10-K 1 v403258_10k.htm FORM 10-K

 

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

FORM 10-K

 

(MARK ONE)

 

þAnnual Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934

For the fiscal year ended December 31, 2014

 

¨Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______.

 

Commission File No. 333-99393

 

BROWNIE’S MARINE GROUP, INC.

(Name Of Small Business Issuer In Its Charter)

 

Nevada   90-0226181
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
     
3001 NW 25th Avenue, Suite 1, Pompano Beach, Florida   33069
(Address of Principal Executive Offices)   (Zip Code)

 

(954) 462-5570

(Issuer’s Telephone Number, Including Area Code)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

    Yes ¨    No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

         Yes ¨    No x

 

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.

           Yes x    No ¨

 

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.)

     Yes x    No ¨

 

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.

 

Large accelerated filer  ¨   Accelerated file ¨
Non-accelerated filer    ¨ (Do not check if a smaller reporting company)   Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)

            Yes ¨     No x

 

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, 2014, was $ 64,865.

 

There were 70,364,157 shares of common stock outstanding as of March 17, 2015.

 

 
 

  

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 prospectus generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

 

 
 

 

PART I

 

Item 1. Business.

 

Overview

 

Brownie’s Marine Group, Inc., a Nevada corporation (referred to herein as “BWMG”, “the Company”, “we”, or “Brownie’s”), does business through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation. The Company designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and Nitrox Generation Systems, and scuba and water safety products. BWMG sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility located at 3001 NW 25th Avenue, Suite 1, Pompano Beach, Florida 33069. The Company’s common stock is quoted on the OTCMarkets under the symbol “BWMG”. The Company’s website is www.Browniesmarinegroup.com. Information on the website is not a part of this report.

 

Mr. Carmichael 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’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 1960’s, the Company has grown into a niche manufacturing and distribution Company with dive-oriented product classified into three categories: Brownie’s Third Lung, Brownie’s Tankfill, and Brownie’s Public Safety. 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 in the boat/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 (GI-PFD). 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 currently on the market by utilizing a variable speed technology that controls battery consumption based on diver demand. Our battery powered hookah system provides divers with gasoline-free all day shallow diving experiences.

 

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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 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.

 

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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 diver 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 covers 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.

 

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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.

 

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.

 

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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 Newswires, newsletters, and social media postings periodically to keep the public informed of our latest products and related endeavors.

 

Tradeshows

 

In 2014, 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. In 2013, the Company was also represented at these shows in addition to the Annapolis Boat Show and the Dubai International 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, 2014 and 2013, were $4,087 and $75,760, respectively.

 

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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, 2014 and 2013, represented 41.28% and 29.15%, respectively, of total net revenues. See Item 13. Certain Relationships and Related Transactions, and Director Independence for additional information on these related parties transactions. Sales to no other customers for the years ended December 31, 2014, or 2013 represented greater than 10% of net revenues for the respective periods.

 

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 others. 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 competitor’s in 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. One of our most significant competitors in the highly specialized field of yacht based compressors ceased operations at the end of 2012.

 

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 thirteen (13) full time employees and two (2) part time employees at our facility in Pompano Beach, Florida. Three (3) are classified as exempt sales and administrative or management, and twelve (12) 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.

 

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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.

 

Item 1A.  Risk Factors.

 

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.

 

Item 2. Properties.

 

In October 2014, the corporate headquarters, factory and distribution center of the Company relocated from 936/940 NW 1st Street, Ft. Lauderdale, FL 33311 to 3001 NW 25th Avenue, Suite 1, Pompano Beach, Florida 33069. The 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 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 $1,500 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. 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. We believe such claim is without merit and intend to continue to aggressively defend such action.

 

Item 4. Mine Safety Disclosure

 

None.

 

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PART II

 

Item 5. Purchases of Equity Securities.

 

The Company’s common stock is quoted on the OTC Markets (global) under the symbol “BWMG”. The Company’s high and low closing bid prices by quarter during 2014 and 2013, as provided by the OTC Markets (global) 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 5, 2015, the quoted closing price of our common stock was $.003 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 2013 
   High Bid   Low Bid 
First Quarter  $1.215   $.270 
Second Quarter  $.675   $.135 
Third Quarter  $.129   $.020 
Fourth Quarter  $.100   $.007 

 

Holders of Common Stock

 

As of March 5, 2015, we believe the Company had in excess of 250 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 three months ended December 31, 2014, the holders’ of the Company’s convertible debentures converted $10,170 principal outstanding into 6,779,871 shares of common stock. The stock was issued without restrictive legend pursuant to Rule 144, as the holders acquired convertible notes issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

 

During the three months ended December 31, 2014, the Company converted $13,500 employee compensation payable to Alexander Fraser Purdon, related party, for the quarter ended December 31, 2014, to 5,017,585 shares of restricted common stock.

 

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Item 6. Selected Financial Data.

 

Information not required by smaller reporting company.

 

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

Restatement

 

We restated our consolidated financial statements for fiscal year 2013 to correct an error in an overstatement of inventory by $107,324 and understatement of net loss by the same amount due to a system identified deficiency when timing of entry of new inventory items in sales order module preceded entry in the inventory module during the year ended December 31, 2013. This overstatement predominantly related to custom orders.  The impact of the restatement on our consolidated financial statements for fiscal 2013 is discussed in Note 23 –Restatement of 2013 Consolidated Financial Statements” of the notes to the consolidated financial statements included in this report.  All information included in this Management’s Discussion and Analysis of Results of Operations and Financial Condition has been correspondingly corrected to give effect to such restatement.

 

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. BWMG sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Fort Lauderdale, Florida. The Company does business as (dba) Brownie’s Third Lung.

 

Financial Performance

 

For the years ended December 31, 2014 and 2013, BWMG had net income of $94,369 and net loss of $895,610, respectively.

 

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 2013 financial statement amounts to conform to the 2014 financial statement presentation.

 

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.

 

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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 the Company was profitable in 2014, we have otherwise incurred losses since 2009. We have had a working capital deficit since 2009.

 

In addition, the Company is behind on payments on matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, and certain vendor payables. The Company is working out delinquencies on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue.

 

During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of 2012, purchased the assets of another, with assumption of their retail location lease. The Company accomplished both transactions predominantly through issuance of restricted common stock in BWMG. The Company believed these transactions would help generate sufficient future working capital. Neither endeavor generated the anticipated profit or cash-flow. Therefore, effective May 31, 2013, the Company closed and ceased operations at its retail facility. The Company was still involved in the joint venture as of December 31, 2014. Because the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about BWMG’s ability to continue as a going concern within one year from date of issue of the consolidated financial statements. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing. BWMG has issued a number of convertible debentures to finance working capital needs. The Company has paid for legal and consulting services with restricted stock to maximize working capital, and intends to continue this practice when possible. In addition, the Company implemented some cost saving measures and will continue to explore more to reduce operating expenses.

 

If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

Inventory – Inventory is stated at the lower of cost or market. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.

 

Furniture, Fixtures, and Equipment – Property, Plant and Equipment are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 5 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).

 

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

 

Revenue recognition – Revenues from product sales are recognized when the Company’s products are shipped or when service is rendered. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost of each contract. This method is used because management considers the percentage of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts.

 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

 

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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, 2014, and 2013, was $3,686 and $43,583, respectively.

 

Customer deposits and returns policy – The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice.

 

Income taxes – The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

 

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Comprehensive income – The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods.

 

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is been determined through use of the quoted stock price.

 

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For the years ended December 31, 2014 and 2013, the Company transacted a fair number of stock-based compensation transactions as reflected on face of the Statement of Stockholders’ Deficit. This included amortized prepaid equity based compensation for personal guarantees of Chief Executive Officer on Company’s bank debt; additional compensation expense to the Chief Executive Officer payable in stock; Board of Directors’ Fees and Bonuses; certain consulting, legal, and other professional fees; equity based incentive and/or retention bonuses for some employees, and consultants; some accrued payroll settled in stock; and operating expense for exclusivity pursuant to strategic alliance agreement payable. Beneficial conversion features on convertible debentures – The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been 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, 2014, and 2013, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of our convertible debentures was the principal balance due at December 31, 2014, and 2013, or $376,645 and $526,910, respectively The principal balance due approximates fair value because of the short maturity of these instruments. On the face of the balance sheet the convertible debentures are presented net of discount, which is less than fair market value at period end dates. At December 31, 2014, discount had been fully accreted so principal balance equaled convertible debentures, net balance.

 

Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. All common stock equivalent shares were excluded in the computation for the years ended December 31, 2014, and 2013, since their effect was antidilutive.

 

New accounting pronouncements

 

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.

 

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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 BWMG’s 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, 2014, as compared to the year ended December 31, 2013

 

Net revenues. For the year ended December 31, 2014, we had net revenues of $2,735,841 as compared to net revenues of $2,870,688 for the year ended December 31, 2013, a decrease of $134,847, or 4.70%. The Company attributes the small decline in sales to some downtime in the fourth quarter when the Company’s headquarters and manufacturing facility moved to Pompano Beach from Fort Lauderdale. For the year ended December 31, 2014 as compared 2013, tankfill system and related sales decreased by approximately $246,000, scuba system and related sales decreased by approximately $45,000, public safety sales decreased by approximately $45,042, and the overall decrease was partially offset by approximately $169,000 increase in hookah systems and related sales.

 

Cost of net revenues. For the year ended December 31, 2014, we had cost of net revenues of $1,991,626 as compared with cost of net revenues of $2,096,879 for the year ended December 31, 2013, a decrease of $105,253, or 5.02%. As a percentage of net revenues, cost of net revenues was consistent between the years ended December 31, 2014 and December 31, 2013.

 

Gross profit. For the year ended December 31, 2014, we had gross profit of $744,215 as compared to gross profit of $773,809 for the year ended December 31, 2013, a decrease of $29,594, or 3.82%.

 

Operating expenses. For the year ended December 31, 2014, we had total operating expenses of $623,261 as compared to total operating expenses of $1,534,897 for the year ended December 31, 2013, a decrease of $911,636, or 59.39%. The $911,636 decrease is due to $839,963 decrease in selling, general and administrative costs and $71,673 decrease in research and development expenses for the year ended December 31, 2014, as compared to same period in 2013. The decrease in selling, general and administrative costs of $839,963 for year ended December 31, 2014, over the same period in 2013, is primarily comprised of decrease in Chief Executive Officer’s compensation of approximately $453,000 (primarily non-cash); approximately $113,000 decrease in legal expense (partially non-cash); approximately $129,000 less consulting and other professional fees (primarily non-cash); $27,500 decrease in Board of Director Fees (non-cash); approximately $40,000 less trade show and advertising expenses; approximately $34,000 less in health insurance costs; approximately $18,000 decrease in dive shop payroll due to closure of retail store in 2013; and approximately $25,000 net decrease in other individually insignificant account increases and decreases during the year ended December 31, 2014 as compared to year ended December 31,2013. In the fourth quarter of 2013, the Chief Executive Officer reduced his salary, and the non-employee Board of Director compensation agreement was cancelled resulting in the significant decreases for the year ended December 31, 2014 compared to the same period in 2013. The primary reason for decline in consulting and other professional fees is consultants who accepted equity based compensation arrangements during the year ended December 31, 2013, had ceased providing services before the year ended December 31, 2014. The primary reason for decline in health insurance expense from the year ended December 31, 2014 compared to the year ended December 21, 2013 is result of a lower cost policy and less employees on in the plan during the current period. The decline in advertising expenses and other individually insignificant account balances is result of further streamlining of expenses and cash flows overall. The $71,673 decrease in research and development resulted due to the reduction in Chief Executive Officers salary since a percentage of his salary is allocated to research and development.

 

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 Other (income) expense, net. For the year ended December 31, 2014, we had other expense, net of $26,541 as compared to other expense, net of $127,044 for the year ended December 31, 2013, a decrease of $100,503, or 79.11%. This account is comprised of other (income) expense, net, and interest expense. Other (income) expense, net, decreased by $44,022 income, net for the period, and is comprised of transactions that are generally of a non-recurring nature. Interest expense decreased by $144,525 for the period. The $44,022 decrease in other income, net during the year ended December 31, 2014 as compared to the same period in 2013, is primarily attributable to the following: approximately $56,000 decrease in sales commissions, approximately $17,000 decrease in royalty income on licensed patents; $47,500 return and retirement of year end 2012 stock bonuses granted to certain consultants during the first half of 2013; $25,788 loss on disposal of fixed assets, net of income from other items sold at time of 2014 relocation of the headquarters and manufacturing facility; $19,566 headquarters and manufacturing facility relocation expense in 2014; approximately $25,000 downward adjustment of estimated foreclosure liability during 2013; approximately $12,000 decline in other income, net of individually significant transactions; and partially offset by $31,463 write-off of accrued legal expense in 2014 due to resolution of prior years’ overbilling, and approximately $83,150 decrease in loss on extinguishment and/or settlement of convertible debentures. The $144,525 decrease in interest expense for the year ended December 31, 2014 as compared to the year ended December 31, 2013, is primarily due to approximately $155,000 less in convertible debenture interest due to fully accreted discounts before year ended December 31,2014, as well as lower convertible debenture balance outstanding during the period; and is partially offset by approximately $14,000 increase in related party interest for loan provided by non-employee Board of Director in the fourth quarter of 2013.

 

Provision for income tax expense. For the year ended December 31, 2014, we had a provision for income tax expense of $44, as compared to $7,478 for the year ended December 31, 2013, a decrease of $7,434, or 99.41%. The decrease is primarily a result of adjustment to valuation allowance against the deferred tax assets attributable to realization of the net operating loss carryforward, which occurred during year ended December 31, 2014.

