325 shareholders of record.
Dividends
We have not paid any dividends on our common
stock and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings to finance the
growth of the business. We cannot assure you that we will ever pay cash dividends. Whether we pay any cash dividends in the future
will depend on the financial condition, results of operations and other factors that the Board of Directors will consider.
Sales of Unregistered Securities
In addition to those unregistered securities
previously disclosed in reports filed with the Securities and Exchange Commission 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. The securities were issued with a legend restricting their transferability
absent registration of applicable exemption.
During the year ended December
31, 2015, the Company issued 19,419,712 common shares with a fair value of $54,000 to Alexander Fraser Purdon, a related
party, as employee compensation. In addition, the Company issued 396,891 common shares representing accrued interest on notes
payable to our Chief Executive Officer.
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Item 6.
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Selected Financial Data.
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Information not required by smaller
reporting company.
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Item 7.
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Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Overview
The Company through its wholly owned subsidiary,
Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation, designs, tests, manufactures and distributes
recreational hookah diving, yacht based scuba air compressor and Nitrox Generation Systems, and scuba and water safety products.
We sell our products both on a wholesale and retail basis. Our headquarters and manufacturing facility is located in Pompano Beach,
Florida. The Company does business as (dba) Brownie’s Third Lung.
Significant Accounting Policies
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make a wide
variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements, and (ii) the reported amounts of revenues and expenses during
the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect
of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties
increases, these judgments become even more subjective and complex. We have identified certain accounting policies that are most
important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are
as follows:
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 2014 financial statement amounts to conform to the 2015 financial statement presentation.
Effective July 15, 2013, the Company effectuated a reverse stock split (1-for-1,350). Accordingly, the transactional number of
shares and per share amounts referenced throughout this report 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. Although profitable for the years ended December 31, 2015 and 2014, we have otherwise incurred
losses since 2009. We have had a working capital deficit since 2009.
The Company is behind on payments due for
matured convertible debentures, related parties notes payable, accrued liabilities and interest – related party, and certain
vendor payables. The Company is handling delinquencies on a case by case basis. However, there can be no assurance that cooperation
the Company has received thus far will continue.
Because the Company does not expect that existing
operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability
to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative
sources of financing. The Company has issued a number of convertible debentures as an interim measure to finance working capital
needs and may continue to raise additional capital through sale of restricted common stock or other securities, and obtaining some
short term loans. The Company has, in the past, paid for legal and consulting services with restricted stock to maximize working
capital, and intends to continue this practice where feasible. In addition, the Company continues to explore additional cost saving
measures.
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 these uncertainties.
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 indicated.
Furniture, Fixtures, Equipment and Leasehold
Improvements
– Furniture, Fixtures, Equipment and Leasehold Improvement is stated at cost less accumulated depreciation
or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated useful lives
of the assets, which are primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures
for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether
events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining
balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash
flows over the remaining life of the fixed assets in measuring their recoverability.
Revenue recognition
– Revenues
from product sales are recognized when the Company’s products are shipped or when service is rendered. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated
total cost of each contract. This method is used because management considers the percentage of cost incurred to date to estimated
total cost to be the best available measure of progress on the contracts.
Contract costs include all direct material
and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and
depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Change in job performance, job conditions, and estimated
profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Revenue and costs incurred for time and material projects are recognized as the work is performed.
Product development costs
–
Product development expenditures are charged to expenses as incurred.
Advertising and marketing costs
–
The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the
costs of communicating advertisements and participating in trade shows in the period in which they occur.
Customer deposits and returns policy
– The Company
typically 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, we would make an adjustment to the valuation allowance
which would reduce the provision for income taxes.
The Company follows the accounting guidance
which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position
will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical
merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially
and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
Comprehensive income
– The
Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods presented.
Stock-based compensation
–
The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation
cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually
the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued
to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance
with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The
fair value is determined through use of the quoted stock price.
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.
At December 31, 2015, and 2014, the carrying
amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties
payable – related parties, other liabilities, other liabilities and accrued interest – related parties, notes payable,
notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short
maturity of these instruments.
Earnings per common share
–
Basic earnings per share 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 dilutive common stock equivalent shares outstanding during the period.
Common stock equivalent shares are excluded from the computation if their effect is antidilutive.
New accounting pronouncements
In July 2015, the Financial Accounting Standards
Board issued Accounting Standards Update (ASU) No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. ASU
No. 2015-11 does not apply to inventory measurement using the last-in, last-out (LIFO) or retail methods. ASU No. 2015-11 applies
to all other inventory measurement methods, which includes first-in, first-out (FIFO) or average cost. Previously, inventory valuation
was at the lower of cost or fair market value. This ASU changes the valuation to lower or cost of net realizable value. Net realizable
value is defined as the estimated selling prices in the ordinary course of the business, less reasonably predictable costs of completion,
disposal, and transportation. ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those
fiscal years. ASU 2015-11 should be applied prospectively with earlier application permitted. The Company opted for early adoption
of ASU 2015-11 this period with no impact to financial condition, results of operations, or cash flows. The Company updated its
consolidated financial statements to reflect inventory valuation at the lower of cost or net realizable value.
In August 2014, the Financial Accounting
and Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements
Going Concern (Subtopic 205-206): Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
The ASU requires an entity’s management to assess its ability to continue as going concern by incorporating and expanding
upon certain principles that are currently in U.S. auditing standards. This includes (1) providing a definition of the term substantial
doubt, (2) requiring an evaluation every reporting period including interim periods, (3) providing principles for considering then
mitigating effect of management’s plans, (4) requiring certain disclosures when substantial doubt is alleviated as a result
of consideration of management’s plans, (5) requiring an express statement and other disclosures when substantial doubt is
not alleviated, and (6) requiring an assessment for a period of one year after the date that the financial statements are issued
(or available to be issued). The ASU is effective for the annual period ending after December 15, 2016, and for annual periods
and interim periods thereafter with early adoption permitted. The Company elected early adoption for the year ended December 31,
2014, with insignificant impact to both its current process for evaluating ability to continue as going concern and to its existing
disclosures.
