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

 

FORM 10-K

 

(MARK ONE)

 

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

For the fiscal year ended December 31, 2013

 

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

For the transition period from _______ to _______.

 

Commission File No. 000-28321

 

BROWNIE’S MARINE GROUP, INC.
(Name Of Small Business Issuer In Its Charter)

 

Nevada	90-0226181
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
940 N.W. 1st Street, Fort Lauderdale, Florida	33311
(Address of Principal Executive Offices)	(Zip Code)
(954) 462-5570
(Issuer’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

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.

 

 

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 28, 2013, was $ 246,138. 

 

There were 8,030,378 shares of common stock outstanding as of March 7, 2014.

 

 

 

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 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

 

 

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 940 N.W. 1^st Street, Fort Lauderdale, Florida 33311. The Company’s common stock is quoted on the OTCBB under the symbol “BWMG”. The Company’s website is www.Browniesmarinegroup.com. Information contained on our website is not part of this report.

 

Mr. Carmichael has operated Trebor as its President since 1986.  Since April 16, 2004, Mr. Carmichael has served as President, Chief Executive Officer, 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.

 

 

 

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 NitroxMaker™  Commercial Series (NMCS).

 

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 further this endeavor.

 

Some of the Company’s Products in Depth

 

Surface Supplied Air Systems:  The Company produces a line of Surface Supplied Diving products, commonly called hookah systems. These systems allow one to four divers to enjoy the marine environment up to a depth of 90 feet/27 meters without the bulk and weight of conventional SCUBA gear.  We believe that hookah diving holds greater appeal to families with children of diving age than does conventional SCUBA.  The reduction of weight by eliminating the tank allows smaller divers, especially children, to participate more actively and enjoyably. The design of our product also reduces the effort required for both its transport and use.  We believe the PELETON™ Hose System revolutionizes hose management for recreational surface supplied diving.  It reduces the work required of any single diver by dispersing the load over the entire group. We use a single, larger diameter hose as a main downline with up to four individual hoses attached to it. This configuration not only reduces the weight and bulk of the hose required, but also reduces drag and entanglement. An entire line of deck-mounted systems is available for commercial applications that demand extremely high performance.  In addition to the gasoline-powered units and the Variable Speed battery powered units mentioned above, a series of electric powered systems is also available for light to commercial duty. Powered by battery for portability or household current for virtually unlimited dive duration, these units are used primarily by businesses that work in a marine environment.

 

E-Reel and Built-in Battery Systems:  The Company developed two surface supplied air products that it believes makes boat diving even easier. The Built-in Battery System builds a battery powered electric unit into the boat, eliminating the need to transport the compressor/motor assembly. The need for a flotation tube is also removed, as the boat itself serves in that capacity.  The E-Reel advances this idea by adding a reel system to provide compact storage of up to 150 feet/46 meters of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. The hose is manually pulled from the reel supporting up to two divers to a depth of 50 feet/15 meters. When the dive is complete, the hose is automatically recoiled and stowed by the simple activation of a switch.

 

Brownie’s Integrated Air Systems (BIAS™): Compressed air can have many uses on a boat.  The E-Reel and Built in Battery Systems discussed above are just a few examples of BIAS.  In addition to supplying air to divers, integrated air systems provide for the inflating fenders, opening of doors, blowing of air horns, flushing toilets and more.

 

Kayak Diving Hose Kits:  This product allows the use of a conventional SCUBA cylinder, but does not require the diver to wear it.  The cylinder remains above the surface, in a kayak or boat, and a hose ranging from 20 feet/6 meters to 150 feet/46 meters allow the diver to explore the surrounding area.

 

 

 

Drop Weight Cummerbelt:  The patented Drop Weight Cummerbelt is available with all our diving systems, and brings a new dimension to weighting systems.  The belt will accommodate waist sizes from 24 to 54 inches and is depth compensating. It features two pockets, each capable of holding up to 10 pounds of block or shot weight.  Each pocket can be instantly released by either hand, allowing the diver to achieve positive buoyancy in an emergency while retaining the belt itself.  Additionally, the design of this belt provides for expanded capability. By adding an optional sleeve that zips onto the back of the belt, an egress, or bailout system, can be added. The Egressor Add-on Kit contains the sleeve, a 6 or 13 cubic foot SCUBA cylinder, and a SCUBA regulator. In addition to the added safety inherent in this design, many other uses for this present themselves, such as propeller clearing, overboard item retrieval and pool maintenance, to name only a few.

 

Tankfill Compressors:  Many yacht owners enjoy the convenience and freedom of filling their own diving tanks with air, NITROX or custom mixed gases while out on cruise, freeing them from carrying extra cylinders or the need to locate a reputable source in various ports-of-call. Brownie’s Tankfill specializes in the design and installation of high-end custom systems to do just that. From surveying the vessel for installation requirements to custom fabrication of the necessary components, Tankfill provides all the services necessary to satisfy this market.  We believe that every large vessel currently in service, being re-fitted, or being built is a potential customer.  Through OEM relationships we have expanded our market to reach these customers.  Our light duty compressor, the Yacht Pro™25 is specifically designed and built to withstand the marine environment with all components and hardware impervious to spray from the elements. The Yacht Pro™ series contains models for both medium-duty applications, such as recreational divers and small groups, and heavy-duty use as found on research vessels, commercial operations and live-aboard dive boats.  All Yacht Pro™ models come with the Digital Frequency Drive, which is a Brownie’s Tankfill innovation. The Digital Frequency Drive eliminates the spike previously experienced in starting the compressor, eliminating the need to ration the boat’s electrical usage by shutting down components when the compressor is needed. Brownie’s utilizes an AutoCAD industrial drawing program to design, engineer and maintain drawings of its various products.  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.