 

Net loss. For the year ended December 31, 2014, we had net income of $94,369 as compared to net loss of $895,610 for the year ended December 31, 2013, an increase in net income of $989,979 or 110.54%. The $989,979 increase in net income is attributable to $911,636 decrease in operating expenses; $100,503 decrease in other expense, net; $7,434 decrease in provision for income taxes; and partially offset by $29,594 decrease in gross profit.

 

Liquidity and Capital Resources

 

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. As of December 31, 2013, the Company had cash and current assets of $950,643 and current liabilities of $1,760,058, or a current ratio of .54 to 1.

 

Contractual obligations of the Company as of December 31, 2014 are set forth in the following table:

 

Payments due by period

 

Contractual Obligations  Total   Less than
1 year
   1-3 years   3-5 years   More than 5
 years
 
Long-Term Debt Obligations  $35,147   $22,916   $12,231         
Operating Lease Obligations   44,998    13,378    31,620         
Convertible Debentures   376,645    376,645             
Purchase Obligations                    
Other Long-Term Liabilities Reflected on the Company’s Balance Sheet under GAAP                    
Total  $456,790   $412,939   $43,851         

 

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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.

 

We incurred net income of approximately $94,000 in 2014, and net loss of approximately $896,000 in 2013. Additionally, 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, thus contributing to continued operating losses.

 

The optional conversion features of a series of convertible debentures issued by the Company could require the Company to issue a substantial number of shares of common stock, which will cause dilution to the Company’s stockholders and a potentially negative effect on our stock price.

 

Since October 4, 2010, the Company has issued convertible debentures to several lenders and other third parties. At December 31, 2014 the outstanding principal balance of these debentures was approximately $377,000. 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.

 

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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.

 

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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.

 

17
 

 

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 determined that as of February 25, 2015, we did not maintain effective internal controls over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework as a result of identified material weaknesses in our internal control over financial reporting related to overstatement of inventory by $107,324 and understatement of net loss by the same amount due to a system identified deficiency when timing of entry of new inventory items in sales order module preceded entry in the inventory module during the year ended December 31, 2013. This overstatement predominantly related to custom orders and caused us to restate our consolidated financial statements for the year ended December 31, 2013. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. 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.

 

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 Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, CFO, to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2014. Based on that evaluation and as described below under “Management’s Report on Internal Control Over Financial Reporting,” we have identified material weaknesses in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) due to our lack of internal control over financial reporting related to a system identified deficiency when timing of entry of new inventory items in sales order module preceded entry in the inventory module during the year ended December 31, 2013 which was determined by the Company’s Board of Directors on February 25, 2015, that caused us to restate our consolidated financial statements for the year ended December 31, 2013 to correct an overstatement of inventory by $107,324 and understatement of net loss by the same amount due to a system identified deficiency when timing of entry of new inventory items in sales order module preceded entry in the inventory module during the year ended December 31, 2013. These weaknesses are described in more detail in the next section. As a result of these material weaknesses, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of December 31, 2014.

 

18
 

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that, due to the material weaknesses described below, our internal control over financial reporting was not effective as of December 31, 2014.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements would not be prevented or detected on a timely basis. The specific material weaknesses identified by our management were as follows: a lack of personnel with an appropriate level of SEC reporting and accounting experience and training in the application of U.S. Generally Accepted Accounting Principles (“GAAP”) commensurate with our financial reporting requirements and business environment. The weakness is principally due to lack of working capital to retain qualified employees, which are integral to the Company’s process for timely disclosure and financial reporting. Furthermore, our Chief Executive Officer and Chief Financial Officer, Mr. Robert Carmichael, lacks experience in U.S. GAAP and financial accounting. The weaknesses resulted in the inventory system deficiency during 2013 disclosed above. In addition, historical deficiencies have resulted in failure to timely file Form 8-K current reports relating to extinguishing debenture agreements, entering into new debenture agreements, significant debenture conversions, and other equity issuances during the period covered by this report. These transactions are disclosed in the notes to the Company’s financial statements for the period covered by this report included herein.

 

This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

 

This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

Remediation of Material Weakness in Internal Control

 

We believe the following actions we are taking will be sufficient to remediate the material weaknesses described above: we strengthened both our preventative and detective controls over inventory recording and reporting. We rely extensively on outside service providers to comply with our financial reporting requirements. Since our inception we have relied on an outside consultant with experience in this area to assist us prepare our financial statements and disclosures in accordance with U.S. GAAP. Until such time as we have a Chief Executive Officer and/or Chief Financial Officer with the requisite expertise in U.S. GAAP, there are no assurances that the significant deficiency in our internal control over timely financial reporting and disclosure.  

 

To mitigate the chance for reoccurrence of this noted deficiency, as disclosed in the Liquidity and Capital Resources section of this 10-K Report, the Company is currently in the process of addressing its working capital shortfall whereby this would provide the needed funds to retain the legal, accounting, and external audit services required for timely disclosure and financial reporting.   As we work towards improvement of our internal control over financial reporting and implement remediation measures identified above, we may supplement or modify these remediation measures described above.

 

19
 

  

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error 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. Due to 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 our company have been detected.

 

Changes in Internal Control

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

PART III

 

Item 10. Directors, Executive Officers, and Corporate Governance.

 

The following is a list of our executive officers and directors. All directors serve one-year terms or until each of their successors are duly qualified and elected.

 

Name:

 

Age:

 

Position:

         
Robert M. Carmichael   52   President, Chief Executive Officer, Principal Financial Officer and Director
         
Mikkel Pitzner   47   Director

  

Robert M. Carmichael. Since April 16, 2004, Mr. Carmichael has served as BWMG’s President, Chief Executive Officer, Principal Financial Officer, and Director. From March 23, 2004 through April 16, 2004, Mr. Carmichael served as the Company’s Executive Vice-President and Chief Operating Officer. Mr. Carmichael has served as president of Trebor Industries since 1986. Mr. Carmichael is the holder and co-holder of numerous patents that are used by Trebor Industries and several other major companies in the diving industry.

 

Mikkel Pitzner. Mr. Pitzner was appointed to the board in December 2010. Since 1996, Mr. Pitzner has served as chief executive officer of Copenhagen Limousine Service, a corporate limousine service company based in Denmark. Since 2001 he has served as chief executive officer of The Private Car Company, also a corporate transportation company located in Denmark. Since 2007, he has been a partner and board member with FT Group Holding, an advertising company based in Denmark and Sweden. From 2003 through 2005 he owned and operated Halcyon Denmark, an importer and distributor of Halcyon diving products.  The Company’s chief executive officer is an affiliate of Halcyon Manufacturing, Inc.  He also serves on the board of directors of VMC Pitzner, AGJ Pitzner, SMCE Pitzner, Corona Pitzner, construction companies in Denmark. Mr. Pitzner was selected as a director for his general business management with specific experience in diving industry.

 

20
 

  

Directors

 

Our Board of Directors may consist of up to five (5) seats. Pursuant to our Bylaws, a majority of directors may appoint a successor to fill any vacancy on the Board of Directors without shareholder vote. Our Board has determined that Mr. Pitzner is independent under the NASDAQ Stock Market listing rules.

 

Committees

 

Currently, the Company has not established any committees of the Board of Directors. Because the board of directors consists of only three members, the board has not delegated any of its functions to committees. The entire board of directors acts as our audit committee as permitted under Section 3(a)(58)(B) of the Exchange Act. We do not have any independent directors who would qualify as an audit committee financial expert. We believe that it has been, and may continue to be, impractical to recruit independent directors unless and until we are significantly larger. None of the current members of the Board of Directors is considered a “financial expert” as defined under item 407 of Regulation S-K.

 

Compensation of Directors

 

None.

 

Compliance with Section 16(a) Of the Securities Act Of 1934

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other of our equity securities. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us copies of all Section 16(a) forms they file. Based on available information, filings required under Section 16(a) were complied with for the period covered by this report, except as follows: Mr. Alexander Frasier Purdon filed one Form 3 and three Form 4’s during 2014 to report monthly compensation of payroll in stock, and none of the Forms were timely filed.

 

Code of Ethics

 

The Company has adopted a formal code of ethics that applies to our principal executive officer and principal accounting officer, all other officers, directors and employees. The code of ethics was provided as an exhibit to the 10-K for the year ended December 31, 2008. The Company undertakes to provide to any person without charge, upon written request to the Company’s Chief Executive Officer, a copy of the code of ethics.

 

Shareholder Communications

 

Although we do not have a formal policy regarding communications with our Board, shareholders may communicate with the Board by writing to us at Brownie’s Marine Group, Inc., 3001 NW 25th Avenue, Suite 1, Pompano Beach, Florida 33069, Attention: Mr. Robert Carmichael.  Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

 

21
 

  

Item 11. Executive Compensation

 

The following table shows all the cash compensation paid by the Company, as well as certain other compensation paid or accrued, during the years ended December 31, 2014 and 2013 to BWMG’s named executive officers. No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the chart below, were paid to these executive officers during these fiscal years.

 

Summary Compensation Table

 

Name and Principal
Position(s)
  Year     Salary     Bonus     Stock
Awards
    Option
Awards
    Non-Equity
Incentive Plan
Compensation
    All Other
 Compen-
sation
    Total  
                                                                 
Robert M. Carmichael, President, Principal     2014     $ 16,615     $     $     $     $     $     $ 16,615 (1)
Executive Officer, and Principal Financial Officer     2013     $ 35,894     $  —     $ 291,904 (2)   $  —     $     $     $ 332,058 (2)

(1)Executive compensation excludes certain transactions which are disclosed under “Item 13. Certain Relationships and Related Transactions, and Director Independence.”

(2)Stock awards of $291,904 consist of $30,000 incentive retention bonus, and $261,904 incremental equity based compensation. On December 23, 2013, the Chief Executive officer forgave the $261,904 payable to him by the Company whereby it was recorded as contributed capital.

 

Outstanding Equity Awards at Fiscal Year End

 

   Option Awards  Stock Awards 
Name  Number of
securities
 underlying
unexercised
options (#)
exercisable
   Number of
securities
underlying
unexercised
option (#)
un-
exercisable
   Equity
Incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
   Option
exercise
price ($)
per share
   Option
expiration
date
  Number of
shares or
units of
stock that
have not
vested
(#)
   Market
value of
shares of
 units of
stock that
have not
vested ($)
   Equity
Incentive
plan
awards:
Number of
unearned
shares,
units or
other
rights that
have not
vested (#)
   Incentive
plan
awards:
Market or
payout
value of
unearned
shares,
units or
other
rights that
have not
 vested ($)
 
                                            
Robert M. Carmichael, Principal Executive Officer, and Principal Financial Officer   234(1) (2)          $1,350   March 2, 2019                

(1)See Footnote (2) to the Summary Compensation Table above.
(2)See discussion of options issued for purchase of Intellectual Property as disclosed under “Item 13. Certain Relationships and Related Transactions, and Director Independence.” The number of options have been retroactively adjusted for the 1 –for- 1,350 reverse stock split on July 15, 2013.

 

22
 

  

Director Compensation

 

None.

 

Employment Agreements

 

None.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

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 (adjusted for 1 –for- 1,350 reverse stock split), and no more than 71 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. The table below includes information as of December 31, 2014.

 

Equity Compensation Plan Information as of December 31, 2014

 

   Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
   Weighted – average
exercise price of
outstanding options,
warrants and rights
(b)
   Number of securities
 remaining available for
future issuances under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
 
Equity Compensation Plans Approved by Security Holders   297   $1,350    0 
Equity Compensation Plans Not Approved by Security Holders            
Total   297   $1,350    0 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock by: (1) all persons who are beneficial owners of five percent (5%) or more of any class of our voting securities; (2) each of our directors; (3) each of our Named Executive Officers; and (4) all current directors and executive officers as a group.

 

Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock held by them.

 

23
 

 

 

Applicable percentage ownership in the following table is based on 70,364,157 shares of common stock outstanding as of March 5, 2015.   Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of march 5, 2015, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise disclosed these persons’ address is c/o Brownie’s Marine Group, Inc., 3001 NW 25th Avenue, Suite 1, Pompano Beach, FL 33069.

 

Title of
Class
  Name and Address of Beneficial 
Owner
  Amount and Nature of
Beneficial Ownership
   Percent
of Class
(4)
 
Executive Officers and Directors             
Common  Robert Carmichael   461,291(1)   .65%
Common  Mikkel Pitzner   2,038,431(2)   2.82%
Common  All directors and executive officers as a group (2 persons)   2,499,722    3.47%
5% Shareholders             
Common  Alexander F. Purdon   15,172,622(3)   21.56%
              
Executive Officers and Directors          
Series A Convertible Preferred Stock  Robert Carmichael   425,000(4)   100.0%
Series A Convertible Preferred Stock  All directors and executive officers as a group (2 persons)   425,000    100.0%

 

(1)

Includes the following: aggregate of 234 shares of common stock underlying currently exercisable options exercisable at $1,350 per share; 42,182 shares of common stock payable by the Company under 2012 bonus awards; and 31,481 shares issuable upon conversion of 425,000 shares of Series A Preferred Stock. See also footnote 4. 

(2)

Includes 1,802,621 shares underlying currently exercisable options, and 18,522 shares of common stock payable by the Company under 2012 bonus awards. 