The Company believes there was no other
new accounting guidance adopted, but not yet effective that either has not already been disclosed in prior reporting periods or
is relevant to the readers of its financial statements.
The following discussion and analysis of
the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to allowance for doubtful accounts and deferred income tax assets. The Company bases its
estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Results of Operations for the Year Ended December 31, 2015,
as Compared to the Year Ended December 31, 2014
Net revenues
.
For the year ended December 31, 2015, revenues remained relatively constant with net revenues of $2,759,643 as compared
to net revenues of $2,735,841 for the year ended December 31, 2014, an increase of $23,802, or less than 1%. Sales to
related parties totaled $876,188 and $1,185,603 for the same periods, respectively. Sales of tankfill systems and related
sales were up approximately $251,967 for the year ended December 31, 2015 compared to 2014, and this increase was partially
offset by an approximate $240,408 decline in hookah systems and related sales during the same period this change in product
mix is not believed to be attributable to any particular identifiable sales trend or competitive pressures but rather normal
fluctuations in market demand. Discontinuance of the Company’s product liability insurance has had negative impact on
hookah sales to some of the Company’s dealers, but the Company believes sales of these products will rebound over time.
Cost of net revenues
. For the year
ended December 31, 2015, we had cost of net revenues of $1,831,989 as compared with cost of net revenues of $1,991,626 for the
year ended December 31, 2014, a decrease of $159,637, or 8%. This was primarily attributable to approximately $11,869 decrease
in overhead allocation primarily due to discontinuance of product liability insurance in the third quarter of 2014, which was an
expense allocable as overhead; approximately $26,622 decrease in direct labor; approximately $19,870 decrease in subcontract labor;
approximately $10,220 decrease in non-sales freight; and approximately $89,973 net decrease of primarily individually insignificant
decreases in the majority of cost of net revenue accounts due to continuance of cost cutting measures by the Company to maximize
working capital without sacrificing quality. In addition, although material costs increased due to quantity increase in sales,
the increase was offset by an approximately 1% overall decline in material cost as a percentage of net revenues.
Gross profit.
For the year ended
December 31, 2015, we had a gross profit of $927,654 as compared to gross profit of $744,215 for the year ended December 31, 2014,
an increase of $183,439, or 25%. The increase in gross profit was primarily attributable to the decrease in cost of net revenues
of $159,637 for the year ended December 31, 2015, as compared to the prior year as discussed above.
Operating expenses
. For the year
ended December 31, 2015, we had operating expenses of $679,721 as compared to operating expenses of $623,261 for the year ended
December 31, 2014, an increase of $56,460, or 9%. The increase is primarily attributable to increase in legal expense of approximately
$141,204 approximately $16,886 increase in rent, and partially offset by approximately $44,652 decrease in insurance expense related
to discontinuance of product liability insurance and reduction of workers compensation insurance, and decrease in indirect labor
of approximately $37,679. There were many other net increases and decreases in account balances not deemed individually insignificant.
The vast majority of the legal expense increase was for the UBS legal proceeding during 2015, including legal defense and counterclaim
settlement. The balance of the increase in legal is primarily a result of a credit to legal expense for overbilled amount during
the year ended December 31, 2014 without comparable transaction during the year ended December 31, 2015. The decrease in direct
labor for the year ended December 31, 2015 as compared to the same period in 2014 is a result of reduction in head count not replaced
when the Company’s factory and headquarters relocated in October 2014.
Other (income) expense, net
. For
the year ended December 31, 2015, we had other (income) expense, net of $18,280, as compared to other (income) expense, net of
$26,541 for the year ended December 31, 2014, a change in other (income) expense, net of $8,261, or 31%. This account is comprised
of interest expense that decreased $18,217 during the year ended December 31, 2015 compared to the year ended December 31, 2014
primarily attributable to the satisfaction of related party notes. Other (income) expense net is comprised of transactions that
are generally of a non-recurring nature. The decrease in other income net of $9,955 is primarily due to transactions occurring
during the year ended December 31, 2014, without comparable transactions during the same period in 2015.
Net income.
For the year ended December
31, 2015, we had net income of $229,610 as compared to net income of $94,369 for the year ended December 31, 2014, an increase
of $135,241, or 143%. The increase in net income is primarily attributable a decrease in the cost of net revenues as described
above.
Liquidity and Capital Resources
As of December 31, 2015, the Company had
current assets (primarily consisting of inventory) of $958,001 and current liabilities of $1,232,943 or a current ratio of .78
to 1. This represents a working capital deficit of $274,942. As of December 31, 2014, the Company had cash and current assets of
$774,291 and current liabilities of $1,356,642, or a current ratio of .57 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 years ended December 31, 2014 and 2015, we have otherwise incurred annual losses
since 2009, and expect we may have losses in future periods. We have had a working capital deficit since 2009.
The Company is behind on payments due matured
convertible debentures; accrued liabilities and interest – related parties; and certain vendor payables. The Company is handling
delinquencies on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will
continue.
The Company does not expect that existing
cash flow will be sufficient to fund presently anticipated operations. This raises substantial doubt about the Company’s
ability to continue as a going concern during the twelve- month period following the date of the financial statements included
herein. The Company will need to raise additional funds and is currently exploring alternative sources of financing. We have issued
a number of convertible debentures as an interim measure to finance our working capital needs. We have historically paid for some
legal and consulting services with restricted stock to maximize working capital. 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.
Net cash provided by operating
activities totaled $147,461 and $157,757 for the years ended December 31, 2015 and 2014, respectively. For both 2015 and
2014, the increase in net cash from operating activities was primarily the result of earnings for the period. Cash generated
from 2015 earnings of $229,610 was reduced primarily by a reduction in accounts payable and accrued liabilities during the
period of $112,830 as well as an increase in prepared expenses and inventory levels dictated by anticipated sales levels.
Cash flows in 2015 were also increased by a decrease in accounts receivable - related parties and increase in accrued
royalties, payable to related parties.