 

 

 

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 to expand efforts, 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.

 

Divers

 

 

 

 

 

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. 

 

 

 

Patents

 

The Company owns multiple patents issued and in process related to the following:  

 

 

Marketing

 

Print Literature, Public Relations, and Advertising

 

We have in-house graphic design and public relations  capability to create and maintain product support literature, catalogs, mailings, web-based advertising, newsletters, editorials, advertorials, and press releases.  We also target specific markets by selectively advertising in journals and magazines that we believe reach our potential customers.  In addition, we strive to issue Newswires periodically to keep the public informed of our latest products and related endeavors. 

 

Tradeshows

 

In 2013, the Company was represented either through their own presence or by a dealer at the following annual trade shows: The Dubai International Boat Show, The Miami Yacht and Brokerage Show, The Fort Lauderdale International Boat Show, the Palm Beach Boat Show, the Seattle Boat Show and the Annapolis Boat Show.  With the exception of the Dubai show, the Company was represented at these same shows in 2012.

 

Websites

 

The Company’s main website is browniesmarinegroup.com.  Additionally, all our products are marketed on our primary customers’ websites.  In addition, to these websites, numerous other websites have quick links to the Company’s website.  Our products are available domestically and internationally.  Internet sales and inquiries are also supported by the Company as a preferred method of many of our customers, particularly International customers.

 

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, 2013 and 2012, were $75,760 and $47,797, respectively.

 

 

 

Government Regulations

 

The SCUBA industry is self-regulating; therefore, the Company is not subject to government industry specific regulation.  Nevertheless, the Company strives to be a leader in promoting safe diving practices within the industry and believes it is at the forefront of self-regulation through responsible diving practices.  The Company is subject to all regulations applicable to “for profit” companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its facility have been obtained.  There can be no assurance that the Company’s operation and profitability will not be subject to more restrictive regulation or increased taxation by federal, state, or local agencies in the future.

 

Customers

 

We are predominantly a wholesale distributor to retail dive stores, marine stores, and shipyards.  This includes approximately 160 active independent Brownie dealers.  We retail our products to including, but not limited to, boat owners, recreational divers and commercial divers.  The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer: Brownie’s Southport Divers, Brownie’s Palm Beach Divers and Brownie’s Yacht Toys.  Combined sales to these entities for the years ended December 31, 2013 and 2012, represented 29.15% and 28.08%, respectively, of total net revenues.  Our largest customer and Brownie dealer is Brownie’s Southport Divers.  Sales to no other customers represented greater than 10% of net revenues for the years ended December 31, 2013 and 2012.

 

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. Our vertically integrated structure of providing the diving-boater with a one-stop source for all diving solutions we believe provides the most formidable strategy.

 

Personnel

 

We currently have eighteen (18) full time employees and two (2) part time employees at our facility in Fort Lauderdale, Florida.  Seven (7) are classified as exempt sales and administrative or management, and thirteen (13) are classified as nonexempt factory or administrative support.  We utilize consultants when needed in the absence of available in-house expertise.  Our employees are not covered by a collective bargaining agreement.

 

 

 

Seasonality

 

The main product categories of our business, Brownie’s Third Lung and Brownie’s Tankfill, are seasonal in nature.  The peak season for Brownie’s Third Lung’s products is the second and third quarters of the year.  The peak season for Brownie’s Tankfill’s products is the fourth and first quarters of the year.  Since the seasons complement one another, we are able to shift cross-trained factory and warehouse personnel between the two product categories as needed.  Thus, the Company is able to avoid the down time normally associated with seasonal business.

 

 

Not applicable to smaller reporting companies. However, our principal risk factors are described under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

Not applicable to smaller reporting companies.

 

 

The corporate headquarters, factory and distribution center of the Company are located at 936/940 NW 1st Street, Ft. Lauderdale, FL  33311.  The facilities are comprised of approximately 16,000 square feet of leased space of which approximately 7,500 square feet is office, and the remainder is factory and warehouse space.  On November 1, 2013, the Company its renewed its lease on the facilities for a one year term with the same terms and conditions of the previous lease year.  The terms of the lease are base rent of $3,750 plus sales tax, and either party can cancel the lease with 90 days written notice.  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.

 

 

On October 14, 2013, Branch Banking and Trust (“BBT”), the lender that foreclosed on the Company’s real estate brought before the Circuit Court for the 17^th Judicial Circuit in and for Broward County court a Motion for Deficiency Final Judgment against Trebor Industries, Inc., the wholly owned subsidiary of the Company, and Robert M. Carmichael, the Company’s Chief Executive Officer, and received a final judgment of  $103,026, plus interest.  Effective November 18, 2013, Trebor and the Company’s Chief Executive Officer, entered into a settlement agreement with BBT whereby BBT accepted $85,000 (the “Settlement Amount”) in full satisfaction and release of the final judgment granted by the court in favor of BBT. The settlement amount was advanced to the Company by Mikkel Pitzner, a member of the Company’s board of directors, under a Loan Agreement executed October 30, 2013.