(3) Includes 1,854 shares of common stock payable by the Company under 2012 bonus awards.
(4) Mr. Carmichael owns 100% of the Series A Convertible Preferred Stock, each share of which has the number of votes 250 per share.  The preferred stock votes with the Company’s common stock, except as otherwise required under Nevada law.  Accordingly, Mr. Carmichael will own 61% 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. The interests of Mr. Carmichael may differ from the interests of the other shareholders.

 

24
 

 

Item 13.          Certain Relationships and Related Transactions, and Director Independence.

 

On October 30, 2013, the Company signed a secured promissory note, with Mikkel Pitzner, the non-employee Board of Director (BOD) for $85,000. The proceeds were used to settle the Branch Banking and Trust (“BBT”) Judgment. Terms of the promissory note include secured by up to $200,000 in and to all of the Company’s right, title and interest in its fixed assets, inventory, receivables, and all documents including its books, records, and files; bearing interest at 21.21% per annum, due in monthly principal and interest payments of $8,585, and matured on November 1, 2014. Principal balance due at December 31, 2014 was $14,167. As of December 31, 2014, the Company was two months in arrears on payments due under the note. No notice of default has been received and the Company plans to make payments as able. As further inducement to make the loan, Mr. Pitzner was granted an option to purchase 1,802,565 shares of the Company’s common stock for $.01 per share. The option is exercisable immediately and will continue for a period ending two years from the agreement date with an option for cashless exercise based on a formula within the agreement. The closing price per share of the Company’s stock closing on the OTCBB on the date of the agreement was $.025 per share. As a result of the option granted, the Company recorded $44,610 stock option expense using the Black-Scholes valuation model on date of the agreement.

 

During the first quarter of 2014, the Company fully satisfied a note payable due the Chief Executive Officer for $49,702. Terms of the note were unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, and matured on August 1, 2013.

 

On May 13, 2013, the Company granted the Chief Executive Officer 370,371 shares of common stock in satisfaction of $50,000 of note payable – related parties. The shares of stock were issued at the fair market value, or trading price, on the date of the transaction.

 

The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers. Combined net revenues from these entities for year ended December 31, 2014, was $948,090. 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 year ended December 31, 2014 was $181,355. Accounts receivable from BGL at December 31, 2014, was $2,107.

 

Sales to Pompano Dive Center for the year ended December 31, 2014 was $56,159. Terms of sale are no more favorable than those extended to any of the Company’s other customers. Accounts receivable from Pompano Dive Center at December 31, 2014 was $13,757.

 

Royalties expense – related parties – The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns. Under the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing 5% annually. Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three and years ended December 31, 2014 and 2013, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of December 31, 2014, the Company was approximately twenty-four months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.

 

25
 

 

Equity based compensation for Chief Executive Officer – On November 2, 2012, the Board of Directors (BODs) approved a stock incentive bonus to certain key employees and consultants to vest and pay out on May 2, 2013, contingent upon continued employment or services. The stock bonus price per share was calculated based on last closing price per the OTCBB on the effective date of the transaction. Of the total stock incentive bonuses declared for the key employees and consultants of $75,150 or 61,852 shares of common stock, the Chief Executive was awarded $45,000 or 37,037 shares. The Company recorded compensation expense ratably over the vesting period, and for the three and years ended December 31, 2013, compensation expense to the Chief Executive Officer related to this transaction was $0 and $30,000, respectively. In addition, on February 23, 2013, the Company declared a bonus payable for the years ended 2012 for certain employees, service providers, and consultants. As part of this bonus, the Chief Executive Officer was awarded $67,000 to be paid out in cash or stock based on later determination by the BODs. This amount was included in operating expense for the year ended December 31, 2012. See table below for inclusion in other liabilities and accrued interest – related parties. Further, pursuant to a Written Consent of the BODs of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012, the BOD declared an $83,333 bonus due the Chief Executive Officer payable in shares of restricted stock. The shares vested as of January 2, 2013. The grant price per share was based on the closing price of the stock on May 31, 2012. For accounting purposes, the Company recognized $83,333 operating expense ratably over the seven months the shares vested. These shares are included in shares payable on the statement of stockholders’ deficit. Lastly, the Chief Executive Officer’s monthly salary was increased by $16,667 per month beginning in June 2012, payable in restricted stock calculated based on a monthly weighted average share factor of .70, or a 30% discount (“incremental salary”). The shares were to vest nine months after the last day of each month, continued employment was requirement for vesting, and shares would not be issuable until vested. The Company recorded $23,801 operating expense each month related to the incremental salary, which was $16,667 plus $7,144 discount added back to record at full monthly weighted average price per market. On December 23, 2013, the Chief Executive Officer forgave all incremental salary shares payable to him by the Company from 2012 and through November 2013. As a result, the Company recorded $428,578 contribution to Additional Paid in Capital for the year ended December 31, 2013, for the cancellation of the $261,904, and $166,667 stock payable from 2013 and 2012, respectively.

 

Non-employee Board of Director fees and bonus – Effective December 23, 2013, the Board of Directors cancelled the $2,500 per month non-employee Board of Director fee agreement under which Mikkel. Pitzner was being compensated. In addition, Mr. Pitzner forgave the $27,500 BOD fees due in shares payable and/or paid him monthly through November 2013. Related to the forgiveness of the BOD fees for 2013, the Company cancelled related stock payable to him, recorded $5,917 receivable for the stock due back from him, and recorded the $27,500 as contribution to Additional Paid in Capital. During the three months ended December 31, 2014, Mr. Pitzner returned 14,406 shares, or $1,383 of $5,917.

 

On February 23, 2013, the Company declared a bonus payable for the years ended 2012 for certain employees, service providers, and consultants. As part of this bonus, Mr. Pitzner was awarded restricted shares of common stock with $73,000 fair market value. The shares were issued to Mr. Pitzner during the three months ended December 31, 2013.

 

Equity based compensation to employee – During November 2013, Alexander F. Purdon, an employee of the Company, exceeded 10% ownership whereby he was reclassified to related party. The Company pays Mr. Purdon’s employment compensation in restricted shares of stock in lieu of cash. The number of shares paid is based on the weighted average price per share during the months the services were rendered. For the years ended December 31, 2014 and 2013, 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.

 

26
 

 

Other liabilities and accrued interest– related parties consists of the following at:

 

  

December 31, 2014

 
     
Year-end 2012 bonus payable to Chief Executive Officer  $67,000 
Year-end 2012 bonus payable to employee   17,500 
Accrued interest on note payable non-employee Board of Director   3,004 
Due to Principals of Carleigh Rae Corp., net   6,017 
   $93,521 

 

Restricted common stock issued for personal guarantee – On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 14,815 shares of restricted common stock in consideration of personal guarantees he provided to secure restatement and consolidation of the first and second mortgages of the Company. The restrictions on the common stock expired 50% on April 20, 2012, and 50% on April 20, 2013, since Mr. Carmichael continued his full time employment with the Company. The company valued the stock at determined fair market value per share on the date of the transaction and has recorded $1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expired. The unearned balance of the compensation was recorded as prepaid compensation as a component of shareholders’ deficit. For the year ended December 31, 2013, the Company fully amortized the remaining $137,494 of prepaid compensation under this agreement.

 

Stock options outstanding from patent purchase – Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued patents. In exchange for the Intellectual Property (“IP), the Company issued Mr. Carmichael 234 stock options (adjusted for 1 –for– 1,350 reverse stock split) at a $1,350 exercise price with expiration ten years from the effective date of grant, or March 2, 2019. None of the options have been exercised to-date.

 

Director independence

 

Mr. Mikkel Pitzner is considered “independent” within the meaning of meaning of Rule 5605 of the NASDAQ Marketplace Rules.

 

27
 

 

Item 14. Principal Accounting Fees and Services.

 

Fees to Auditors Fiscal Year ended December 31, 2014

 

Audit Fees: The aggregate fees, including expenses, billed by principal accountants for professional services rendered for the audit of the Company’s consolidated financial statements during fiscal year ending December 31, 2014 and for the review of the Company’s financial information included in its quarterly reports on Form 10-Q during the fiscal year ending December 31, 2013 or services that are normally provided in connection with statutory and regulatory filings or engagements during the fiscal year ending December 31, 2014 was $36,000.

 

Audit Related Fees: The aggregate fees, including expenses, billed by principal accountants for assurance and related services reasonably related to the performance of the Company’s audit or review of the Company’s financial statements during the year ended December 31, 2014 were $-0-.

 

Tax Fees: The aggregate fees, including expenses, billed by principal accountants for tax compliance, tax advice and tax planning during year 2014 was $3,000.

 

All Other Fees: The aggregate fees, including expenses, billed for all other services rendered to the Company by principal accountants during year 2014 was $-0-.

 

The Company has no audit committee. The Company's board of directors has considered whether the provisions of the services covered above under the captions is compatible with maintaining the auditor’s independence. All services were approved by the board of directors prior to the completion of the respective audit.

 

Fees to Auditors Fiscal Year ended December 31, 2013

 

Audit Fees: The aggregate fees, including expenses, billed by principal accountants for professional services rendered for the audit of the Company’s consolidated financial statements during fiscal year ending December 31, 2013 and for the review of the Company’s financial information included in its quarterly reports on Form 10-Q during the fiscal year ending December 31, 2013 or services that are normally provided in connection with statutory and regulatory filings or engagements during the fiscal year ending December 31, 2013 was $36,000.

 

Audit Related Fees: The aggregate fees, including expenses, billed by principal accountants for assurance and related services reasonably related to the performance of the Company’s audit or review of the Company’s financial statements during the year ended December 31, 2013 were $-0-.

 

Tax Fees: The aggregate fees, including expenses, billed by principal accountants for tax compliance, tax advice and tax planning during year 2013 was $3,000.

 

All Other Fees: The aggregate fees, including expenses, billed for all other services rendered to the Company by principal accountants during year 2013 was $-0-.

 

The Company has no audit committee. The Company's board of directors has considered whether the provisions of the services covered above under the captions is compatible with maintaining the auditor’s independence. All services were approved by the board of directors prior to the completion of the respective audit.

 

28
 

 

PART IV

 

Item 15. Exhibits, Financial Statements Schedules

 

Our consolidated financial statements appear beginning at F-1.

 

Exhibit No.   Description   Location
2.2   Merger Agreement, dated June 18, 2002 by and among United Companies Corporation, Merger Co., Inc. and Avid Sportswear & Golf Corp.   Incorporated by reference to Exhibit 2.02 Amendment No. 1 to Form S-4 filed June 24, 2002.
         
2.3   Articles of Merger of Avid Sportswear & Golf Corp. with and into Merger Co., Inc.   Incorporated by reference to Exhibit 2.03 Amendment No. 1 to Form S-4 filed June 24, 2002.
         
3.1   Articles of Incorporation   Incorporated by reference to Exhibit 3.1 of 10-Q for the quarter ended September 30, 2009 filed on November 13, 2009.
         
3.4   Designation of Series A Preferred Stock   Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 27, 2012.
         
3.5   Articles of Amendment   Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on July 15, 2013.
         
3.6   Bylaws   Incorporated by reference to Exhibit 3.04 to the Registration Statement on Form 10-SB.
         
10.1   Share Exchange Agreement, dated March 23, 2004 by and among the Company, Trebor Industries, Inc. and Robert Carmichael   Incorporated by reference to Exhibit 16.1 to Current Report on Form 8-K filed April 9, 2004
         
10.2   Non-Exclusive License Agreement –BC Keel Trademark   Incorporated by reference to Exhibit 10.18 to Form 10QSB for the quarter ended December 31, 2005 filed August 15, 2005.
         
10.3   Exclusive License Agreement - Brownie's Third Lung, Brownie's Public Safety, Tankfill, and Related Trademarks and Copyrights   Incorporated by reference to Exhibit 10.20 to Form 10QSB for the quarter ended December 31, 2005 filed August 15, 2005.
         
10.4   Exclusive License Agreement – Brownie’s Third Lung and Related Trademarks and Copyright   Incorporated by reference to Exhibit 10.26 to Form 10KSB for the year ended December 31, 2006 filed April 4, 2007.
         
10.5   Promissory Note dated January 1, 2007 payable to Robert M. Carmichael.   Incorporated by reference to Exhibit 10.32 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.
         
10.6   Asset Purchase Agreement between Trebor Industries, Inc. and Robert Carmichael   Incorporated by reference to Form 8K filed on August 1, 2008.

 

29
 

 

Exhibit No.   Description   Location
10.7   Asset Purchase Agreement between Trebor Industries, Inc. and Robert Carmichael.   Incorporated by reference to Form 8K filed on March 5, 2009.
         
10.8   Asset Purchase Agreement between Trebor Industries, Inc. and Robert Carmichael.   Incorporated by reference to Form 8K filed on January 19, 2010.
         