Net cash used in financing
activities totaled $12,622 and $126,202 at December 31, 2015 and 2014, respectively, and primarily reflects the repayments
during the periods of principal payments on notes payable to related parties of $30,068 and $113,452, respectively. The net
cash used in financing activities for 2015 was net of $27,000 proceeds of additional notes payable - related parties.
Net cash provided by
operating activities for 2014 resulted primarily from 2014 earning of $94,369 coupled with an increase in other liabilities
and accrued interest payable to related parties of $74,504 and advanced from related parties $34,617.
For both years ending December 31, 2015 and 2014, the Company has heavily depended upon the funding of
related parties to maintain its operations.
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.
Risk Factors
The Company is subject to various risks
that may materially harm its business, financial condition and results of operations. These may not be the only risks and uncertainties
that the Company faces. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our
future business operations. 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 in 2015 and
2014, the Company has negative working capital, is behind on payments due for matured convertible debentures, related party notes
payable, accrued liabilities and interest –related parties, and certain vendor payables. The Company is working out all matters
of delinquency on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will
continue. Our continued existence is dependent upon generating working capital and obtaining adequate new debt or equity financing.
Because of our historical 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.
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 December 31, 2015 the outstanding principal balance of these
debentures was approximately $372,000. 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 OTC Markets.
There is a limited public market for our common stock and there can be no assurance that an active trading market for our common
stock will develop. As a result, this could adversely affect our shareholders’ ability to sell our common stock in short
time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded in an active public
market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations,
which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we
believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition
of the financial markets could cause the price of our common stock to fluctuate substantially.
Our company is a voluntary filer with the Securities and
Exchange Commission and in the event that we cease reporting under the Exchange Act, investors would have limited information available
to them about the company.
While we are subject to Section 15(d) of
the Exchange Act, we do not have a class of securities registered under Section 12(g) of the Exchange Act. To the extent that our
duty to file Exchange Act reports has automatically suspended under Section 15(d) of the Exchange Act, as a voluntary filer, we
may elect to cease reporting under the Exchange Act at such time which would limit the information available to investors and shareholders
about the company.
Our common stock is deemed to be “penny stock,”
which may make it more difficult for investors to sell their shares due to suitability requirements.
Our common stock is deemed to be “penny
stock” as that term is defined under the Securities Exchange Act of 1934. Penny stocks generally are equity securities with
a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system,
provided that current price and volume information with respect to transactions in such securities is provided by the exchange
or system). Our common stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited investors, which are generally institutions with
assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
jointly with their spouse.
Broker/dealers dealing in penny stocks are
required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required
to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult
for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price
to decline.
We depend on the services of our
Chief Executive Officer
.
Our success largely depends on the efforts
and abilities of Robert M. Carmichael, our President and Chief Executive Officer. Mr. Carmichael has been instrumental in securing
our existing financing arrangements. Mr. Carmichael is primarily responsible for the development of our technology and the design
of our products. The loss of the services of Mr. Carmichael could materially harm our business because of the cost and time necessary
to recruit and train a replacement. Such a loss would also divert management attention away from operational issues. We do not
presently maintain a key-man life insurance policy on Mr. Carmichael.
We require additional personnel and
could fail to attract or retain key personnel
.
In addition, 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 to assist the Chief Executive Officer with finance and
operations. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer
or Chief Operations Officer or further assistance in these areas 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 and enforce
intellectual property protection may 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 affects 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, 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 or cease 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 could have an adverse
effect on operating results
.
Our business is significantly impacted by
weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably rough surf, may decrease boat use
and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may not be indicative of results
of any future period.
Investors should not rely on an investment
in our stock for the payment of cash dividends
.
We have not paid any cash dividends on our
capital stock and we do not anticipate paying cash dividends in the future. Investors should not make an investment in our common
stock if they require dividend income. Any return on an investment in our common stock will be as a result of any appreciation,
if any, in our stock price.
The manufacture and distribution of recreational diving
equipment could result in product liability claims and we currently lack product liability insurance
.
We, like any other retailer, distributor
and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure to product
liability claims in the event that the use of our products results in injury. Such claims may include, among other things, that
our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or side
effects, if any. We do not anticipate obtaining contractual indemnification from parties
-
supplying raw materials
,
manufacturing
our products or marketing our products. In any event, any such indemnification if obtained will be limited by our terms and, as
a practical matter, to the creditworthiness of the indemnifying party. We currently do not have any product liability insurance.
In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products
could have a material adverse effect on our operations and financial conditions, which could force us to curtail or cease our business
operations.
If we fail to maintain an effective system of internal
control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential
shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock
.
Our management has previously determined that
we did not maintain effective internal controls over financial reporting. For a detailed description of these material weaknesses
and our remediation efforts and plans, see “Part II — Item 9A — Controls and Procedures.” If the result
of our remediation of the identified material weaknesses is not successful, or if additional material weaknesses are identified
in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of
our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further
implement expensive and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness
of our financial reports which could have an adverse effect on our stock price and potentially subject us to litigation.
We currently have no independent directors, which poses
a risk for us from a corporate governance perspective.
Robert Carmichael, our only executive officer,
also serves as our only director. Our director and executive officer is required to make interested party decisions, such as the
approval of related party transactions, his level of his compensation, and oversight of our accounting function. Our director and
executive officer also exercise substantial control over all matters requiring stockholder approval, including the nomination of
directors and the approval of significant corporate transactions. Due to our lack of independent directors, we have not implemented
various corporate governance measures, the absence of which may cause stockholders to have more limited protections against transactions
implemented by our board of directors, conflicts of interest and similar matters. Stockholders should bear in mind our current
lack of corporate governance measures in formulating their investment decisions.
Our Chief Executive Officer beneficially owns approximately
55% of the combined voting power of our Common Stock and Series A Convertible Preferred Stock and is able to control voting issues
and actions that may not be beneficial or desired by minority shareholders.