 

 

None.

 

 

 

PART II

 

 

The Company’s common stock is quoted on the Over-the-Counter Bulletin Board under the symbol “BWMG”.  The Company’s high and low closing bid prices by quarter during 2013 and 2012, as provided by the Over the Counter Bulletin Board (adjusted for 1 –for – 1,350 reverse stock split in third quarter 2013) 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 7, 2014, the closing price of our common stock, as reported on the Over-the-Counter Bulletin Board, was $.0095 per share.

 

		Calendar Year 2013
		High Bid			Low Bid
First Quarter		$	1.215		$	.270
Second Quarter		$	.675		$	.135
Third Quarter		$	.129		$	.020
Fourth Quarter		$	.100		$	.007

 

		Calendar Year 2012
		High Bid			Low Bid
First Quarter		$	94.50		$	2.70
Second Quarter		$	121.50		$	12.15
Third Quarter		$	14.85		$	1.08
Fourth Quarter		$	3.78		$	.54

 

Holders of Common Stock

 

As of March 7, 2014, 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, 2013, the holders’ of the Company’s convertible debentures converted $20,455 principal outstanding into 1,819,133 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, 2013, the Company converted $13,500 of employee compensation for the quarter ended December 31, 2013, to 662,062 shares of restricted common stock.

 

During the three months ended December 31, 2013, the Company declared payable 133,305 shares of restricted common stock or $6,810 for subcontract services.

 

 

 

 

Information not required by smaller reporting company.

 

 

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, 2013 and 2012, BWMG had net losses of $788,286 and $2,013,349, 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:

 

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

 

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

 

Reclassifications – Certain reclassifications have been made to the 2012 financial statement amounts to conform to the 2013 financial statement presentation.

 

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

 

Going Concern –The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements.   We have incurred losses since 2009, and expect to have losses into 2014.  We have had a working capital deficit since 2009.  The Company defaulted on its first mortgage on its executive facilities in the third quarter of 2010, which resulted in an automatic default on its second mortgage, and was restructured with a forbearance agreement with a maturity date of May 22, 2012.  The Company was notified of default under the forbearance agreement on or around April 27, 2013, and the real estate was foreclosed on and purchased at auction by lender on August 16, 2013.   On November 20, 2013, the Company settled the final judgment related to the foreclosure with the lender for $85,000.

 

 

 

In addition, the Company is behind on payments due for payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, and certain vendor payables.  The Company is 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.  To-date neither endeavor generated profit or cash-flow.  Effective May 31, 2013, the Company closed and ceased operations at its retail facility.  The Company is still involved in the joint venture.   As a result of the above matters, the Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the first quarter of 2014.  This raises substantial doubt about BWMG’s ability to continue as a going concern. The Company will need to raise additional funds and is currently exploring alternative sources of financing.  BWMG has issued a number of convertible debentures as an interim measure to finance working capital needs 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 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.

 

 

 

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, 2013, and 2012, was $43,583 and $19,380, respectively. 

 

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

 

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

 

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

 

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

 

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

 

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees.  Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value. Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries.   Subsequent to the first quarter of 2012, the Company’s trading volume has not been nominal.

 

 

 

For the years ended December 31, 2013 and 2012, the Company transacted a fair number of stock-based compensation transactions as reflected on face of the Statement of Stockholders’ Deficit.  This included amortized prepaid equity based compensation for personal guarantees of Chief Executive Officer on Company’s bank debt; additional compensation expense to the Chief Executive Officer payable in stock; Board of Directors’ Fees and Bonuses; certain consulting, legal, and other professional fees;  equity based incentive and/or retention bonuses for some employees, and consultants; some accrued payroll settled in stock; and operating expense for exclusivity pursuant to strategic alliance agreement payable.  

 

Beneficial conversion features on convertible debentures – The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value.   Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries. 

 

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, 2013, and 2012, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related parties,  notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments.  The fair value of our convertible debentures was the principal balance due at December 31, 2013, and 2012, or $526,910 and $703,740, 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.   

 

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, 2013, and 2012, since their effect was antidilutive. 

 

New accounting pronouncements – The Company believes there was no new accounting guidance adopted but not yet effective that either has not already been disclosed in prior reporting periods or is relevant to the readers of BWMG’s financial statements.

 

 

 

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, 2013, As Compared To the Year Ended December 31, 2012

 

Net revenues.  For the year ended December 31, 2013, we had net revenues of $2,870,688 as compared to net revenues of $2,864,327 for the year ended December 31, 2012, an increase of $6,361 or less than .5%.  Although net revenue was relatively flat between the periods, the sales mix was different, and an overall increase in net revenues in the fourth quarter of 2013, compared to the same period in 2012, resulted in overcoming the $276,334 decrease in net revenues for the nine months ended September 30, 2013 as compared to the same period in 2012. For the year ended December 31, 2013 as compared 2012, tankfill system and related sales, and public safety sales increased approximately $176,000, and $6,700, respectively.  For the same comparative period, hookah system and related sales, and SCUBA and related sales decreased approximately $147,000 and $29,000, respectively.  The Company is encouraged by the increased consumer spending in the fourth quarter of 2013, and hope it is a sign of either improvement in the economy or consumers adjusting to continued economic uncertainty 

 

Cost of net revenues.  For the year ended December 31, 2013, we had cost of net revenues of $1,989,555 as compared with cost of net revenues of $1,981,912 for the years ended December 31, 2012, an increase of $7,643, or less than .5%.  