10.9   Loan Conversion for Restricted Common Stock   Incorporated by reference to Form 8K filed on October 5, 2010.
         
10.10   Asset Purchase Agreement between Trebor Industries, Inc. and the Carleigh Rae Corporation   Incorporated by reference to Form 8K filed on January 6, 2011
         
10.11   Joint Venture Equity Exchange Agreement between Brownie’s Marine Group, Inc and Pompano Dive Center, LLC.   Incorporated by reference to Exhibit 10.21 to From 10-Q filed on November 14, 2011
         
10.12   Restricted Common Stock Issued for Board of Director Fees Payable, and Incentive Bonus Awards to Chief Executive Officer, Board of Director, and Certain Employees and Consultants   Incorporated by reference to Form 8-K filed on November 13, 2012
         
10.13   Year End 2012 Bonus Awards Executive Officer, Board of Director and Certain Consultants and Service Providers   Incorporated by reference to Form 8-K filed on February 26, 2013
         
10.14   Settlement of Brownie’s Third Lung and Robert Carmichael, Chief Executive Officer with Branch Banking and Trust   Incorporated by reference to Form 8-K filed on November 20, 2013
         
10.15   Promissory Note dated November 18, 2013 payable to Mikkel Pitzner, Board of Director, and Stock Option Grant   Incorporated by reference to Form 8-K filed on November 20, 2013
         
31.1   Certification Pursuant to Rule 13a-14(a)/15d-14(a)   Provided herewith.
         
31.2   Certification Pursuant to Rule 13a-14(a)/15d-14(a)   Provided herewith.
         
32.1   Certification Pursuant to Section 1350   Provided herewith.
         
32.2   Certification Pursuant to Section 1350   Provided herewith.
         
101   XBRL Interactive Data File *  

 

* Attached as Exhibit 101 to this report are the following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders’ Deficit (iv) the Consolidated Statements of Cash Flows, and (iv) related notes to these consolidated financial statements tagged as blocks of text.

 

30
 

 

SIGNATURES

 

In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: March 30, 2015 Brownie’s marine group, Inc.
   
  By: /s/ Robert M. Carmichael
    Robert M. Carmichael
    President, Chief Executive Officer,
    Chief Financial Officer and
    Principal Accounting Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date:  March 30, 2015 By: /s/ Robert M. Carmichael
    Robert M. Carmichael
    Director
     
Date:  March 30, 2015 By: /s/ Mikkel Pitzner
    Mikkel Pitzner
    Director

 

 
 

 

BROWNIE’S MARINE GROUP, INC.

TABLE OF CONTENTS FOR CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

  PAGE(S)
   
REPORTS OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRMS F-1 AND F-2
   
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2014 AND 2013 F-3
   
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 F-4
   
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 F-5
   
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 F-6
   
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-8 TO F-34

 

 
 

 

Report of Independent Registered Public Accounting Firm

 

 

 

To the Board of Directors and Stockholders of

Brownie's Marine Group, Inc.

 

We have audited the accompanying consolidated balance sheet of Brownie's Marine Group, Inc. as of December 31, 2014, and the related consolidated statements of operation, stockholders’ deficit, and cash flow for the year ended December 31, 2014. These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brownie's Marine Group, Inc. as of December 31, 2014, and the results of its operation and its cash flow for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the entity has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

/s/ RMSM, LLP

 

RMSM, LLP

March 30, 2015

Las Vegas, Nevada

 

F-1
 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and Stockholders of

Brownie's Marine Group, Inc.

 

We have audited the accompanying consolidated balance sheet of Brownie's Marine Group, Inc. as of December 31, 2013, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2013. These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brownie's Marine Group, Inc. as of December 31, 2013, and the results of its operations and its cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the entity has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ L.L. Bradford & Company, LLC

 

L.L. Bradford & Company, LLC

March 17, 2014 (except for the effect of the restatement discussed in Note 23 to the consolidated financial statements, for which the date is March 30, 2015)

Las Vegas, Nevada

 

F-2
 

 

 

BROWNIE’S MARINE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

 

   December 31,   December 31, 
   2014   2013, Restated 
ASSETS          
           
Current assets          
Cash  $19,188   $70,084 
Accounts receivable, net of $47,000 and $39,000 allowance  for doubtful accounts, respectively   41,693    30,298 
Accounts receivable - related parties   71,325    105,942 
Inventory   606,213    628,602 
Prepaid expenses and other current assets   30,195    109,523 
Other current assets - related parties   5,444    5,917 
Deferred tax asset, net - current   233    277 
Total current assets   774,291    950,643 
           
Property and equipment, net   108,506    76,265 
           
Deferred tax asset, net - non-current   2,330    2,330 
Other assets   31,049    27,635 
           
Total assets  $916,176   $1,056,873 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities          
Accounts payable and accrued liabilities  $462,776   $517,058 
Customer deposits and unearned revenue   40,385    99,610 
Royalties payable - related parties   127,661    137,129 
Other liabilities   232,738    252,009 
Other liabilities and accrued interest - related parties   93,521    90,517 
Convertible debentures, net   376,645    523,576 
Notes payable - current portion   8,749    12,540 
Notes payable - related parties - current portion   14,167    127,619 
Total current liabilities   1,356,642    1,760,058 
           
Long-term liabilities          
Notes payable - long-term portion   12,231    2,765 
           
Total liabilities   1,368,873    1,762,823 
           
Commitments and contingencies          
           
Stockholders’ deficit          
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000  issued and outstanding   425    425 
Common stock; $0.0001 par value; 5,000,000,000 shares authorized; 83,772,236 and 10,049,140 shares issued, respectively; 60,471,929 and 5,672,051 shares outstanding, respectively   6,047    567 
Common stock payable; $0.0001 par value;  195,610 and 200,795 shares, respectively   20    20 
Additional paid-in capital   8,631,496    8,478,092 
Accumulated deficit   (9,090,685)   (9,185,054)
Total stockholders’ deficit   (452,697)   (705,950)
           
Total liabilities and stockholders’ deficit  $916,176   $1,056,873 

 

See Accompanying Notes to Consolidated Financial Statements

 

F-3
 

 

BROWNIE’S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Year Ended December 31, 
   2014   2013, Restated 
         
Net revenues          
Net revenues  $1,550,238   $1,924,445 
Net revenues - related parties   1,185,603    946,243 
Total net revenues   2,735,841    2,870,688 
           
Cost of net revenues          
Cost of net revenues   1,925,528    2,027,288 
Royalties expense - related parties   66,098    69,591 
Total cost of net revenues   1,991,626    2,096,879 
           
Gross profit   744,215    773,809 
           
Operating expenses          
Selling, general and administrative   619,174    1,459,137 
Research and development costs   4,087    75,760 
Total operating expenses   623,261    1,534,897 
           
Income (loss) from operations   120,954    (761,088)
           
Other (income) expense,  net          
Other (income) expense, net   (29,709)   (73,731)
Interest expense   39,726    198,342 
Interest expense - related parties   16,524    2,433 
Total other (income) expense, net   26,541    127,044 
           
Net income (loss) before provision for income taxes   94,413    (888,132)
           
Provision for income tax expense   44    7,478 
           
Net income (loss)  $94,369   $(895,610)
           
Basic income (loss) per common share  $0.00   $(0.36)
Diluted income (loss) per common share  $0.00   $(0.36)
           
Basic weighted average common  shares outstanding   27,745,173    2,484,342 
Diluted weighted average common  shares outstanding   73,650,957    2,484,342 

 

See Accompanying Notes to Consolidated Financial Statements

 

F-4
 

 

BROWNIE’S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

                       Prepaid   Additional       Total 
   Common stock   Preferred stock   Common stock payable   Equity Based   paid-in   Accumulated   stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Compensation   capital   deficit   deficit 
                                         
 Balance, December 31, 2012   401,424   $40    425,000   $425    962,940   $96   $137,494   $7,648,732   $(8,289,444)  $(777,645)
                                                   
Issuance of stock payable from prior reporting periods   851,852    85            (851,852)   (85)                
                                                   
Stock granted or payable  for consulting, legal, and other professional services   105,064    11            133,305    13        58,586        58,610 
                                                   
Equity based  incentive/retention bonuses to consultants   5,185    1            8,643    1        16,299        16,301 
                                                   
Discounts on convertible debentures                               72,053        72,053 
                                                   
Equity based compensation and incentive/ retention bonus to Chief Executive Officer                   3,375,907    338        291,566        291,904 
                                                   
Forgiveness and cancellation of certain equity based  compensation due Chief Executive Officer                   (3,431,001)   (343)       343         
                                                   
Amortization of prepaid equity based compensation to Chief Executive Officer                           137,494            137,494 
                                                   
Conversion of note payable - related party (Chief Executive Officer) to stock   370,370    37                        49,963        50,000 
                                                   
Conversion of Board of Directors’ fees payable to stock   12,346    1                        14,999        15,000 
                                                   
Equity based Board of Director’s  fees   22,635    2            216,070    22        27,476        27,500 
                                                   
Forgiveness of Board of Director’s fees                   (216,070)   (22)       5,939        5,917 
                                                   
Stock options granted with note payable -  - related party (Board of Director)                               44,610        44,610 
                                                   
Conversion of employee compensation payable to stock   959,870    96                        53,904        54,000 
                                                   
Equity based incentive/retention bonuses to employees                   2,716    -        3,300        3,300 
                                                   
Conversion of accrued interest and fees convertible debentures to stock   42,444    4                        7,398        7,402 
                                                   
Conversion of convertible debentures to stock   3,017,602    302                        176,832        177,134 
                                                   
Extinguishment of convertible debentures                               46,913        46,913 
                                                   
Equity based compensation for exclusivity pursuant to agreement with Precision Paddleboards, Inc.                   137            6,667        6,667 
                                                   
Retirement of certain 2012 year end equity bonuses returned by consultants   (117,284)   (12)                       (47,488)       (47,500)
                                                   
Adjustment for shares rounded upward as a result of 1-for-1,350  reverse split   543                                     
                                                   
Net loss                                   (788,286)   (788,286)
                                                   
Balance, December 31, 2013, as previously stated   5,672,051   $567    425,000   $425    195,610   $20   $   $8,478,092   $(9,077,730)  $(598,626)
                                                   
Correction of inventory accounting error                                           (107,324)   (107,324)
                                                   
Balance, December 31, 2013, restated   5,672,051   $567    425,000   $425    195,610   $20   $    8,478,092   $(9,185,054)  $(705,950)
                                                   
Conversion of related party employee compensation payable to stock   10,842,129    1,084                        52,916        54,000 
                                                   
Conversion of accrued interest on convertible debentures to stock   1,544,778    154                        3,848        4,002 
                                                   
Conversion of convertible debentures to stock   42,427,377    4,243                        98,022        102,265 
                                                   
Retirement of shares returned by non-employee Board of  Director   (14,406)   (1)                       (1,382)       (1,383)
                                                   
Net profit                                   94,369    94,369 
                                                   
Balance, December 31, 2014   60,471,929   $6,047    425,000   $425    195,610   $20   $   $8,631,496   $(9,090,685)  $(452,697)

 

See Accompanying Notes to Consolidated Financial Statements

 

F-5
 

 

BROWNIE’S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Year Ended December 31, 
   2014   2013, Restated 
         
Cash flows provided by (used in) operating activities:          
Net income (loss)  $94,369   $(895,610)
Adjustments to reconcile net income (loss) to net cash used in   operating activities:          
Depreciation   21,570    18,675 
Amortization of leasehold improvements   2,599    941 
Change in deferred tax asset, net   44    7,478 
Equity based compensation for consulting and legal services       58,610 
Equity based compensation for product exclusivity       6,667 
Equity based employee and consultant bonuses       19,600 
Stock options issued to non-employee Board of Director as incentive to enter in note-payable-related party        44,610 
Equity based non-employee Board of Director’ fees       27,500 
Accretion of convertible debenture discounts   3,334    133,793 
Equity based  Chief Executive Officer compensation and bonuses       291,905 
Amortization of prepaid equity based compensation to Chief Executive Officer       137,494 
Loss on disposal of fixed assets   26,041     
Loss on extinguishment of convertible debentures       93,825 
Retirement of certain 2012 year end consultant bonuses       (47,500)
Changes in operating assets and liabilities:          
Change in accounts receivable, net   (11,395)   (9,742)
Change in accounts receivable - related parties   34,617    (54,239)
Change in inventory   22,389    (24,735)
Change in prepaid expenses and other current assets   5,945    39,328 
Change in other current assets - related parties   473     
Change in other assets   (3,414)   4,000 
Change in accounts payable and accrued liabilities   (43,768)   101,082 
Change in customer deposits and unearned revenue   (59,225)   45,932 
Change in other liabilities   (858)   (116,818)
Change in other liabilities and accrued interest - related parties   74,504     
Change in  royalties payable - related parties   (9,468)   (434)
Net cash provided by (used in) operating activities   157,757    (117,638)
           
Cash flows from investing activities:          
Purchase of fixed assets   (82,451)   (23,600)
Net cash used in investing activities   (82,451)   (23,600)
           
Cash flows from financing activities:          
Proceeds from borrowing on convertible debentures       176,750 
Proceeds from short-term loans payable       200,000 
Repayment against short-term loans   (18,413)   (2,000)
Principal payments on convertible debentures       (229,696)
Proceeds from notes payable   18,216     
Principal payments on note payable   (12,553)   (12,259)
Proceeds from notes payable - related parties       85,000 
Principal payments on note payable - related parties   (113,452)   (75,765)
Net cash (used in) provided by financing activities   (126,202)   142,030 
           
Net change in cash   (50,896)   792 
           
Cash, beginning of period   70,084    69,292 
           
Cash, end of period  $19,188   $70,084 

 

See Accompanying Notes to Consolidated Financial Statements

 

F-6
 

 

BROWNIE’S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Year Ended December 31, 
   2014   2013, Restated 
         
Supplemental disclosures of cash flow information:          
Cash paid for interest  $14,437   $16,324 
           
Cash paid for income taxes  $   $ 
           
Supplemental disclosures of non-cash investing activities and future operating activities:          
Discounts on convertible debentures  $   $72,053 
           
Conversion of convertible debentures to stock  $102,265   $177,134 
           
Conversion of accrued payroll to stock - related party  $54,000   $54,000 
`          
Conversion of accrued interest and fees on convertible debentures to stock  $4,002   $7,402 
           
Conversion of accrued Non-employee Board of Directors fees to stock  $   $15,000 
           
Retirement of shares returned by non-employee Board of Director  $1,383   $ 

 

See Accompanying Notes to Consolidated Financial Statements

 

F-7
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.Description of business and summary of significant accounting policies

 

Description of business –Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company” or “BWMG”) designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, and scuba and water safety products through its wholly owned subsidiary Trevor Industries, Inc. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Fort Lauderdale, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. The Company’s common stock is quoted on the OTC Markets (global) under the symbol “BWMG”.