As of December 31, 2015, Robert Carmichael,
our only executive officer, beneficially owns approximately 55% of the combined voting power of the Common Stock and Series A Convertible
Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to
the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also
the power to prevent or cause a change in control.
|
Item 7A.
|
Quantitative and Qualitative Disclosures about Market Risk.
|
Not required for smaller
reporting companies.
|
Item 8.
|
Financial Statements.
|
Our consolidated financial
statements appear beginning at page F-1.
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|
None.
|
Item 9A.
|
Controls and Procedures.
|
Evaluation of Disclosure Controls
and Procedures
We maintain disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the
SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
The Company’s management, under the supervision and with the participation of Robert Carmichael, the Company's Chief Executive
Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act)
as of December 31, 2015. Based upon that evaluation and the identification of the material weakness in the Company’s internal
control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting,”
the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were
ineffective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial
Reporting
Management is responsible for
establishing and maintaining adequate internal control over financial reporting of the Company. Management, with the
participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2015, based on the 2013 criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2015, our internal
control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles because of the Company’s limited resources and limited number of employees. To mitigate the
current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with
the use of legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable
us to implement adequate segregation of duties within the internal control framework.
This annual report does not include an attestation
report of the company's registered public accounting firm regarding internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive
Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will
prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to,
the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood
of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-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.
|
Item 9B.
|
Other Information.
|
None.
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,” “our” or “BWMG”)
designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation
systems, and scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. The Company sells its
products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Pompano Beach,
Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. The Company’s
common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”.
Basis of Presentation
– The financial statements
of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America
(“GAAP”). In the opinion of management all normal recurring adjustments considered necessary to give a fair presentation
of operating results for the periods presented have been included.
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.
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. Although profitable for the years ended December 31, 2015 and 2014, we have otherwise incurred losses since 2009. We
have had a working capital deficit since 2009.
The Company is behind on payments due for matured convertible
debentures, related parties notes payable, accrued liabilities and interest – related parties, and certain vendor payables.
The Company is handling delinquencies on a case by case basis. However, there can be no assurance that cooperation the Company
has received thus far will continue.
Because the Company does not expect that existing operational
cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue
as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of
financing. The Company has issued a number of convertible debentures as an interim measure to finance working capital needs and
may continue to raise additional capital through sale of restricted common stock or other securities, and obtaining some short
term loans. The Company has, in the past, paid for legal and consulting services with restricted stock to maximize working capital,
and intends to continue this practice where feasible. In addition, the Company continues to explore additional cost saving measures.
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 these uncertainties.
Accounts receivable
– Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for
doubtful accounts are estimated based on historical customer experience and industry knowledge.
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 indicated.
Furniture, Fixtures, Equipment and Leasehold Improvements
–
Furniture, Fixtures, Equipment and Leasehold Improvement is stated at cost less accumulated depreciation or amortization. Depreciation
and amortization is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily
3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and
renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed
from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances
have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed
assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the
remaining life of the fixed assets in measuring their recoverability.
Revenue recognition
– Revenues from product sales
are recognized when the Company’s products are shipped or when service is rendered. Revenues from fixed-price contracts are
recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost
of each contract. This method is used because management considers the percentage of cost incurred to date to estimated total cost
to be the best available measure of progress on the contracts.
Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs.
General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Change in job performance, job conditions, and estimated profitability
may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Revenue and
costs incurred for time and material projects are recognized as the work is performed.
Product development costs
– Product development
expenditures are charged to expenses as incurred.
Advertising and marketing costs
– The Company expenses
the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating
advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the
years ended December 31, 2015, and 2014, totaled $8,497 and $3,686, respectively.
Customer deposits and returns policy
– The Company
typically 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.
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company follows the accounting guidance which provides that
a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained
upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax
positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent
periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
Comprehensive income
– The Company has no components
of other comprehensive income. Accordingly, net income equals comprehensive income for all periods presented.
Stock-based compensation
– The Company accounts
for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured
at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.
The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees
and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally
accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is
determined through use of the quoted stock price.
For the years ended December 31, 2015 and 2014, the Company
compensated and/or converted all accrued payroll to stock for one related party employee totaling $54,000 and $54,000, respectively.
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
through use of the quoted stock price.
Fair value of financial instruments
–
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets that are accessible
at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices for similar assets and liabilities in
active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques,
as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques
and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk.
An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the
fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by
the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant
market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does
not necessarily correspond to the Company’s perceived risk of that investment.
At December 31, 2015, and 2014, 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.
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 dilutive common stock equivalent shares outstanding during
the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.
Potentially dilutive shares included in dilutive earnings per share totaled 44,837,540 and 45,905,784 at December 31, 2015
and 2014, respectively. These shares reflect shares potentially issuable under convertable note agreements during the periods
and 195,610 shares payable to a related party at both December 31, 2015 and 2014, respectively.
New accounting pronouncements
–
In July 2015, the Financial Accounting Standards Board issued
Accounting Standards Update (ASU) No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. ASU No. 2015-11
does not apply to inventory measurement using the last-in, last-out (LIFO) or retail methods. ASU No. 2015-11 applies to all other
inventory measurement methods, which includes first-in, first-out (FIFO) or average cost. Previously, inventory valuation was at
the lower of cost or fair market value. This ASU changes the valuation to lower of cost or net realizable value. Net realizable
value is defined as the estimated selling prices in the ordinary course of the business, less reasonably predictable costs of completion,
disposal, and transportation. ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those
fiscal years. ASU 2015-11 should be applied prospectively with earlier application permitted. The Company opted for early adoption
of ASU 2015-11 this period with no impact to financial condition, results of operations, or cash flows. The Company updated its
consolidated financial statements to reflect inventory valuation at the lower of cost or net realizable value.