 

Gross profit.  For the year ended December 31, 2013, we had gross profit of $881,133 as compared to gross profit of $882,415 for the year ended December 31, 2012, a decrease of $1,282, or less than .5%. 

 

Operating expenses.  For the year ended December 31, 2013, we had total operating expenses of $1,534,897 as compared to total operating expenses of $2,505,281 for the year ended December 31, 2012, a decrease of $970,384, or 38.73%. The $970,384 decrease is due to a decrease in selling, general and administrative costs of $998,347 partially offset by an increase in research and development expenses of $27,973 for the year ended December 31, 2013, as compared to the same period in 2012.  The decrease in selling, general and administrative costs of $998,347 for year ended December 31, 2013, over the same period in 2012, is primarily comprised of approximately $436,000 decrease in consultant expense and bonuses (non-cash), approximately $170,000 (cash and non-cash) decrease in bonuses to employees and Chief Executive Officer, and $362,510 decrease in amortization of prepaid equity based compensation (non-cash) to Chief Executive Officer, which was fully amortized in 2013.  The $27,973 increase in research and development (R&D) costs for the year ended December 31, 2013 compared to the year ended December 31, 2012, is primarily attributable to approximately $20,000 increase in R&D material expense,  approximately $22,000, increase  subcontract R&D services, partially offset by approximately $14,000 less allocation of payroll expense allocated to R&D during the period. 

 

Other expense, net.  For the year ended December 31, 2013, we had other expense, net of $127,044 as compared to other expense, net of $352,252 for the year ended December 31, 2012, a decrease in other expense, net of $225,208, or 63.93%.  This account is comprised of other (income) expense, net, and interest expense.  Other (income) expense, net, increased by $155,386 income, and is comprised of transactions that are generally of a non-recurring nature; interest expense decreased by $69,822 for the period. The $155,386 increase in other income, net is primarily attributable to approximately $106,000 in sales commissions in 2013; $47,500 return and retirement in 2013 of year end 2012 stock bonuses granted to certain consultants; approximately $25,000 downward adjustment of BBT foreclosure liability from settlement of Final Judgment in 2013; approximately $8,000 less loss on extinguishment of convertible debentures in 2013 than in 2012; $44,610 stock option expense in 2013; and approximately $8,000 less in product license royalty income in 2013 than 2012; whereas in 2012, there was a foreclosure loss of $116,539 and $95,054 gain on forgiveness of  legal debt dating prior to 2004 for which there were not comparable transactions in 2013. The decrease in interest expense of $69,822 is primarily attributable to approximately $42,000 decrease in interest on convertible debentures fully accreted; and no mortgage interest in 2013, which was  $25,000 in 2012 prior to foreclosure. 

 

 

 

(1)

Convertible Debentures are presented “Gross” in the above Schedule.  On the Company’s Financial Statements for the year ended December 31, 2013, Convertible Debentures are presented “Net” of Discount.

 

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 losses of approximately $788,000 in 2013, and $2,010,000 in 2012. We anticipate these losses will continue for the foreseeable future. Additionally, the Company has negative cash flows from operations, negative working capital, is behind on payments due for payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, a note payable due an unrelated party, and certain vendor payables.  The Company is working out all matters of delinquency on a case by case basis.  However, there can be no assurance that cooperation the Company has received thus far will continue.  During the year ended December 31, 2012, the Company’s real estate was foreclosed upon, and the Company now operates under a short-term lease of the property.  This raises a substantial doubt about our ability to continue as a going concern. Our continued existence is dependent upon generating working capital and obtaining adequate new debt or equity financing. Because of our continuing losses, we may not have working capital to permit us to remain in business through the end of the year, without improvements in our cash flow from operations or new financing. Working capital limitations continue to impinge on our day-to-day operations, thus contributing to continued operating losses.

 

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

 

Since October 4, 2010 the Company has issued convertible debentures to several lenders and other third parties. At December 31, 2013 the outstanding principal balance of these debentures was approximately $527,000.  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 Over-the-Counter Bulletin Board. There is a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’ ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. On March 14, 2013, the Company received notice from The Depository Trust Company (“DTC”) that they had imposed a restriction on physical deposit and Deposit/Withdrawal at Custodian (“DWAC”) electronic deposit transactions, referred to as a “Deposit Chill”. The Company filed an “objection” and engaged independent Counsel to provide legal opinion that all shares deposited were tradable without restriction under the Securities Act of 1933. The action was successful, and on June 26, 2013, DTC advised the Company that it had lifted the Deposit Chill.

 

 

 

Our Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For Investors to Sell Their Shares Due To Suitability Requirements

 

Our common stock is deemed to be “penny stock” as that term is defined under the Securities Exchange Act of 1934.  Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Our common stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.

 

Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks.  Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.