 

Basis of Presentation – The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included.

 

Definition of fiscal year – The Company’s fiscal year end is December 31.

 

Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications – Certain reclassifications have been made to the 2013 financial statement amounts to conform to the 2014 financial statement presentation. Effective July 15, 2013 the Company effectuated a reverse stock split (1 -for- 1,350). See Note 18. CHANGE IN CAPITAL STRUCTURE for more information. Accordingly, the transactional number of shares referenced throughout the Notes has been retroactively stated unless otherwise noted.

 

Cash and equivalents – Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.

 

Going Concern –The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. Although profitable for the year ended December 31, 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. Payment delinquencies are further addressed in Note 7. RELATED PARTIES TRANSACTIONS, Note 9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 10. OTHER LIABILITIES, Note 11. NOTES PAYABLE, and Note 12. CONVERTIBLE DEBENTURES.

 

F-8
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.Description of business and summary of significant accounting policies (continued)

 

Going Concern (continued) – During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of 2012, purchased the assets of another, with assumption of their retail location lease. The Company accomplished both transactions predominantly through issuance of restricted common stock in BWMG. The Company believed these transactions would help generate sufficient future working capital. Neither endeavor generated the anticipated profit or cash-flow. Therefore, effective May 31, 2013, the Company closed and ceased operations at its retail facility. The Company was still involved in the joint venture as of December 31, 2014. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT and Note 8. ASSET PURCHASE for further discussion of these transactions. Because the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about BWMG’s ability to continue as a going concern within one year from date the financial statements are issued. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing. BWMG has issued a number of convertible debentures as an interim measure to finance working capital needs as discussed in Note 12. CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities, and obtaining some short term loans. The Company has paid for legal and consulting services with restricted stock to maximize working capital, and intends to continue this practice when possible. In addition, the Company implemented some cost saving measures and will continue to explore more to reduce operating expenses.

 

If BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

Inventory – Inventory is stated at the lower of cost or fair market value. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.

 

Furniture, Fixtures, 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.

 

F-9
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.Description of business and summary of significant accounting policies (continued)

 

Product development costs – Product development expenditures are charged to expenses as incurred.

 

Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the years ended December 31, 2014, and 2013, was $3,686 and $43,583 respectively.

 

Customer deposits and returns policy – The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice.

 

Income taxes – The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

 

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Comprehensive income – The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods.

 

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is determined through use of the quoted stock price.

 

F-10
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.Description of business and summary of significant ACCOUNTING policies (continued)

 

Stock-based compensation (continued) – For the years ended December 31, 2014 and 2013, the Company compensated and/or converted all accrued payroll to stock for one related party employee. In addition, for the years ended December 31, 2014 and 2013, the Company transacted stock-based compensation transactions as follows: amortized prepaid equity based compensation for personal guarantees of Chief Executive Officer on Company’s bank debt; additional compensation expense to the Chief Executive Officer; Board of Directors’ fees and bonuses; certain consulting, legal, and other professional fees; equity based incentive and/or retention bonuses for some employees, and consultants; and operating expense for exclusivity pursuant to strategic alliance agreement payable. These transactions, as applicable, are also further discussed in Note 7. RELATED PARTIES TRANSACTIONS, Note 13. EQUITY BASED COMPENSATION FOR CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES, Note 20. EQUITY BASED INCENTIVE/RETENTION BONUSES, and Note 21. STRATEGIC ALLIANCE AGREEMENT.

 

Beneficial conversion features on convertible debentures – The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined through use of the quoted stock price. See Note 12. CONVERTIBLE DEBENTURES for further discussion.

 

Fair value of financial instruments Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

 

Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.

 

F-11
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.Description of business and summary of significant ACCOUNTING policies (continued)

 

Fair value of financial instruments (continued) At December 31, 2014, and 2013, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of the Company’s convertible debentures was the principal balance due at December 31, 2014, and 2013, or $376,645, and $526,910, respectively, as presented in Note 12. CONVERTIBLE DEBENTURES. The principal balance due approximates fair value because of the short maturity of these instruments. On the face of the balance sheet the convertible debentures are presented net of discount, which is less than fair market value at period end dates when discount is not fully accreted.

 

Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. All common stock equivalent shares were included for the year ended December 31, 2014, and excluded in the computation of dilutive earnings per share for the year ended December 31, 2013, since their effect was antidilutive.

 

New accounting pronouncements

 

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 BWMG’s financial statements.

 

2.INVENTORY

 

Inventory consists of the following as of:

 

  

 

December 31, 2014

  

December 31,
2013, Restated

 
         
Raw materials  $331,879   $317,187 
Work in process        
Finished goods   274,334    311,415 
   $606,213   $628.602 

 

F-12
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3.PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets totaling $30,195 at December 31, 2014, consists of $21,508 prepaid inventory, $8,112 prepaid insurance, and $575 other current assets and prepaid expenses.

 

Prepaid expenses and other current assets totaling $109,523 at December 31, 2013, consists of $94,990 prepaid inventory, $14,141 prepaid insurance, and $392 other current assets.

 

4.PROPERTYAND EQUIPMENT, NET

 

Property and equipment consists of the following as of:

 

   December 31, 2014   December 31, 2013 
         
Factory and office equipment  $62,633   $89,357 
Tooling   52,344    51,144 
Computer equipment and software   23,932    10,308 
Vehicles   44,160    25,945 
Leasehold improvements   38,379    5,242 
Furniture and fixtures       22,900 
    221,448    204,896 
Less:  accumulated depreciation and amortization   (112,942)   (128,631)
   $108,506   $76,265 

 

5.OTHER ASSETS

 

Other assets of $31,049 at December 31, 2014, consists of $24,740 investment in joint venture, and $6,309 refundable deposits. Other assets of $27,635 at December 31, 2013 consists of $24,740 investment in joint venture, and $2,895 refundable deposits. See Note 18. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further information on investment in joint venture.

 

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, 2014 and 2013, represented 41.28% and 29.15%, respectively, of total net revenues. Sales to no other customers for the years ended December 31, 2014, or 2013 represented greater than 10% of net revenues for the respective periods.

 

7.RELATED PARTIES TRANSACTIONS

 

Notes payable – related parties

 

Notes payable – related parties consists of the following at December 31, 2014:

 

Promissory note payable to the non-employee Board of Director, secured by up to $200,000 in and to all of the Company’s right, title and interest in its fixed assets, inventory, receivables, and all documents including its books, records, and files; bearing interest at 21.21% per annum, due in monthly principal and interest payments of $8,585,  matured on November 1, 2014  $14,167 
      
Less amounts due within one year   14,167 
      
Long-term portion of notes payable  $ 
      
   $14,167 

 

F-13
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7.RELATED PARTIES TRANSACTIONS (continued)

 

As of December 31, 2014, principal payments on the notes payable – related parties are as follows:

 

2015  $14,167 
2016    
2017    
2018    
2019    
Thereafter    
   $14,167 

 

During the first quarter of 2014, the Company fully satisfied the note payable due the Chief Executive Officer for $49,702, which had matured August 1, 2013. See terms below.

 

As of December 31, 2014, the Company was two months in arrears on payments due under the Note payable to the non-employee Board of Director. No notice of default has been received and the Company plans to make payments as able.

 

Notes payable – related parties consists of the following at December 31, 2013:

 

Promissory note payable to the Chief Executive Officer of the the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, matured on August 1, 2013.  $49,702 
      
Promissory note payable to the non-employee Board of Director, secured by up to $200,000 in and to all of the Company’s right, title and interest in its fixed assets, inventory, receivables, and all documents including its books, records, and files; bearing interest at 21.21% per annum, due in monthly principal and interest payments of $8,585, maturing on November 1, 2014.   77,917 
      
    127,619 
      
Less amounts due within one year   127,619 
      
Long-term portion of notes payable  $ 

 

As of December 31, 2013, the Company was approximately nine months in arrears on principal payments due under the Note payable to the Chief Executive Officer. On May 13, 2013, the Company granted the Chief Executive Officer 370,371 shares of common stock in satisfaction of $50,000 of note payable – related parties. The shares of stock were issued at the fair market value, or trading price, on the date of the transaction.

 

On October 30, 2013, the Company signed a secured promissory note, with Mikkel Pitzner, the non-employee Board of Director (BOD) for $85,000. In addition to the terms of the Note Payable disclosed in the table above, the Company was to use its best efforts to settle the Branch Banking and Trust (“BBT”) Judgment and terminate all Uniform Commercial Code filings in favor of Mr. Pitzner within 10 business days of the date of the agreement. As further inducement to make the loan, Mr. Pitzner was granted an option to purchase 1,802,565 shares of the Company’s common stock for $.01 per share. The option is exercisable immediately and will continue for a period ending two years from the agreement date with an option for cashless exercise based on a formula within the agreement. The closing price per share of the Company’s stock closing on the OTCBB on the date of the agreement was $.025 per share. As a result of the option granted, the Company recorded $44,610 stock option expense using the Black-Scholes valuation model on date of the agreement.

 

F-14
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7.RELATED PARTIES TRANSACTIONS (continued)

 

Net revenues and accounts receivable – related parties – The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers. Combined net revenues from these entities for years ended December 31, 2014 and 2013, was $948,090 and $836,872, 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. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2013, was $11,926, $6,116, and $3,047, respectively.

 

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, 2014, and 2013, were $181,355 and $15,710, respectively. Accounts receivable from BGL at December 31, 2014, and December 31, 2013 was $2,107 and $70,823, respectively.

 

Sales to Pompano Dive Center for the years ended December 31, 2014, and 2013, were $56,159 and $23,322, respectively. Terms of sale are no more favorable than those extended to any of the Company’s other customers. Accounts receivable from Pompano Dive Center at December 31, 2014 and December 31, 2013, was $13,757, and $14,029, respectively. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further discussion regarding Pompano Dive Center. .

 

Royalties expense – related parties – The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns. Under the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing 5% annually. Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three and years ended December 31, 2014 and 2013, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of December 31, 2014, and December 31, 2013, the Company was approximately twenty-four and twenty-nine months in arrears, respectively, on royalty payments due. No default notice has been received and the Company plans to make payments as able.

 

F-15
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7.RELATED PARTIES TRANSACTIONS (continued)

 

Equity based compensation for Chief Executive Officer – On November 2, 2012, the Board of Directors (BODs) approved a stock incentive bonus to certain key employees and consultants to vest and pay out on May 2, 2013, contingent upon continued employment or services. The stock bonus price per share was calculated based on last closing price per the OTCBB on the effective date of the transaction. Of the total stock incentive bonuses declared for the key employees and consultants of $75,150 or 61,852 shares of common stock, the Chief Executive was awarded $45,000 or 37,037 shares. The Company recorded compensation expense ratably over the vesting period, and for the three and years ended December 31, 2013, compensation expense to the Chief Executive Officer related to this transaction was $0 and $30,000, respectively. See Note 20. EQUITY BASED INCENTIVE/RETENTION BONUSES for further discussion. In addition, on February 23, 2013, the Company declared a bonus payable for the years ended 2012 for certain employees, service providers, and consultants. As part of this bonus, the Chief Executive Officer was awarded $67,000 to be paid out in cash or stock based on later determination by the BODs. This amount was included in operating expense for the year ended December 31, 2012. See table below for inclusion in other liabilities and accrued interest – related parties. Further, pursuant to a Written Consent of the BODs of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012, the BOD declared an $83,333 bonus due the Chief Executive Officer payable in shares of restricted stock. The shares vested as of January 2, 2013. The grant price per share was based on the closing price of the stock on May 31, 2012. For accounting purposes, the Company recognized $83,333 operating expense ratably over the seven months the shares vested. These shares are included in shares payable on the statement of stockholders’ deficit. Lastly, the Chief Executive Officer’s monthly salary was increased by $16,667 per month beginning in June 2012, payable in restricted stock calculated based on a monthly weighted average share factor of .70, or a 30% discount (“incremental salary”). The shares were to vest nine months after the last day of each month, continued employment was requirement for vesting, and shares would not be issuable until vested. The Company recorded $23,801 operating expense each month related to the incremental salary, which was $16,667 plus $7,144 discount added back to record at full monthly weighted average price per market. On December 23, 2013, the Chief Executive Officer forgave all incremental salary shares payable to him by the Company from 2012 and through November 2013. As a result, the Company recorded $428,578 contribution to Additional Paid in Capital for the year ended December 31, 2013, for the cancellation of the $261,904, and $166,667 stock payable from 2013 and 2012, respectively.

 

Non-employee Board of Director fees and bonus – Effective December 23, 2013, the Board of Directors cancelled the $2,500 per month non-employee Board of Director fee agreement under which Mikkel. Pitzner was being compensated. In addition, Mr. Pitzner forgave the $27,500 BOD fees due in shares payable and/or paid him monthly through November 2013. Related to the forgiveness of the BOD fees for 2013, the Company cancelled related stock payable to him, recorded $5,917 receivable for the stock due back from him, and recorded the $27,500 as contribution to Additional Paid in Capital. During the three months ended December 31, 2014, Mr. Pitzner returned 14,406 shares, or $1,383 of $5,917.