In August 2014, the Financial Accounting and Standards Board
(FASB) issued Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements Going Concern (Subtopic
205-206): Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU requires an entity’s
management to assess its ability to continue as going concern by incorporating and expanding upon certain principles that are currently
in U.S. auditing standards. This includes (1) providing a definition of the term substantial doubt, (2) requiring an evaluation
every reporting period including interim periods, (3) providing principles for considering then mitigating effect of management’s
plans, (4) requiring certain disclosures when substantial doubt is alleviated as a result of consideration of management’s
plans, (5) requiring an express statement and other disclosures when substantial doubt is not alleviated, and (6) requiring an
assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The ASU
is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early
adoption permitted. The Company elected early adoption for the year ended December 31, 2014, with insignificant impact to both
its current process for evaluating ability to continue as going concern and to its existing disclosures.
The Company believes there was no other new accounting guidance
adopted, but not yet effective that either has not already been disclosed in prior reporting periods or is relevant to the readers
of our financial statements.
Inventory consists of the following as of:
|
|
December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
422,115
|
|
|
$
|
331,879
|
|
Work in process
|
|
|
—
|
|
|
|
—
|
|
Finished goods
|
|
|
232,098
|
|
|
|
274,334
|
|
|
|
$
|
654,213
|
|
|
$
|
606,213
|
|
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
3.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current assets consisted of the following:
|
|
December 31
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Prepaid inventory
|
|
$
|
42,076
|
|
|
$
|
21,508
|
|
Prepaid insurance
|
|
|
8,819
|
|
|
|
8,112
|
|
Prepaid other current assets
|
|
|
7,117
|
|
|
|
575
|
|
|
|
$
|
58,012
|
|
|
$
|
30,195
|
|
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment consists of the following as of:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Factory and office equipment
|
|
$
|
62,633
|
|
|
$
|
62,633
|
|
Tooling
|
|
|
59,149
|
|
|
|
52,344
|
|
Computer equipment and software
|
|
|
23,932
|
|
|
|
23,932
|
|
Vehicles
|
|
|
44,160
|
|
|
|
44,160
|
|
Leasehold improvements
|
|
|
43,779
|
|
|
|
38,379
|
|
|
|
|
233,653
|
|
|
|
221,448
|
|
Less: accumulated depreciation and amortization
|
|
|
(147,941
|
)
|
|
|
(112,942
|
)
|
|
|
$
|
85,712
|
|
|
$
|
108,506
|
|
Depreciation and amortization
expense totaled $21,531 and $13,468 for the year ended December 31, 2015 and $21,570 and $2,599 for the year ended December
31, 2014, respectively.
Other assets of $6,649 at December 31, 2015, consisted of refundable
deposits. Other assets of $31,049 at December 31, 2014 consisted of $24,740 investment in joint venture, and $6,309 refundable
deposits. See Note 16.
|
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 the years
ended December 31, 2015 and 2014, represented 31.75% and 43.34%, respectively, of total net revenues. A single non-related
party entity represented 18.7% of revenues for 2015. Sales to no other customers for the year ended December 31, 2014 represented
greater than 10% of net revenues.
|
7.
|
RELATED PARTIES TRANSACTIONS
|
Notes payable – related parties
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Promissory note payable to Chief Executive Officer, unsecured, payable in twelve monthly principal payments of $2,250 beginning June 15, 2015, with interest at 10% per annum with payments monthly in shares of stock based on the monthly weighted average price of the stock, maturing May 15, 2016.
|
|
$
|
11,098
|
|
|
$
|
—
|
|
Promissory note payable to non-employee member of the Board of Director, secured by up to $200,000 in company assets, bearing interest at 21% with monthly principal and interest payments of $8,585, matured November 1, 2014.
|
|
|
—
|
|
|
|
14,167
|
|
|
|
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
11,098
|
|
|
|
14,167
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,098
|
|
|
$
|
14,167
|
|
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective April 22, 2015, the
Company issued Mr. Carmichael, Chief Executive Officer of the Company, an unsecured promissory note presented in the table above
in consideration for a $27,000 advance. For purposes of calculating the interest due monthly on the note, the weighted average
price per share during the monthly period from the historical data as quoted on www.quotemedia.com for BWMG shall be used. Interest
shall be calculated as the unpaid principal balance times the daily rate for the number of the days in the period times the average
weighted price per share for the monthly period. The Company borrowed and is using the proceeds for tooling and inventory of new
product. For the year ended December 31, 2015, the Company converted $1,015 accrued interest on the note payable – related
party to 396,891 shares of restricted stock.
On October 30, 2013, the Company
signed a secured promissory note, with Mikkel Pitzner, the non-employee Board of Director (“BOD”) for $85,000. 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 expired October 31, 2015 without
being exercised, in whole or in part. During the third quarter ended September 30, 2015, the Company paid off the remaining balance
due under the note payable – related party.
Net revenues and accounts receivable – related parties
– The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s
Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those
extended to any of the Company’s other customers with similar sales volumes. Combined net revenues from these entities for
years ended December 31, 2015 and 2014, totaled $825,491 and $948,090, respectively. Accounts receivable from Brownie’s SouthPort
Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2015, was $12,981, $4,678,
and $15,221, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers,
and Brownie’s Yacht Toys at December 31, 2014, was $42,882, $4,128, and $8,451, respectively.
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 on a per order basis include promotion of BWMG’s technologies
and “Brownie’s” brand, offered only on product or services not offered for resale, and must provide for reciprocal
terms or arrangements to BWMG on strategic partners’ product or services. BGL is fulfilling the strategic partner terms by
providing exposure for BWMG’s technologies and “Brownie’s” brand in the yachting and exploration community
word-wide through its operations. Combined net revenues from these entities for years ended December 31, 2015, and 2014, were $50,697
and $181,355, respectively. Accounts receivable from BGL at December 31, 2015, and December 31, 2014 was $6,443 and $2,107, respectively.
Accounts receivable from 3D Buoy was $1,948 at December 31, 2015.
Royalties expense – related parties
– The
Company has Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned
by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”,
“Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement,
the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the years ended December
31, 2015 and 2014, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of December 31, 2015,
the Company was approximately 27 months in arrears on royalty payments due. No default notice has been received and the Company
plans to make payments as able.