 

We Depend On the Services of Our Chief Executive Officer

 

Our success largely depends on the efforts and abilities of Robert M. Carmichael, our President and Chief Executive Officer.  Mr. Carmichael has been instrumental in securing our existing financing arrangements.  Mr. Carmichael is primarily responsible for the development of our technology and the design of our products.  The loss of the services of Mr. Carmichael could materially harm our business because of the cost and time necessary to recruit and train a replacement.  Such a loss would also divert management attention away from operational issues. We do not presently maintain a key-man life insurance policy on Mr. Carmichael.

 

We Require Additional Personnel and Could Fail To Attract or Retain Key Personnel

 

In addition, our continued growth depends on our ability to attract and retain a Chief Financial Officer, a Chief Operations Officer, and additional skilled associates.  We are currently utilizing the services of two professional consultants to assist the Chief Executive Officer with finance and operations.  The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or Chief Operations Officer or further assistance in these areas may have a material adverse effect upon us. Also, there can be no assurance that we will be able to retain our existing personnel or attract additional qualified associates in the future.

 

Our Failure to Obtain and Enforce Intellectual Property Protection May Have a Material Adverse Effect on Our Business

 

Our success depends in part on our ability, and the ability of our patent and trademark licensors, entities owned and controlled by Robert M. Carmichael, our President and Chief Executive Officer, to obtain and defend our intellectual property, including patent protection for our products and processes, preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing the proprietary rights of third parties, both in the United States and in other countries.  Despite our efforts to protect our intellectual proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection.

 

Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights.  Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future.

 

We May Be Unable To Manage Growth

 

Successful implementation of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management and financial resources.  If we fail to manage our growth effectively, our business, financial condition or operating results could be materially harmed, and our stock price may decline.

 

 

 

Reliance on Vendors and Manufacturers

 

We deal with suppliers on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued supply or pricing.  In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production facility capacity.  Historically, we have purchased enough inventories of products or their substitutes to satisfy demand.  However, unanticipated failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us to curtail or cease operations.

 

Dependence on Consumer Spending

 

The success of the our business depends largely upon a number of factors related to consumer spending, including current and future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates.  In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products.  Any significant deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect our financial results.  The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher fuel prices; declines in the value of investments and residential real estate; and increases in federal and state taxation can all negatively affect our results.  There can be no assurance that in this type of environment consumer spending will not decline, thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely affected by continuing or future downturns in the economy, boating industry, or dive industry.  If declines in consumer spending on recreational marine accessories and dive gear are other than temporary, we could be forced to curtail or cease operations.

 

Government Regulations May Impact Us

 

The SCUBA industry is self-regulating; therefore, Brownie’s is not subject to government industry specific regulation.  Nevertheless, Brownie’s strives to be a leader in promoting safe diving practices within the industry and is at the forefront of self-regulation through responsible diving practices.  Brownie’s is subject to all regulations applicable to “for profit” companies as well as all trade and general commerce governmental regulation.  All required federal and state permits, licenses, and bonds to operate its facility have been obtained.  There can be no assurance that our operations will not be subject to more restrictive regulations in the future, which could force us to curtail or cease operations.

 

Bad Weather Conditions Could Have an Adverse Effect on Operating Results

 

Our business is significantly impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably rough surf, may decrease boat use and diving, thereby decreasing sales.  Accordingly, our results of operations for any prior period may not be indicative of results of any future period.

 

Investors Should Not Rely On an Investment in Our Stock for the Payment of Cash Dividends

 

We have not paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the future. Investors should not make an investment in our common stock if they require dividend income. Any return on an investment in our common stock will be as a result of any appreciation, if any, in our stock price.

 

The Manufacture and Distribution of Recreational Diving Equipment Could Result In Product Liability Claims

 

We, like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury.  Such claims may include, among other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or side effects, if any.  We do not anticipate obtaining contractual indemnification from parties-supplying raw materials, manufacturing our products or marketing our products.  In any event, any such indemnification if obtained will be limited by our terms and, as a practical matter, to the creditworthiness of the indemnifying party. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our operations and financial conditions, which could force us to curtail or cease our business operations.

 

 

 

 

Not required for smaller reporting companies.

 

 

Our consolidated financial statements appear beginning at page F-1.

 

 

None.

 

Item 9A.            Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

 Our management carried out an evaluation with the participation of our Chief Executive Officer who serves as our principal executive officer and principal financial and accounting officer, required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act.

 

Based on this evaluation, our Chief Executive Officer and principal financial and accounting officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective such that the information relating to our company required to be disclosed in our SEC reports (i) is recorded processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management to allow timely decisions regarding required disclosures. Our management concluded that a significant deficiency exists regarding timely disclosure controls and procedures as described in more detail below.  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.

 

The specific weakness identified by our management was a lack of personnel with an appropriate level of SEC reporting and accounting experience and training in the application of U.S. Generally Accepted Accounting Principles (“GAAP”) commensurate with our financial reporting requirements and business environment. The weakness is principally due to lack of working capital to retain qualified employees, which are integral to the Company’s process for timely disclosure and financial reporting. Furthermore, our Chief Executive Officer and Chief Financial Officer, Mr. Robert Carmichael, lacks experience in U.S. GAAP and financial accounting. We rely extensively on outside service providers to comply with our financial reporting requirements. Since our inception we have relied on an outside consultant with experience in this area to assist us prepare our financial statements and disclosures in accordance with U.S. GAAP. Until such time as we have a Chief Executive Officer and/or Chief Financial Officer with the requisite expertise in U.S. GAAP, there are no assurances that the significant deficiency in our internal control over timely financial reporting and disclosure.   This deficiency 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.