 

On February 23, 2013, the Company declared a bonus payable for the years ended 2012 for certain employees, service providers, and consultants. As part of this bonus, Mr. Pitzner was awarded restricted shares of common stock with $73,000 fair market value. The shares were issued to Mr. Pitzner during the three months ended December 31, 2013.

 

Equity based compensation to employee – During November 2013, Alexander F. Purdon, an employee of the Company, exceeded 10% ownership whereby he was reclassified to related party. The Company pays Mr. Purdon’s employment compensation in restricted shares of stock in lieu of cash. The number of shares paid is based on the weighted average price per share during the months the services were rendered. For the years ended December 31, 2014 and 2013, 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.

 

F-16
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7.RELATED PARTIES TRANSACTIONS (continued)

 

Patent purchase agreements – In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the Company of patents previously subject to Non-Exclusive License Agreements. Effective 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.

 

Other liabilities and accrued interest– related parties

 

Other liabilities and accrued interest– related parties consists of the following at:

 

   December 31, 2014   December 31, 2013 
         
Year-end 2012 bonus payable to Chief Executive Officer  $67,000   $67,000 
Year-end 2012 bonus payable to employee   17,500    17,500 
Accrued interest on note payable non-employee   Board of Director   3,004     
Due to Principals of Carleigh Rae Corp., net   6,017    6,017 
   $93,521   $90,517 

 

Restricted common stock issued for personal guarantee – On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 14,815 shares of restricted common stock in consideration of personal guarantees he provided to secure restatement and consolidation of the first and second mortgages of the Company. The restrictions on the common stock expired 50% on April 20, 2012, and 50% on April 20, 2013, since Mr. Carmichael continued his full time employment with the Company. The company valued the stock at determined fair market value per share on the date of the transaction and has recorded $1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expired. The unearned balance of the compensation was recorded as prepaid compensation as a component of shareholders’ deficit. For the year ended December 31, 2013, the Company fully amortized the remaining $137,494 of prepaid compensation under this agreement.

 

Stock options outstanding from patent purchase – Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued patents. In exchange for the Intellectual Property (“IP), the Company issued Mr. Carmichael 234 stock options (adjusted for 1 –for– 1,350 reverse stock split) at a $1,350 exercise price with expiration ten years from the effective date of grant, or March 2, 2019. None of the options have been exercised to-date.

 

F-17
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8.ASSET PURCHASE

 

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 “Agreement”). Under the terms of the Agreement, the Company acquired certain diving and related inventory, and Seller provided a three year non-compete agreement within a 10-mile wide radius. In addition, the Company assumed a commercial lease obligation for a retail dive store in Boca Raton, Florida beginning in April 1, 2012. The lease was automatically renewable on an annual basis through May 31, 2014, with 90 days written notice assuming the Lessee was in compliance with all terms of the lease. On May 31, 2013, the Company closed the dive store and vacated the premises. The $3,200 lease deposit was returned during the year ended December 31, 2013. As of 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.

 

9.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

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 $150,838 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.

 

Accounts payable and accrued liabilities of $517,058 at December 31, 2013, consists of $245,672 accounts payable trade, $50,910 accrued payroll and fringe benefits, $45,000 accrued year-end bonuses, $40,556 accrued payroll taxes and withholding, and $152,057 accrued interest. Accrued payroll taxes and withholding were approximately nine months in arrears at December 31, 2013. Balances due certain vendors are also due in arrears to varying degrees.

 

10.OTHER LIABILITIES

 

Other liabilities of $232,738 at December 31, 2014, consists of $216,586 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement (Note 8. ASSET PURCHASE), and $3,295 on-line training liability. Other liabilities of $252,009 at December 31, 2013, consists of $235,000 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement, $3,169 on-line training liability, and $983 other liabilities. The $235,000 short-term loans is comprised of three loans due on demand from unrelated parties. The loans have no other stated terms except one for $200,000 indicated it was for settlement of debenture debt. Therefore, the Company used the proceeds from that loan toward settlement of convertible debentures referenced in (13) of Note 12. CONVERTIBLE DEBENTURES.

 

On-line training certificates with all hookah units sold. The training certificates entitle the holder to an on-line interactive course at no additional charge to the holder. The number of on-line training certificates issued per unit is the same as the number of divers the unit as sold is designed to accommodate (i.e., a three diver unit configuration comes with three on-line training certificates). The certificates have eighteen-month redemption from the time customer purchases the unit before expiration. The Company owes the on-line training vendor an agreed upon negotiated rate for on-line certificates redeemed prior to expiration, and payment is due upon redemption. The Company estimates the on-line training liability based on the historical redemption rate of approximately 10%. The Company continues to monitor and maintain a reserve for certificate redemption that approximates the historical redemption rate.

 

F-18
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11.NOTES PAYABLE,

 

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 

 

As of December 31, 2014, principal payments on the notes payable are as follows:

 

2015  $8,749 
2016   6,099 
2017   6,133 
2018    
2019    
Thereafter    
      
   $12.231 

 

The unsecured note payable in the table above and as reflected table below in the December 31, 2013, note payable balance resulted from conversion of a vendor payable dating back to February 2011. The note payable was restructured once in June 2012 to reduce the monthly payments and to extend the maturity.

 

Notes payable consists of the following as of December 31, 2013:

 

Promissory note payable, unsecured, bearing interest at 5% simple interest per annum, due in weekly principal and interest payments of $250, maturing on March 10, 2015.  $15,305 
      
Less amounts due within one year   12,540 
      
Long-term portion of notes payable  $2,765 

 

F-19
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12.CONVERTIBLE DEBENTURES

 

Convertible debentures consist of the following at December 31, 2014:

 

                  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   $28,829   (2)
11/11/2011  5%   76,000    (32,571)   -    -    -    -   (3)
5/2/2013  8%   42,500    (27,172)   -    -    -    -   (4)
8/2/2013  8%   78,500    (50,189)   4,680    -    4,680    6,280   (4)
5/5/2012  5%   300,000    (206,832)   300,000    -    300,000    110,000   (6)
8/31/2013  5%   10,000    (4,286)   10,000    -    10,000    1,679   (7)
   10%   See ref (9) for Discussion     -    -    379   (9)
2/10/2014  10%   5,500    -    472    -    472    167   (10)
2/10/2014  10%   39,724    -    2,743    -    2,743    3,503   (11)
4/14/2013  9.90%   20,000    (13,333)   -    -    -    -   (14)
                                     
                $376,645        $376,645   $150,837    

 

Reference numbers in right hand column of table entitled Ref. refer to paragraphs with corresponding numbers that immediately follow this paragraph. The referenced paragraphs also support the December 31, 2013 table, which appears at the end of this Note. Therefore, some of the number references do not appear in the table above (i.e. Ref. 1), but appear in the December 31, 2013 table below.

 

(1)The Company converted an accounts payable for legal services to a convertible debenture. At the option of the lender, the principal amount of the note plus any accrued interest may be converted in whole or in part into Common Stock at the conversion price per share of $.001 by written notice. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term. The Company valued the beneficial conversion feature (BCF) of the convertible debenture at $20,635, the “ceiling” of its intrinsic value. The Company accreted the discount to the convertible debenture and recognized interest expense through its maturity. On the maturity date of the debenture, the lender sold and assigned the debenture to an unrelated third party for the face value of the debenture. Because the original lender asserted default against this party, the original lender re-assigned the debenture to another party. See Ref. (12) for assignment of the debenture as well as accounting treatment of the assignment.

 

F-20
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12.CONVERTIBLE DEBENTURES (continued)

 

(2)The Company purchased in exchange for convertible debenture exclusive rights for license of certain intellectual property from an unrelated party. The parties agreed to a royalty of 2.5% of net revenues generated from the sale, sub-license or use of the technology or a reasonable negotiated rate based on similar invention. The debenture was convertible to common shares of the Company at May 27, 2011, along with accrued interest at the option of the lender. Conversion price per share is 30% discount as determined from the weighted average of the preceding 12 trading days’ closing market price. The Company valued the BCF of the convertible debenture at $53,517, its intrinsic value. The Company accreted the discount to the convertible debenture and will recognize interest expense through repayment in full or conversion. Because there was no assurance of success and the invention was still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense during the year ended 2010. Both parties agreed to confidentiality regarding the invention during the pre-prototype stage. In addition, the Company agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services.

 

On February 10, 2012, the holder of this debenture entered into an agreement with a third party to sell/assign the $125,000 principal balance, plus accrued interest. The purchase was to be in installments with transfer/assignment of the debenture upon payment, referred to as “Closings”. The first Closing was on or about February 15, 2012 for $7,500, with that amount assigned/transferred. The second Closing, occurred 90 days after the first closing for $11,750 paid/assigned. All subsequent Closings were to be for $11,750 and occur in 30 day increments after the second Closing. This was to continue until the full principal balance of $125,000, plus accrued interest is purchased/assigned. See Ref. (9) for discussion of new terms on the assigned portions of the debenture.

 

(3)The Company ratified a technology and license agreement with commitment for purchase of inventory related to an agreement signed in 2010, which set pricing for products if minimum quantity purchases were met. Since the Company did not purchase the minimum quantities, but desired to maintain the technology and licensing rights along with the pricing, it agreed to purchase the 2010 balance shortage in 2011, as well as the 2011 minimum quantities. The agreement required the Company issue a convertible debenture for $76,000, and 38,000 shares of restricted common stock. The lender at their option could convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $32,571. The Company accreted the discount to the convertible debenture and will recognize interest expense through paid in full or converted. The Company repaid $28,000 of this debenture in 2011. See Note 16. COMMITMENTS AND CONTINGENCIES for discussion of litigation involving the technology and license agreement that was settled in the third quarter of 2014. On July 1, 2014, the court granted dismissal of the final remaining complaint asserted by UBS as referenced in Note 16. COMMITMENTS AND CONTINGENCIES. Associated with the dismissal, the Company reversed in the third quarter of 2014, related prepaid inventory and convertible debenture resulting in a loss on settlement of $14,850, which was accrued as of June 30, 2014.

 

F-21
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12.CONVERTIBLE DEBENTURES (continued)

 

(4)In 2011, the Company borrowed $42,500, $37,500, and $37,500, respectively, in exchange for three convertible debentures from a lender. The Company valued the related beneficial conversion features (BCF) at $42,500, 37,500 and 37,500, respectively. On February 7, 2012, the lender sold/assigned all rights and interest on the first debenture having net book value of $11,000 plus accrued interest of $3,328. On March 9, 2012, the lender sold/assigned all rights and interest in the second debenture having a net book value of $24,500, plus $1,448 of accrued interest. See reference (11) which discusses the terms and conditions surrounding the new debentures issued upon extinguishment of the two originals as well as accounting treatment of the transactions. During the third quarter of 2012, the lender converted to stock the third convertible debenture with $37,500 principal and $1,500 accrued interest outstanding in full satisfaction of the convertible debenture. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

 

On July 2, 2012, the Company borrowed $78,500 from this same lender in exchange for a convertible debenture maturing on April 5, 2013. Beginning 180 days after the date of the debenture, lender could convert the note to common shares at a 39% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company granted a lower price for common stock purchase or conversion to anyone else during the term of the agreement, the lender’s conversion price would be adjusted downward to the same. The lender could not convert an amount greater than 4.99% of the outstanding common stock at any one time. The Company could have prepaid the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest. There was a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company was also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture. The Company valued the BCF of the convertible debenture at $35,268. Accordingly, the $78,500 debenture was discounted by the amount of the BCF and accreted to the convertible debenture through its maturity, and interest was recognized until converted. By December 31, 2013, the lender had converted $78,500 principal plus accrued interest on the convertible debenture in full satisfaction of the debt. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

 

On August 8, 2012, the Company borrowed $42,500 from this same lender in exchange for a convertible debenture maturing on May 10, 2013. Beginning 180 days after the date of the debenture, lender could have converted the note to common shares at a 39% discount pursuant to the same terms and conditions discussed in preceding paragraph. The Company valued the BCF of the convertible debenture at $27,172. Accordingly, the $42,500 debenture was discounted by the amount of the BCF. The Company accreted the discount to the convertible debenture through its maturity and recognized interest expense until full conversion. The lender fully converted this debenture to shares of common stock with $34,055 converted during the year ended December 31, 2013, and $8,445 converted during the year ended December 31, 2014. In addition, $1,700 accrued interest on the convertible debenture was converted to stock in the first quarter of 2014. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

 

On October 31, 2012, the Company borrowed $78,500 from this same lender in exchange for a convertible debenture maturing on August 2, 2013. Beginning 180 days after the date of the debenture, lender could have converted the note to common shares at a 39% discount pursuant to the same terms and conditions discussed in two paragraphs preceding this one. The Company valued the BCF of the convertible debenture at $50,189, 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.

 

F-22
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12.CONVERTIBLE DEBENTURES (continued)

 

(5)On March 9, 2011, the Company borrowed $50,000 in exchange for a convertible debenture. The lender could at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company could have prepaid the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 50,000 and 100,000 warrants at $337.50 and $472.50 per share (after restatement for 1 for -1,350- reverse stock split) , respectively. As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $34,472, which was recorded as a discount against the debenture. The Company accreted the discount to the convertible debenture through its maturity and recognized interest expense until both the debenture and accrued interest were converted to stock in full satisfaction of amounts due, in the first and second quarter of 2012, respectively. Before discount, the Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.