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 years ended December
31, 2015 and 2014, stock based compensation to Mr. Purdon was $54,000 and $54,000, 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 is payable 1,852 shares of stock, which were valued at $2,250. 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 December 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 was 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. The obligation was satisfied in the fourth quarter of 2015.
Other liabilities and accrued interest– related parties
Other liabilities and accrued interest– related parties
consists of the following at:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
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 Director
|
|
|
—
|
|
|
|
3,004
|
|
Due to Principals of Carleigh Rae Corp., net
|
|
|
—
|
|
|
|
6,017
|
|
|
|
$
|
84,500
|
|
|
$
|
93,521
|
|
Stock options outstanding from patent purchase
–
Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer
of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued patents.
In exchange for the Intellectual Property (“IP), the Company issued Mr. Carmichael 234 stock options at a $1,350 exercise
price expiring ten years from the effective date of grant, or March 2, 2019. None of the options have been exercised to-date.
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 to
the agreement (collectively, the “FDI 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. On May 31, 2013, the
Company closed the dive store and vacated the premises. As of December 31, 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 at December 31, 2015 and 2014, respectively.
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable and accrued liabilities of $349,946 at December
31, 2015, consists of $59,916 accounts payable trade, $27,245 accrued payroll and fringe benefits, $45,000 accrued year-end bonuses,
$36,520 accrued payroll taxes and withholding, and $181,266 accrued interest. Balances due certain vendors are also due in arrears
to varying degrees.
Accounts payable and accrued liabilities of $462,776 at December
31, 2014, consists of $196,027 accounts payable trade, $31,669 accrued payroll and fringe benefits, $45,000 accrued year-end bonuses,
$39,242 accrued payroll taxes and withholding, and $150,837 accrued interest. Accrued payroll taxes and withholding were approximately
nine months in arrears at December 31, 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.
Other liabilities of $231,551 at December 31, 2015, consists
of $215,782 short-term loans, $12,857 payable for assets purchased pursuant to FDI Agreement, and $2,912 on-line training liability.
Other liabilities of $232,738 at December 31, 2014, consist of $216,586 short-term loans, $12,857 payable for assets purchased
pursuant to FDI Agreement and $3,295 on-line training liability.
Notes payable consists of the following as of December 31, 2015:
Promissory note payable, secured by vehicle underlying loan having carrying value of $17,760 at December 31, 2014, bearing interest at 1.9% per annum, due in monthly principal and interest payments of $523, maturing on December 5, 2017.
|
|
$
|
12,232
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
6,099
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
6,133
|
|
As of December 31, 2015, principal payments on the notes payable
are as follows:
2016
|
|
$
|
6,099
|
|
2017
|
|
|
6,133
|
|
2018
|
|
|
—
|
|
2019
|
|
|
—
|
|
2020
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
12,232
|
|
The unsecured note payable in the table below in the December
31, 2014, 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, 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.
|
|
$
|
2,764
|
|
|
|
|
|
|
Promissory note payable, secured by vehicle underlying loan having carrying value of $17,760 at December 31, 2014, bearing interest at 1.9% per annum, due in monthly principal and interest payments of $523, maturing on December 5, 2017.
|
|
|
18,216
|
|
|
|
|
20,980
|
|
|
|
|
|
|
Less amounts due within one year
|
|
|
8,749
|
|
|
|
|
|
|
Long-term portion of notes payable
|
|
$
|
12,231
|
|
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
12.
|
CONVERTIBLE DEBENTURES
|
Convertible debentures consist of the following at December
31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination
|
|
|
Origination
|
|
|
Period End
|
|
|
End
|
|
|
End
|
|
|
Accrued
|
|
|
|
|
Maturity
|
|
Interest
|
|
|
Principal
|
|
|
Discount
|
|
|
Principal
|
|
|
Discount
|
|
|
Balance,
|
|
|
Interest
|
|
|
|
|
Date
|
|
Rate
|
|
|
Balance
|
|
|
Balance
|
|
|
Balance
|
|
|
Balance
|
|
|
Net
|
|
|
Balance
|
|
|
Ref.
|
|
5/27/2011
|
|
|
10
|
%
|
|
$
|
125,000
|
|
|
$
|
(53,571
|
)
|
|
$
|
58,750
|
|
|
|
-
|
|
|
$
|
58,750
|
|
|
$
|
34,709
|
|
|
|
(1
|
)
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
140,000
|
|
|
|
(3
|
)
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
2,183
|
|
|
|
(4
|
)
|
2/10/2014
|
|
|
10
|
%
|
|
|
5,500
|
|
|
|
-
|
|
|
|
472
|
|
|
|
-
|
|
|
|
472
|
|
|
|
216
|
|
|
|
(5
|
)
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
-
|
|
|
|
2,743
|
|
|
|
-
|
|
|
|
2,743
|
|
|
|
4,158
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
371,965
|
|
|
$
|
-
|
|
|
$
|
371,965
|
|
|
$
|
181,266
|
|
|
|
|
|
Convertible debentures consist of the following at December
31, 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
|
|
|
Reg.