 

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.  

 

 

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management, including the Company's Chief Executive Officer and Principal Accounting Officer, has conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, based on the criteria for effective internal control described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company’s internal control over financial reporting was not effective as discussed in the section above as of December 31, 2013.

 

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.

 

Changes in Internal Controls 

 

There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the fourth quarter of the year ended December 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.            Other Information

 

None.

 

PART III

 

 

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.

 

 

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.

 

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.  No Directors are 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 two 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

 

Members of the Company’s Board of Directors are reimbursed for all out of pocket expenses incurred in connection with the attendance at any Board meeting or in connection with any services they provide for and on behalf of the Company.  In April 2012, the Board of Directors approved a new director compensation plan whereby each non-employee director would be paid the equivalent of $2,500 per month by the Company. Effective December 1, 2013, the  Board of Directors’ compensation plan was terminated. 

 

 

 

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, an employee of the Company through monthly payment of his salary in shares of stock became a greater than 10% owner of the Company on November 30, 2013, and failed to file any report of ownership during the period covered by this report.  Mr. Mikkel Pitzner did not timely file Form 4’s during 2013 for monthly Board of Directors fees paid in stock through November 2013;  however, effective December 2013, Mr. Pitzner agreed per Board or Director resolution to return the shares back to the Company as contributed capital as disclosed in the notes to the Company’s financial statements; Mr. Robert Carmichael, Chief Executive Officer, did not file Form 4s for incremental equity compensation payable monthly through November; however, effective December 23, 2013, Mr. Carmichael agreed per Board of Director resolution to forgive the shares payable and the Company recorded as contributed capital along with incremental equity compensation payable due from 2012, as disclosed in the notes to the Company’s financial statements. 

 

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., 940 N.W. 1^st Street, Fort Lauderdale, Florida 33311, 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.

 

 

 

 

The following table shows all the cash compensation paid by the Company, as well as certain other compensation paid or accrued, during the fiscal years ended December 31, 2013 and 2012 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

 

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

  

Outstanding Equity Awards at Fiscal Year End

 

 

 

 

Director Compensation

 

In April 2012, the Board of Directors approved a new director compensation plan (“Plan”) whereby each non-employee director would be paid the equivalent of $2,500 per month by the Company.  For the year ended December 31, 2013, Director’s fees under this plan were $27,500 through November 2013. Effective December 23, 2013, the Board of Director Compensation was terminated and Mr. Pitzner agreed per Board of Director resolution to forgive the Board of Directors fees collected and/or due him in stock.  Accordingly, the Company recorded the forgiveness of debt as  contributed capital, as disclosed in the notes to the Company’s financial statements. 

 

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 maximum number of shares that may be issued under the Plan is 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, 2013.

 

Equity Compensation Plan Information as of December 31, 2013

 

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

  

 

 

 

 

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.

 

Applicable percentage ownership in the following table is based on 8,030,378 shares of common stock outstanding as of March 7, 2014.   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 7, 2014, 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., 940 N.W. 1^st Street, Fort Lauderdale, Florida 33311.

 

Title of		Name and Address of Beneficial		Amount and Nature of				Percent
Class		Owner		Beneficial Ownership				of Class
Executive Officers and Directors
Common		Robert Carmichael		461,291		(1)		5.69	%
Common		Mikkel Pitzner		2,052,837		(2)		20.84	%
Common		All directors and executive officers as a group (2 persons)		2,514,128				26.53	%
5% Shareholders
Common		Alexander F. Purdon		1,768,405		(3)		22.02	%
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 (1 persons)		425,000				100.0	%

 

 

 

 

 

Notes payable – related parties

 

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

 

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

 

As of December 31, 2013, principal payments on the notes payable – related parties are as follows:

 

2014		$	127,619
2015			--
2016			--
2017			--
2018			--
Thereafter			--
		$	127,619

 

As of December 31, 2013, the Company was approximately nine months in arrears on principal payments due under the Note payable to the Chief Executive Officer.  On May 13, 2013, the Company granted the Chief Executive Officer 370,371 shares of common stock.  The shares of stock were issued at the fair market value, or trading price, on the date of the transaction. No default notice has been received and the Company makes monthly payments to not fall further behind until it is able address past due payments.  

 

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

 

 

 

Net revenues and accounts receivable – related parties – The Company sells products to three entities, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer.  Terms of sale are no more favorable than those extended to any of the Company’s other customers.  Combined net revenues from these entities for year ended December 31, 2013, was $836,872. 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.  Sales to Pompano Dive Center for the year ended December 31, 2013, was $23,322.   Accounts Receivable from Pompano Dive Center at December 31, 2013 was $14,029.  Sales to the Company’s Chief Executive Officer for the year ended December 31, 2013 was $1,097.  Sales to Brownie’s Global Logistics. LLC and 940 Associates, Inc., companies owned by the Chief Executive Officer, were $80,613 and $4,340, respectively, for the year ended December 31, 2013.  Accounts receivable from Brownie’s Global Logistics, LLC at December 31, 2013, was $70,823 and the receivable related to a sale in the 4^th quarter of 2013, was paid within terms in January 2014. 