 

(6)On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 300,000 and 600,000 warrants at $337.50 and $472.50 per share (after restatement for 1 for -1,350- reverse stock split), respectively. As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $206,832, which was recorded as a discount against the debenture. The Company accreted the discount to the convertible debenture through maturity and will recognize interest expense until paid in full or converted. Before discount, the Company determined the FMV of the warrants as $45,000 using the Black-Scholes valuation model.

 

(7)The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $4,286. The Company accreted the discount to the convertible debenture and will recognize interest expense until paid in full or converted.

 

(8)The Company converted a note payable and related accrued interest of $39,724 into a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $17,025. Because the debenture was issued and matured in the third quarter of 2011, the full amount of the discount, $17,025 was accreted and recognized as interest expense during the period.

 

On February 10, 2012, the lender sold/assigned all rights and interest on the debenture having a net book value of $39,724, plus $1,552 of accrued interest. See reference (11) which discusses the terms and conditions surrounding the new debenture issued upon extinguishment of the original as well as accounting treatment of the transaction.

 

F-23
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12.CONVERTIBLE DEBENTURES (continued)

 

(9)The Company entered a new debenture agreement upon sale/assignment of the original lender under the debenture as discussed in reference (2) above. Because the stated terms of the new debenture agreement were significantly different from the original debenture, including analysis of value of the beneficial conversion feature at the assignment/purchase date, the transaction was treated as extinguishment of the old debenture and recording of the new for accounting purposes. Because the debenture is being assigned/sold in installments, the Company is calculating and recognizing gain or loss on the extinguishment as it occurs.

 

On February 10, 2012, the new holder (lender) purchased $7,500 of the original $125,000 principal balance, and based on this transaction, the Company recorded a $4,286 loss on extinguishment. On May 18, 2012, the lender purchased another $11,750, and the Company recorded a $6,714 loss on extinguishment related to this transaction. On July 17, 2012, the lender purchased another $11,750, and the Company recorded a $6,714 loss on extinguishment related to this transaction. On November 8, 2012, the lender purchased another $11,750, and the Company recorded a $6,714 loss on the extinguishment related to this transaction. Since that date the lender has not purchased or converted any shares pursuant to the sale/assignment agreement.

 

The Company may prepay at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debenture is $.37125 (adjusted for 1-for-1,350 reverse stock split), and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term.

 

As of December 31, 2014 and December 31, 2013, the lender had assigned a cumulative $5,500 under the debenture to four separate parties, and $23,500 to another party. See reference (10) and (12), respectively, related to the assignments.

 

(10)This line is comprised of the assignment of $5,500 of the convertible debenture from reference (9) above with the same stated terms and conditions equally to four separate parties. Due to the smaller transaction amounts, these four debenture holders have been combined for presentation purposes.

 

(11)The Company entered into three new debenture agreements upon sale/assignment of the original lenders under the debentures as discussed in references (4) and (8) above. Because the stated terms of the new debenture agreement and principal amounts were significantly different from the original debenture, including analysis of value of the beneficial conversion feature at the assignment/purchase date, the transactions are treated as extinguishment of the old debentures and recorded as new for accounting purposes. As a result of these three transactions, the Company recognized a combined loss on extinguishment of $71,577 in the year ended December 31, 2012.

 

F-24
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12.CONVERTIBLE DEBENTURES (continued)

 

The new debentures were issued with the same following terms and conditions: The Company may prepay at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debentures is $.37125 (adjusted for 1-for-1,350 reverse stock split), and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. During the years end December 31, 2013, the lender converted $3,211 of the debenture with original principal balance of $39,724 to stock. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

 

On January 18, 2013, the lender sold/assigned all rights and interest on one of its three debentures having net book value of $16,000 plus accrued interest of $1,512. On the same day, the lender sold/assigned all rights and interest on another of its three debentures having a net book value of $56,250, plus $4,825 of accrued interest. See reference (13) which discusses the terms and conditions surrounding the new debentures issued upon extinguishment of the two originals as well as accounting treatment of the transactions. As of December 31, 2014, the lender still held the third debenture with original principal balance of $39,724 with net book value of $2,743.

 

(12)On April, 19, 2012, the original lender discussed in ref (1) above re-assigned the debenture to this party asserting default against the first assignee. The amount of assignment was the balance remaining per the original lender’s records, or $16,347. The Company recognized a $3,700 loss on this transaction. Terms of the assigned debenture are the same as the original debenture as stated in ref (1). During the year ended December 31, 2012, the new holder converted $16,347 of the debenture principal plus $162 of accrued interest in full satisfaction.

 

During the years ended December 31, 2012, the lender accepted assignment of $23,500, of a convertible debenture from the lender discussed in (9) above. See reference (2) for terms surrounding the original convertible debenture. In addition, the Company converted $2,125 of the assignments to stock during the year ended December 31, 2013, plus $202 of accrued interest in full satisfaction of the amount due this lender under the assignments. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired the convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

 

(13)On January 18, 2013, the Company entered into three new convertible debenture agreements: one new lending and two upon sale/assignment of two debentures as discussed in reference (11). Because the stated terms of the new debenture agreements and principal amounts are significantly different from the original debentures that were sold/assigned, including analysis of value of the beneficial conversion feature at the assignment/purchase date, the sale/assignment transactions are treated as extinguishment of the old debentures and recorded as new for accounting purposes. As a result of the sale/assignment transactions, the Company recognized a combined loss on extinguishment of $93,826. Principal balance on these two new convertible debentures was $30,500 and $95,000, respectively. The Company was also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debentures.

 

F-25
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12.CONVERTIBLE DEBENTURES (continued)

 

The Company borrowed $84,500, the third debenture referred to above with this lender. The interest rate on the debenture was 10% per annum, and the conversion price was 59% of the lowest closing bid price per share in the ten trading days prior to the conversion notice. Per terms of the debenture agreement, the lender was not to convert an amount that would cause it or any of its affiliates to beneficially own in excess of 4.99% of the Company. The Company could prepay the debenture within 90 days after the effective date at 140% multiplied by outstanding principal and accrued interest. The Company was also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture. The Company valued the BCF of the convertible debenture at $58,720, its intrinsic value. Accordingly, the $84,500 debenture was discounted by the amount of the BCF. The Company accreted discount to the convertible debenture and interest expense through its settlement on August 12, 2013 as discussed below. Further, the debenture agreement provided for post-closing expenses, which the lender noted was $1,000 per conversion and approximately $700 in other fees per each debenture. The Company accrued these fees on each debenture and per conversion.

 

The $95,000 and $30,500 debentures contained the same terms and conditions as the $84,500 debenture except there were no prepayment clause, and the conversion price was 44% of the lowest closing bid price per share in the ten trading days prior to the conversion notice. During the years ended December 31, 2013, the Company converted $30,500 plus $191 of accrued interest in full satisfaction of the $30,500 debenture, and $22,500 toward the $95,000 debenture. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

 

On August 12, 2013, the Company fully settled the two debentures outstanding with $157,446 principal and $8,794 accrued interest totaling $166,240 with this lender for $170,000. All pre-payment penalties were waived and the Company recognized the difference between the $166,240 and $170,000, or $3,760, as other expense for the year ended December 31, 2013.

 

(14)On April 8, 2013, the Company borrowed $20,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (40%) discount as determined from the lowest trading price for the 5 trading days prior to the conversion notice. The Company valued the BCF of the convertible debenture at $13,333 and is accreting the discount to the convertible debenture, and will recognize interest expense until paid in full or converted. During the year ended December 31, 2014, the lender converted $20,000 in full satisfaction of the convertible debenture to shares of common stock. In addition, during the year ended 2014, the Company converted all the accrued interest on the debenture, or $2,302, to shares of common stock. The debenture and interest conversion 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.

 

F-26
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Convertible debentures consist of the following at December 31, 2013:

 

                     Period   Period        
         Origination   Origination   Period End   End   End   Accrued    
Origination  Maturity  Interest  Principal   Discount   Principal   Discount   Balance,   Interest    
Date  Date  Rate  Balance   Balance   Balance   Balance   Net   Balance   Ref.
10/4/2010  4/4/2011  5%   20,635    (20,635)  $-    -   $-   $-   (1)
11/27/2010  5/27/2011  10%   125,000    (53,571)   58,750    -    58,750    22,949   (2)
1/7/2011  11/11/2011  5%   76,000    (32,571)   48,000    -    48,000    7,950   (3)
2/10/2011  1/14/2012  8%   42,500    (42,500)   -    -    -    -   (4)
9/12/2011  6/14/2012  8%   37,500    (37,500)   -    -    -    -   (4)
12/19/2011  9/21/2012  8%   37,500    (37,500)   -    -    -    -   (4)
8/8/2012  5/2/2013  8%   42,500    (27,172)   8,445    -    8,445    3,949   (4)
10/31/2012  8/2/2013  8%   78,500    (50,189)   78,500    -    78,500    7,325   (4)
7/2/2012  4/5/2013  8%   78,500    (35,268)   -    -    -    -   (4)
3/9/2011  3/9/2012  10%   50,000    (34,472)   -    -    -    -   (5)
5/3/2011  5/5/2012  5%   300,000    (206,832)   300,000    -    300,000    80,000   (6)
8/31/2011  8/31/2013  5%   10,000    (4,286)   10,000    -    10,000    1,175   (7)
9/8/2011  9/20/2011  10%   39,724    (17,016)   -    -    -    -   (8)
2/10, 5/18,
7/17,
11/8/2012
  2/10, 5/18,
7/17,
11/8/2014
  10%   42,750    -    -    -    -    379   (9)
3/14/2012  2/10/2014  10%   5,500    -    472    -    472    120   (10)
2/10/2012  2/10/2014  10%   39,724    -    2,743    -    2,743    3,227   (11)
3/9/2012  3/9/2014  10%   56,250    -    -    -    -    -   (11)
4/19, 8/17,
11/7/2012
  4/4/2011,
2/10,
4/14/2014
  5%, 10%   39,847    -    -    -    -    -   (12)
1/18/2014  10%  84,500   (58,720)   -    -    -    -    -   (13)
1/18/2014  10%  30,500   -    -    -    -    -    -   (13)
1/18/2014  10%  95,000   -    -    -    -    -    -   (13)
4/8/2013  4/14/2013  9.90%   20,000    (13,333)   20,000    (3,334)   16,666    1,440   (14)
                   $526,910        $523,576   $128,514    

 

Reference numbers in right hand column of table entitled Ref. refer to paragraphs above the table.

 

F-27
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

13.EQUITY BASED COMPENSATION FOR CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES

 

Equity based compensation is presented on the face of the Statement of Stockholders’ Deficit for the years ended December 31, 2014 and 2013. More information on the significant components of the amounts presented for the years ended December 31, 2014 and 2013 follows:

 

For the years ended December 31, 2014 and 2013, the Company converted $54,000, and $54,000, respectively, of accrued compensation to 10,842,129 and 959,870 restricted stock, respectively, based upon the weighted average stock price per share during the months the services were rendered. For additional information see Note 7. RELATED PARTIES - Equity based compensation to employee

 

On March 27, 2013, the Company entered into a consulting agreement for financial strategic advisory services for a term of twelve months from the date of the agreement, which could be terminated by either party within 30 days written notice and any monies owed due upon termination. As initial fee, the Company paid the consultant $25,000 in restricted stock during the three months ended March 30, 2013. Further, upon obtaining $5,000,000 new capital into the Company, the consultant will be due $500,000, upon successfully obtaining a second $500,000 commitment of new capital, $50,000 will be due to the consultant, upon successfully obtaining a third $500,000 commitment of new capital, and the same arrangement through eleven additional commitment of new capital. Amounts due shall be paid in cash and any brokerage commissions, private placement fees or other fees in connection with obtaining the new capital shall be reduced from the fees due the consultant on a dollar per dollar basis.

 

14.INCOME TAXES

 

The components of the provision for income tax expense are as follows for the years ended:

 

   December 31, 2014   December 31, 2013,
Restated
 
Current taxes          
Federal  $   $ 
State        
Current taxes        
Change in deferred taxes   18,564    48,575 
Change in valuation allowance   (18,520)   (41,097)
           
Provision for income tax expense  $44   $7,478 

 

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2014:

 

Deferred tax assets:     
Equity based compensation  $97,276 
Allowance for doubtful accounts   15,980 
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 

 

F-28
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

14.INCOME TAXES (continued)

 

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 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, 2014   December 31, 2013, Restated 
Statutory tax rate   %   %
Increase (decrease) in rates resulting from:          
Net operating loss carryforward or carryback   (35)%   (10)%
Equity based compensation and loss   %   16%
Change in valuation allowance   32%   (5)%
Change in allowance for doubtful accounts   3%   %
Effective tax rate   %   1%

 

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2013, Restated:

 

Deferred tax assets:     
Equity based compensation  $97,276 
Allowance for doubtful accounts   13,260 
Depreciation and amortization timing differences    
Net operating loss carryforward   1,160,789 
On-line training certificate reserve   1,109 
Total deferred tax assets   1,272,434 
Valuation allowance   (1,269,827)
      
Deferred tax assets net of valuation allowance   2,607 
      
Less deferred tax assets – non-current, net of valuation allowance   2,330 
      
Deferred tax assets – current, net of valuation allowance  $277 

 

F-29
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

14.INCOME TAXES (continued)

 

The effective tax rate used for calculation of the deferred taxes as of December 31, 2013 was 34%. The Company has established a valuation allowance against deferred tax assets of $1,269,827 (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.