|
|
11/27/2010
|
|
5/27/2011
|
|
|
10
|
%
|
|
$
|
125,000
|
|
|
$
|
(53,571
|
)
|
|
$
|
58,750
|
|
|
|
—
|
|
|
$
|
58,750
|
|
|
$
|
28,829
|
|
|
|
(1
|
)
|
10/31/2012
|
|
8/2/2013
|
|
|
8
|
%
|
|
|
78,500
|
|
|
|
(50,189
|
)
|
|
|
4,680
|
|
|
|
—
|
|
|
|
4,680
|
|
|
|
6,280
|
|
|
|
(2
|
)
|
5/3/2011
|
|
5/5/2012
|
|
|
5
|
%
|
|
|
300,000
|
|
|
|
(206,832
|
)
|
|
|
300,000
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
110,000
|
|
|
|
(3
|
)
|
8/31/2011
|
|
8/31/2013
|
|
|
5
|
%
|
|
|
10,000
|
|
|
|
(4,286
|
)
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
1,679
|
|
|
|
(4
|
)
|
3/14/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
5,500
|
|
|
|
—
|
|
|
|
472
|
|
|
|
—
|
|
|
|
472
|
|
|
|
167
|
|
|
|
(5
|
)
|
2/10/2012
|
|
2/10/2014
|
|
|
10
|
%
|
|
|
39,724
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
—
|
|
|
|
2,743
|
|
|
|
3,882
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
376,645
|
|
|
$
|
—
|
|
|
$
|
376,645
|
|
|
$
|
150,837
|
|
|
|
|
|
|
(1)
|
The Company purchased in exchange for convertible debenture exclusive rights for license of certain intellectual property from
an unrelated party. The parties agreed to a royalty of 2.5% of net revenues generated from the sale, sub-license or use of the
technology or a reasonable negotiated rate based on similar invention. The debenture was convertible to common shares of the Company
at May 27, 2011, along with accrued interest at the option of the lender. Conversion price per share is 30% discount as determined
from the weighted average of the preceding 12 trading days’ closing market price. The Company valued the BCF of the convertible
debenture at $53,517, its intrinsic value. The Company accreted the discount to the convertible debenture and will recognize interest
expense through repayment in full or conversion. Because there was no assurance of success and the invention was still in design
and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense
during the year ended 2010. Both parties agreed to confidentiality regarding the invention during the pre-prototype stage. In addition,
the Company agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production
at the Company’s prevailing wholesale rate for comparable services.
|
On February 10, 2012, the holder of this debenture
entered into an agreement with a third party to sell/assign the $125,000 principal balance, plus accrued interest. The purchase
was to be in installments with transfer/assignment of the debenture upon payment, referred to as “Closings”. The first
Closing was on or about February 15, 2012 for $7,500, with that amount assigned/transferred. The second Closing, occurred 90 days
after the first closing for $11,750 paid/assigned. All subsequent Closings were to be for $11,750 and occur in 30 day increments
after the second Closing. This was to continue until the full principal balance of $125,000, plus accrued interest is purchased/assigned.
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
(2)
|
On October 31, 2012, the Company borrowed $78,500 from this 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, and accordingly, discounted the $78,500 debenture by this amount. 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
year ended December 31, 2014, the lender converted $73,820 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.
|
|
(3)
|
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, 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 interest
expense. The Company recognized the FMV of the related warrants as $45,000 using the Black-Scholes valuation model.
|
|
(4)
|
The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of
the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four
(4) highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture
at $4,286, which was accreted to interest expense.
|
|
(5)
|
This line is comprised of the assignment of $5,500 of a previously issued convertible debenture. The notes are convertible
at $0.37125 per share.
|
|
(6)
|
The Company entered into three new debenture agreements upon sale/assignment of the original lenders. 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.
|
The conversion price under the debentures is $0.37125
and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties
apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99%
of the outstanding Common Stock of the Company at any one time.
The components of the provision for income tax expense are as
follows for the years ended:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Current taxes
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Current taxes
|
|
|
—
|
|
|
|
—
|
|
Change in deferred taxes
|
|
|
82,112
|
|
|
|
18,564
|
|
Change in valuation allowance
|
|
|
(82,069
|
)
|
|
|
(18,520
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
$
|
43
|
|
|
$
|
44
|
|
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the significant components of
the Company’s deferred tax assets and liabilities at December 31, 2015:
Deferred tax assets:
|
|
|
|
|
Equity based compensation
|
|
$
|
97,276
|
|
Allowance for doubtful accounts
|
|
|
9,520
|
|
Net operating loss carryforward
|
|
|
1,015,748
|
|
On-line training certificate reserve
|
|
|
818
|
|
Total deferred tax assets
|
|
|
1,123,362
|
|
Valuation allowance
|
|
|
(1,120,842
|
)
|
|
|
|
|
|
Deferred tax assets net of valuation allowance
|
|
|
2,520
|
|
|
|
|
|
|
Less deferred tax assets – non-current, net of valuation allowance
|
|
|
2,330
|
|
|
|
|
|
|
Deferred tax assets – current, net of valuation allowance
|
|
$
|
190
|
|
The effective tax rate used for calculation of the deferred
taxes as of December 31, 2015 was 34%. The Company has established a valuation allowance against deferred tax assets of $1,120,842
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 years ended are as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Statutory tax rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State tax, net of Federal benefits
|
|
|
3.63
|
%
|
|
|
3.63
|
%
|
Change in valuation allowance
|
|
|
(37.63
|
)%
|
|
|
(37.63
|
)%
|
Effective tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
The following is a summary of the significant components of
the Company’s deferred tax assets and liabilities at December 31, 2014, Restated:
Deferred tax assets:
|
|
|
|
|
Equity based compensation
|
|
$
|
97,276
|
|
Allowance for doubtful accounts
|
|
|
15,980
|
|
Depreciation and amortization timing differences
|
|
|
—
|
|
Net operating loss carryforward
|
|
|
1,091,064
|
|
On-line training certificate reserve
|
|
|
1,154
|
|
Total deferred tax assets
|
|
|
1,205,474
|
|
Valuation allowance
|
|
|
(1,202,911
|
)
|
|
|
|
|
|
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 December 31, 2014 was 34%. The Company has established a valuation allowance against deferred tax assets of $1,202,911
(Restated) or 99.8%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve against the net operating
carryforward, 100% reserve against the allowance for doubtful accounts, and 97% reserve against the deferred tax assets attributable
to the equity based compensation.