 

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

 

Non-employee Board of Director Fees, loan conversion, and bonus  –  Non-Employee Board of Directors’ (BOD) fees for the year ended December 31, 2013 was $27,500.  Effective December 23, 2013, the BODs cancelled the $2,500 per month  non-employee BOD compensation agreement on a go-forward basis.  In addition, Mr. Pitzner forgave the $27,500 BOD fees due and or paid him through November 2013, for the year ended December 31, 2013.  Related to the forgiveness of the BOD fees for 2013, the Company cancelled stock payable to him, recorded $5,917 receivable for the stock due back from him, and recorded the $27,500 as contribution to Additional Paid in Capital. 

 

On February 23, 2013, the Company declared a bonus payable for the years ended 2012 for certain employees, service providers, and consultants.  As part of this bonus, Mr. Pitzner was awarded restricted shares of common stock with $73,000 fair market value.  This amount is included on the statement of stockholders’ deficit as shares payable as of and for the years ended December 31, 2012. The shares were issued to Mr. Pitzner during the first quarter ended March 31, 2013.

 

Equity based compensation to employee  –  During the year ended December 31, 2013 the Company converted $54,000 of accrued payroll to 959,870 shares of restricted stock for services rendered by Alexander F. Purdon in 2013 based on the weighted average price per share during the months the services were rendered.  Mr. Purdon, owned stock in the Company prior to agreeing to accept stock in lieu of cash for employment compensation.  As a result, Mr. Purdon exceeded 10% ownership in November 2013, and is now accounted for as a related party. 

 

Other liabilities and accrued interest– related parties

 

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

 

		December 31, 2013
Year-end 2012 bonus payable to Chief Executive Officer		$	67,000
Due to Principals of Carleigh Rae Corp., net			6,017
Other liabilities – related parties		$	73,017

  

The $6,017 due to the Principals of the Carleigh Rae Corp. is part of the patent infringement settlements received by the Company and is discussed above as is the non-employee BOD Fee.

 

 

	26

 

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 recognized $137,494 as amortization of prepaid compensation under this agreement.  Prepaid compensation remaining under this agreement as of December 31, 2013, was $0.

 

Equity based compensation for Chief Executive Officer– On November 2, 2012, the BOD approved a stock incentive bonus to certain key employees and consultants to vest and pay out on May 2, 2013, contingent upon continued employment or services. The stock bonus price per share was calculated based on last closing price per the OTCBB on the effective date of the transaction, or for a total of $75,100.  Shares were set aside and reserved for this transaction.  Of the $75,100 bonus, $45,000 was awarded to the Chief Executive Officer of the Company.  The Company recorded compensation expense ratably over the vesting period.  The Chief Executive Officer’s monthly salary was increased by $16,667 per month beginning in June 2012, payable in restricted stock calculated based on a monthly weighted average share factor of .70, or a 30% discount (“incremental salary”). The shares were to vest six months after the last day of each month, continued employment was requirement for  vesting, and shares would not be issuable until vested.  The Company recorded $23,801 operating expense each month related to the incremental salary, which was $16,667 plus $7,144 discount added back to record at full monthly weighted average price per market.  On December 23, 2013, the Chief Executive Officer forgave all incremental salary shares payable to him by the Company from 2012 and through November 2013.  As a result, the Company recorded $428,578 contribution to Additional Paid in Capital for the year ended December 31, 2013, for the cancellation of the $261,904, and $166,667 stock payable from 2013 and 2012, respectively.

 

Item 14.  Principal Accounting Fees and Services.

 

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.

 

Fees to Auditors Fiscal Year ended December 31, 2012

 

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, 2012 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, 2012 or services that are normally provided in connection with statutory and regulatory filings or engagements during the fiscal year ending December 31, 2012 was $37,580.           

 

 

 

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, 2012 were $-0-.

 

Tax Fees:  The aggregate fees, including expenses, billed by principal accountants for tax compliance, tax advice and tax planning during year 2012 was $4,000.

 

All Other Fees:  The aggregate fees, including expenses, billed for all other services rendered to the Company by principal accountants during year 2012 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.

 

 

 

PART IV

 

 

Our consolidated financial statements appear beginning at F-1.

 

 

 

 

 

* 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, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders’ Deficit (iv) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Annual Report on Form 10-K  shall not be deemed "filed" or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

 

 

 

SIGNATURES

 

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

 

 

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.

 

 

 

BROWNIE'S MARINE GROUP, INC.