 

15.AUTHORIZATION OF PREFERRED STOCK

 

During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of Chapter 78 of the Nevada Revised Statutes. Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets.  The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock. As of December 31, 2014, and December 31, 2013, the 425,000 shares of preferred stock are owned by the Company’s Chief Executive Officer. The preferred shares have 250 to 1 voting rights over the common stock, and are convertible into 31,481 shares of common stock. The preferred stock votes with the Company’s common stock, except as otherwise required under Nevada law. Accordingly, Mr. Carmichael will have approximately 61% of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.

 

16.COMMITMENTS AND CONTINGENCIES

 

On July 15, 2014, the Company was provided a 90 Day Lease Termination notice from its Landlord in accordance with terms of its lease agreement whereby either party could provide 90-day notice terminating lease. As a result, the Company entered into a new lease commitment on August 14, 2014. 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 $1,500 per month subject to periodic adjustment. The Company began relocating its headquarters and manufacturing facility to its new location at 3001 NW 25th Avenue, Suite 1, Pompano Beach, FL 33069 during September 2014. The Company was in full occupancy conducting normal business operations from this location beginning October 2014.

 

During the third quarter of 2014, the Company did not renew its product liability insurance since the renewal policy 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.

 

F-30
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

16.COMMITMENTS AND CONTINGENCIES (continued)

 

On July 1, 2014 the following complaint was settled in full: On December 18, 2012, Undersea Breathing Systems, Inc. (“UBS”) filed an amended complaint against the Company compelling purchase of Medal Model No. 4241 membranes or equivalent pursuant to pricing agreement in 2011. UBS is the holder of the convertible debenture referenced in Note 12. CONVERTIBLE DEBENTURES Ref (3). Under the complaint, UBS 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 has not purchased or taken delivery of additional membranes. At the same time the stock was issued the Company granted UBS a convertible debenture of $76,000 and reduced its balance to $48,000 when the Company paid $28,000 cash and took delivery of the 14 membranes. Therefore, UBS currently has $24,000 worth of stock and a $48,000 convertible debenture for which the Company took no membrane deliveries. On July 1, 2014, the court granted dismissal of the final remaining complaint asserted by UBS. Associated with the dismissal, the Company reversed in the third quarter of 2014, related prepaid inventory and convertible debenture (ref 3) resulting in a loss on settlement of $14,850, which was accrued as of June 30, 2014.

 

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. 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. We also had another such claim previously disclosed from January 2013, and one in October 2014. Both cases were settled by insurance carrier without additional cost to the company.

 

On or about May 3, 2012, the Company received notice of filing of an action for breach of contract, conspiracy to commit securities fraud and injunctive relief against the Company and the first party named in Note 12. CONVERTIBLE DEBENTURES Ref (1). The Plaintiff, Eventus Capital, Inc., is the second party referenced in Note 12. CONVERTIBLE DEBENTURES, Ref (1) who purchased the original debenture from the first party. The net book value, excluding interest, on the debenture as of December 31, 2012 was approximately $12,700. The amount named in the original lawsuit was “damages in excess of $15,000”, plus other fees. On July 16, 2012, the Palm Beach County Court issued an Order on the Company’s Motion to dismiss this complaint. The motion was granted without prejudice to allow the plaintiff 15 days to file an amended complaint with substantiating documentation. The plaintiff amended its complaint as required, asserted it incurred a loss of $735,616 in damages. The other Defendant in the action asserted counter and third party claims against the plaintiff. On June 23, 2014, this case was dismissed with prejudice as to all claims, counterclaims, and third party claims with all parties to bear their own respective attorneys’ fees and costs.

 

17.JOINT VENTURE EQUITY EXCHANGE AGREEMENT

 

On November 7, 2011, the Company entered into a Joint Venture Equity Exchange Agreement (“Agreement”) with Pompano Dive Center, LLC. (“PDC”). PDC owns a retail store, several dive boats, and has a classroom for training divers. Under the terms of the Agreement, the Company will provide PDC with an assortment of Brownie’s Third Lung products on consignment, and PDC will act as a training and demonstration site for Brownie’s Third Lung products. Beginning in 2012, both parties ceased operating under the consignment inventory arrangement. Inventory not sold was returned, and inventory was purchased for sale. See Note: 7 RELATED PARTIES TRANSACTIONS - Net revenues and accounts receivable – related parties for further information on sales to PDC for years ended December 31, 2014 and 2013, and Accounts Receivable balances at December 31, 2014, and December 31, 2013. Terms of sale to PDC are no more favorable than those granted other dealers of the Company’s products.

 

F-31
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

17.JOINT VENTURE EQUITY EXCHANGE AGREEMENT (continued)

 

In addition, the Agreement provides for a non-binding letter of intent for the possible acquisition of PDC in exchange for BWMG’s stock for the yet to be agreed upon value of PDC. In anticipation of a possible purchase, the Agreement provides BWMG with a 33% interest in PDC. As part of the transaction, BWMG issued 3,394 restricted shares of its common stock with fair market value on the date of the transaction of $24,740 to PDC, reflected in other assets in the long-term portion of the Company’s balance sheet.

 

If BWMG purchases PDC, the stock issued by BWMG will be credited to the purchase price. Further, PDC is required to remit no later than 45 days from the end of each quarter, a 33% share in pre-tax net profits. At least 50% of the total pre-tax profits are required for distribution under the Agreement, and BWMG is not required to share in losses. If PDC decides to sell any inventory provided by the Company, the purchase price will be the same as that offered to other dealers of the Company’s products.

 

If this Agreement is terminated by either party and/or a written purchase and sales agreement is not entered into by the parties, then the parties’ respective interests in each other’s business will revert back to the original party. Accordingly, if this should happen, PDC will relinquish the interest acquired in BWMG through this Agreement and BWMG will do the same. All property at PDC owned by BWMG would be returned to BWMG at that time as well. Because the joint venture is cancellable at any time by either party with return of respective interest transferred to each as per the joint venture agreement, possible acquisition of PDC is in the form of a non-binding letter of intent, each entities assets and liabilities remain their own, BWMG will not share in any of PDC losses or additional expenses unless otherwise approved, and the management and operation of PDC remains with PDC, the Company accounted for the investment in PDC under the Cost basis. Since inception of the Agreement PDC has reported pre-tax net losses. Therefore, to-date there has been no profit sharing due the Company under the agreement. Effective December 31, 2014, the Company received notice from PDC of intent to cancel this agreement in accordance with the terms of this agreement. As a result, the unwinding of this transaction is expected to be completed in the first quarter of 2015.

 

18.CHANGE IN CAPITAL STRUCTURE

 

Effective July 15, 2013, the Company effectuated a reverse split of all outstanding shares of Common Stock by a factor of one-for-one thousand three hundred fifty (1 -for- 1,350). Fractional shares were rounded up to the nearest whole share. The reverse split became effective as of July 15, 2013. In accordance with Securities and Exchange Commissions’ Staff Accounting Bulletin Topic 4C, when a change in capital structure occurs after the period reporting date, but before release of the financial statements the Company must apply retroactive treatment to the financial statements to reflect the change. Accordingly, the Company restated the financial statements for year ended December 31, 2013 to reflect the change in the number of shares, as well as throughout the Note disclosures, as applicable.

 

Effective February 22, 2012, also with retroactive restatement, the Company increased the number of authorized shares of common stock from 250,000,000 to 5,000,000,000, and decreased the par value per share of Common Stock from $.001 to $.0001.

 

19.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.

 

F-32
 

 

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

20.EQUITY BASED INCENTIVE/RETENTION BONUSES

 

On November 2, 2012, the Board of Directors consented to grant equity based bonuses to certain key employees and consultants as an incentive to retain their services. Stock incentive bonuses were to vest, and be paid out on May 2, 2013, contingent upon continued employment or service. The stock bonus price per share was calculated based on last closing price as reported on per the OTCBB prior to the grant date for a total of $75,100. Shares were set aside and reserved for this transaction. As disclosed in Note 7. RELATED PARTIES TRANSACTIONS, $45,000 and $2,250 of the $75,100 bonuses, or 37,038 and 1,854 shares, were awarded to the Chief Executive Officer and the related party employee, respectively. The Company accrued operating expense ratably from the time of the awards through May 2, 2013, when vested. Of the 61,852 vested shares, only 5,185 have been issued to-date. The rest are reflected in shares payable balance on the Statement of Stockholders’ Deficit and the Balance Sheet.

 

21.STRATEGIC ALLIANCE AGREEMENT

 

On April 10, 2012, the Company entered into a strategic alliance agreement with Precision Paddleboards, Inc. The agreement provides for 12 month exclusivity granted for $24,000 in one year restricted stock, or 494 shares. Price per share was calculated as the weighted average per share for 30 days preceding the agreement or $.036 per share. The Company recognized the operating expense ratably over the twelve month vesting term with corresponding entry to shares payable. For the three and years ended December 31, 2013, the Company recognized $0 and $6667, respectively, as operating expense under the agreement. As of December 31, 2014, none of the 494 shares have been paid out and are reflected in shares payable balance on the Statement of Stockholders’ Deficit and the Balance Sheet.

 

22.INTEREST EXPENSE NON-RELATED PARTIES AND OTHER EXPENSE (INCOME), NET

 

For the year ended December 31, 2014, non-related parties interest expense of $39,726 is comprised of $38,809 interest on convertible debentures and $917 interest on notes payable and other interest. For the year ended December 31, 2013, non-related parties interest expense of $198,342 is comprised of approximately $194,000 interest on convertible debentures and approximately $4,000 interest on notes payable and other interest.

 

For the year ended December 31, 2014, $29,709 other income, net is comprised primarily of $49,812 sales commissions, $31,463 write off of accrued legal expense from prior years resulting from resolution of overbilling as identified by Company, and partially offset by $19,566 headquarters and manufacturing facility relocation expense, $25,788 net loss on disposal of assets at predominantly at time of relocation, $14,850 loss on convertible debenture settlement and $8,638 other income, net of individually insignificant items. For the year ended December 31, 2013, $73,731 other income, net is comprised primarily of $106,000 in sales commissions, approximately $22,000 royalty income on licensed patents, $47,500 return and retirement of year end 2012 stock bonuses granted to certain consultants, approximately $25,000 downward adjustment of BBT foreclosure liability from settlement of Final Judgment, $15,841 other income, net of individually insignificant items, and partially offset by approximately $98,000 loss on extinguishment of convertible debentures, and $44,610 stock option expense. See Note 7. RELATED PARTIES for further information regarding the stock options granted Mr. Pitzner, BOD, in conjunction with note payable issued to him by Company for $85,000.

 

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BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

23.RESTATEMENT OF 2013 CONSOLIDATED FINANCIAL STATEMENTS

 

During the course of preparing financial statements and schedules for the 2014 year end audit, it was noted that that $107,324 of an $111,115 inventory adjustment made in the fourth quarter of 2014 related primarily to 2013. The actual adjustment was made as result of full physical inventory taken when the Company’s headquarters and manufacturing facility relocated to Pompano Beach from Fort Lauderdale, FL, and the inventory discrepancy (error) was identified. The error occurred as a result of an identified weakness in the accounting system interface between the Company’s sales order and inventory modules. The error occurred when sales invoices were converted from sales orders containing custom items that were entered in the sales order module prior to set up in the inventory module. When this occurred, sales invoices converted from these sales failed to remove the inventory and account for the cost of the sale. This was despite fact that the inventory items had been subsequently added to the inventory module. These items were also not added to any of the categories in the cycle count rotation since they were special order with quick sales turnaround.

 

The Company has internal controls designed to detect inventory misstatement such as inventory cycle counts and gross profit margin review of sale transactions. Regardless, the controls in place during 2013 failed to detect the identified weakness and misstatement.

 

However, in 2014, the Company strengthened its internal controls further in its review of sales margins on daily transactions to adjust bills of material as needed, and better identify inventory errors if and when they occurred for timely correction. This unknowingly also addressed much of the identified weakness. Regardless, once the system weakness was identified, the Company also modified its process to enter items in the inventory module prior to entry in the sales order module, which should completely eliminate the identified weakness.

 

Because the Company determined the $107,324 error significant to the 2013 financial statements as previously reported, they have been restated in the consolidated financial statements these notes support. The restatement to 2013 includes a $107,324 reduction to inventory and corresponding increase to cost of sales.

 

24.SUBSEQUENT EVENTS

 

On January 31, 2015 Mr. Alexander F. Purdon, was issued 1,427,401 shares of restricted common stock in lieu of cash for $4,500, employee compensation for the month ended. On February 28, 2015, he was issued 1,924,827 shares of restricted common stock in lieu of cash for $4,500, employee compensation for the month ended. The number of shares issued was based on the weighted average share price during the month.

 

Conversions of debentures to shares of common stock occurred subsequent to December 31, 2014. The stock was issued upon partial conversion of a convertible note without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares. Conversions were as follows (ref. number corresponds to lender reference number in Note 12. CONVERTIBLE DEBENTURES:

 

Ref (4) lender

On January 8, 2015, the lender converted $4,680 of its debenture to 2,340,000 shares , and $1,000 of its accrued interest to 500,000 shares.

On January 22, 2015, the lender converted $4,200 of accrued interest to 2,800,000 shares.

On February 17, 2015, the lender converted $1,080 of accrued interest to 900,000 shares in full satisfaction of all amounts due under this debenture.

Accordingly, on March 17, 2015, all shares held in escrow for future conversions by this lender were cancelled.

 

On February 23, 2015, the Company was served along with multiple co-defendants in a wrongful death claim. The Company, based on its preliminary review, believes that the claims are without merit. In addition, as the Company was recently served in this matter, it has not determined the potential liability associated with the claims, if any.

 

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