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
14.
|
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. The Company
authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment
authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to
designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each
series, any or all of which may be greater than the rights of the common stock. As of December 31, 2015, and December 31, 2014,
the 425,000 shares of preferred stock are owned by the Company’s Chief Executive Officer. The preferred shares have 250 to
1 voting rights over the common stock, and are convertible into 31,481 shares of common stock. The preferred stock votes with the
Company’s common stock, except as otherwise required under Florida law. Accordingly, Mr. Carmichael will have approximately
55% of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will
control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.
|
15.
|
COMMITMENTS AND CONTINGENCIES
|
From time to time the Company is subject to legal proceedings,
claims and litigation arising in the ordinary course of business, including matters relating to product liability claims. Such
product liability claims sometimes involving wrongful death or injury have historically been covered by product liability insurance,
which provided coverage for each claim up to $1,000,000. During the third quarter of 2014, the Company did not renew its product
liability insurance since the renewal policy amount was cost prohibitive. The Company is currently seeking a new insurance carrier
or alternative means to satisfy this potential liability exposure, as well as to fulfil the sales terms of some of our customers,
which require the insurance coverage.
As previously disclosed, we are co-defendants under an action
filed by an individual in June 2013 in the Circuit Court of Broward County claiming personal injury resulting from use of a Brownie’s
Third Lung. Plaintiff has claimed damages in excess of $1,000,000. The insurance carrier’s legal counsel indicates unfavorable
outcome is possible, but not probable. We believe such claim is without merit and intend to continue to aggressively defend such
action. In addition, as previously disclosed, we are also co-defendant under an action filed March 2015, in the Circuit Court of
Broward County claiming personal injury resulting from the use of a Brownie’s Third Lung product. This claim falls outside
the Company’s period of insurance coverage. The Company believes the claim to be a Workers Compensation claim relating exclusively
against other defendant and without merit, and has retained counsel to aggressively defend this action.
On August 14, 2014, the Company entered into a new lease commitment.
Terms of the new lease include thirty-seven month term commencing on September 1, 2014; payment of $5,367 security deposit; base
rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses
(i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment.
Base rent expense, attributable to the Company’s
headquarters
facility totaled approximately $48,000 and $47,000 for the years ended December 31, 2015 and 2014, respectively.
The following is a achieved of future minimum rental payments
required under our lease agreement on August 14, 2014:
|
|
Operating lease
|
|
year 1
|
|
$
|
48,000
|
|
year 2
|
|
|
36,000
|
|
year 3
|
|
|
—
|
|
year 4
|
|
|
—
|
|
year 5
|
|
|
—
|
|
|
|
$
|
84,000
|
|
On September 24, 2015 all claims and counterclaims by and between
Undersea Breathing Systems, Inc. (“UBS”) and the Company were settled in full in the Circuit Court of the 15
th
Judicial Circuit in and for Palm Beach County, FL, in the third quarter of 2015. The settlement included the Company owing UBS
nothing, UBS owing the Company certain tangible property within 14 days, mutual execution of general release, and stipulation for
dismissal with prejudice with all parties to bear their own attorneys’ fees and costs.
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the above settlement in full on July 1, 2014, the amended
complaint for damages in excess of $15,000 filed by UBS on December 10, 2013 in the Circuit Court of the 15
th
Judicial
Circuit in and for Palm Beach County, FL was partially dismissed as to Count IV, Default on Promissory Note Against BWMG. The complaint
against the Company sought to compel purchase of Medal Model No. 4241 membranes or equivalent pursuant to pricing agreement in
2011. UBS was the holder of the convertible debenture referenced in Note 12.
CONVERTIBLE DEBENTURES
Ref (2). Under the complaint,
UBS asserted 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 had 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 had $24,000 worth of stock and a $48,000 convertible debenture for which the Company took no
membrane deliveries. Associated with the dismissal of Count IV, the Company reversed in the third quarter of 2014, related prepaid
inventory and convertible debenture resulting in a loss on settlement of $14,850, which was accrued as of June 30, 2014.
|
16.
|
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 would 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. Terms of sale to PDC are no more favorable than those granted
other dealers of the Company’s products.
In December 2014, the Company received notice from Pompano Dive
Center, LLC. (“PDC”) of intent to cancel the Joint Venture Equity Exchange Agreement described below effective January
1, 2015, in accordance with the terms of the agreement. After notice, BWMG awaited the return of the stock PDC held in BWMG to
fulfil terms of dissolution. PDC returned the stock at the end of the second quarter of 2015 and the Company cancelled it at the
beginning of third quarter of 2015. The cancellation is reflected on the face of the statement of stockholders’ equity. Market
value of the 3,394 shares of stock PDC held that were returned was $0. The Company had recorded the decline in value of the stock
in the second quarter of 2015 by reversing the $24,740 long term asset (purchase option) tied to the stock provided PDC discussed
below, with corresponding reduction in additional paid in capital to write the asset down to fair market value.
|
17.
|
EQUITY INCENTIVE PLAN
|
On August 22, 2007, the Company adopted an Equity Incentive
Plan (the “Plan”). Under the Plan, Stock Options may be granted to Employees, Directors, and Consultants in the form
of Incentive Stock Options or Nonstatutory Stock Options. Stock Purchase Rights, time vested and/performance invested Restricted
Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan. The initial maximum number of
shares that may be issued under the Plan shall be 297 shares, and no more than 75 Shares of Common Stock may be granted to any
one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period.
Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company. The term
of the Plan shall be ten years. The Board of Directors may amend, alter, suspend, or terminate the Plan at any time. All 297 options
were issued under the plan prior to January 1, 2010, and to-date all remain outstanding.
BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
18.
|
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.
During the year ended December 31, 2015,
the Company issued 19,419,712 common shares with a fair value of $54,000 to Alexander Fraser Purdon, a related party, as employee compensation. In addition, the Company issued
396,891 common shares representing accrued interest on notes payable to our Chief Executive Officer
|
19.
|
INTEREST EXPENSE NON-RELATED PARTIES
|
For the year ended December 31, 2015, non-related parties interest
expense of $37,018 is comprised of $36,708 interest on convertible debentures and $310 interest on notes payable and other interest.
For the year ended December 31, 2014, non-related parties interest expense of $39,726 is comprised of approximately $38,809 interest
on convertible debentures and approximately $917 interest on notes payable and other interest.
On January 14, 2016, Mr. Robert Carmichael, Chief Executive
Officer, was issued 16,052 shares of restricted common stock for $73 accrued interest on notes payable-related party.