TABLE OF CONTENTS FOR CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 2013 AND 2012

 

 

 

 

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 sheets of Brownie's Marine Group, Inc.  as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period 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 2012, and the results of its operations and its cash flows for each of the years in the two-year period 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

Las Vegas, Nevada

 

 

 

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

 

		December 31,			December 31,
		2013			2012
ASSETS
Current assets
Cash		$	70,084		$	69,292
Accounts receivable, net of $39,000 and $36,000 allowance
for doubtful accounts, respectively			30,298			20,556
Accounts receivable - related parties			105,942			51,703
Inventory			735,926			603,867
Prepaid expenses and other current assets			109,523			148,851
Other current assets - related parties			5,917			--
Deferred tax asset, net – current			277			304
Total current assets			1,057,967			894,573
Furniture, fixtures and equipment, net			76,265			72,281
Deferred tax asset, net - non-current			2,330			9,781
Other assets			27,635			31,635
Total assets		$	1,164,197		$	1,008,270
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities		$	534,558		$	508,715
Customer deposits and unearned revenue			99,610			53,678
Royalties payable - related parties			137,129			137,563
Other liabilities			252,009			170,827
Other liabilities and accrued interest - related parties			73,017			80,517
Convertible debentures, net			523,576			638,667
Notes payable - current portion			12,540			12,152
Notes payable - related parties - current portion			127,619			168,384
Total current liabilities			1,760,058			1,770,503
Long-term liabilities
Notes payable - long-term portion			2,765			15,412
Notes payable - related parties - long-term portion			--			--
Total liabilities			1,762,823			1,785,915
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;
10,049,140 and 2,357,589 shares issued, respectively;
5,672,051 and 401,424 shares outstanding, respectively			567			40
Common stock payable; $0.0001 par value; 200,795 and 962,940
shares, respectively			20			96
Prepaid equity based compensation			--			(137,494)
Additional paid-in capital			8,478,092			7,648,732
Accumulated deficit			(9,077,730)			(8,289,444)
Total stockholders' deficit			(598,626)			(777,645)
Total liabilities and stockholders' deficit		$	1,164,197		$	1,008,270

 

See Accompanying Notes to Consolidated Financial Statements

 

 

 

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Year Ended December 31,
		2013			2012
Net revenues
Net revenues		$	1,924,445		$	2,048,364
Net revenues - related parties			946,243			815,963
Total net revenues			2,870,688			2,864,327
Cost of net revenues
Cost of net revenues			1,919,964			1,915,746
Royalties expense - related parties			69,591			66,166
Total cost of net revenues			1,989,555			1,981,912
Gross profit			881,133			882,415
Operating expenses
Selling, general and administrative			1,459,137			2,457,484
Research and development costs			75,760			47,797
Total operating expenses			1,534,897			2,505,281
Loss from operations			(653,764)			(1,622,866)
Other expense, net
Other (income), expense net			(73,731)			81,655
Interest expense			198,342			264,243
Interest expense - related parties			2,433			6,354
Total other expense, net			127,044			352,252
Net loss before provision for income taxes			(780,808)			(1,975,118)
Provision for income tax expense			7,478			38,231
Net loss		$	(788,286)		$	(2,013,349)
Basic loss per common share		$	(0.32)		$	(14.24)
Diluted loss per common share		$	(0.32)		$	(14.24)
Basic weighted average common
shares outstanding			2,484,342			141,365
Diluted weighted average common
shares outstanding			2,484,342			141,365

 

See Accompanying Notes to Consolidated Financial Statements

 

 

 

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, 2011		35,499		$	4		425,000		$	425		7,651		$	1			(637,498)		$	6,150,762		$	(6,276,095)		$	(762,401)
Issuance of stock payable from prior
reporting periods		7,651			1		--			--		(7,651)			(1)			--			--			--			--
Stock granted for consulting, legal, and
other professional services		36,259			3		--			--		--			--			--			230,909			--			230,912
Equity based incentive/retention/year end
bonuses to consultants		--			--		--			--		678,519			68			--			280,332			--			280,400
Stock for equity investment		494			--		--			--		--			--			--			5,000			--			5,000
Discounts on convertible debentures		--			--		--			--		--			--			--			150,129			--			150,129
Equity based compensation and incentive/
retention bonus to Chief Executive Officer		--			--		--			--		102,460			10			--			264,989			--			264,999
Amortization of prepaid equity based
compensation to Chief Executive Officer		--			--		--			--		--			--			500,004			--			--			500,004
Conversion of Board of Director's fees
payable to stock		18,519			2		--			--		--			--			--			22,498			--			22,500
Equity based year end bonus to
non-employee Board of Director		--			--		--			--		180,247			18			--			72,982			--			73,000
Coversion of short-term loan from Board
of Director to stock		1,975			--		--			--		--			--			--			20,000			--			20,000
Stock issued for assets purchased from
Florida Dive Industries, Inc.		1,630			--		--			--		--			--			--			59,400			--			59,400
Conversion of employee compensation
payable to stock		16,537			2		--			--		--			--			--			98,998			--			99,000
Equity based incentive/retention bonuses
to employees		--			--		--			--		1,358			-			--			1,650			--			1,650
Conversion of accrued interest on
convertible debentures to stock		2,376			--		--			--		--			--			--			7,178			--			7,178
Conversion of convertible debentures		280,485			28		--			--		--			--			--			194,555			--			194,583
to stock
Extinguishment of convertible debentures		--			--		--			--		--			--			--			72,017			--			72,017
Equity based compensation for exclusivity
pursuant to agreement with Precision
Paddleboards, Inc.		--			--		--			--		357			--			--			17,333			--			17,333
Net loss		--			--		--			--		--			--			--			--			(2,013,349)			(2,013,349)
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		5,672,051		$	567		425,000		$	425		200,795		$	20		$	--		$	8,478,092		$	(9,077,730)		$	(598,626)