$BWMG - could not copy whole report, too large
Post# of 29735
Posted On: 05/13/2013 7:50:13 AM
$BWMG - could not copy whole report, too large
Quarterly Report (10-q)
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(mark one)
þ Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934
For the quarterly period ended March 31, 2013
o Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______.
Commission File No. 333-99393
Brownie’s Marine Group, Inc.
(Name of Small Business Issuer in Its Charter)
Nevada 90-0226181
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
940 N.W. 1 st Street, Fort Lauderdale, Florida 33311
(Address of Principal Executive Offices) (Zip Code)
(954) 462-5570
(Issuer’s Telephone Number, Including Area Code)
(Former Name, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Website, in any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes ¨ No x
There were 2,517,133,137 shares of common stock outstanding as of April 26, 2013.
PART I
Item 1. Financial Statements
Financial Information
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2013 2012
ASSETS
Current assets
Cash $ 45,748 $ 69,292
Accounts receivable, net of $44,000 and $36,000 allowance
for doubtful accounts, respectively 21,670 20,556
Accounts receivable - related parties 67,519 51,703
Inventory 613,728 603,867
Prepaid expenses and other current assets 152,145 148,851
Deferred tax asset, net - current 277 304
Total current assets 901,087 894,573
Furniture, fixtures and equipment, net 67,557 72,281
Deferred tax asset, net - non-current 6,025 9,781
Other assets 31,635 31,635
Total assets $ 1,006,304 $ 1,008,270
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities $ 564,970 $ 508,715
Customer deposits and unearned revenue 99,413 53,678
Royalties payable - related parties 141,266 137,563
Other liabilities 163,019 170,827
Other liabilities and accrued interest - related parties 73,017 80,517
Convertible debentures, net 665,390 638,667
Derivative liability 565,689 --
Notes payable - current portion 12,067 12,152
Notes payable - related parties - current portion 148,226 168,384
Total current liabilities 2,433,057 1,770,503
Long-term liabilities
Notes payable - long-term portion 12,573 15,412
Notes payable - related parties - long-term portion -- --
Total liabilities 2,445,630 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;
3,678,090,568 and 3,182,745,767 shares issued, respectively;
2,333,548,447 and 541,921,900 shares outstanding, respectively 233,355 54,192
Common stock payable; $0.0001 par value; 361,179,463 and 1,299,969,461
shares, respectively 36,118 129,997
Prepaid equity based compensation (12,493 ) (137,494 )
Additional paid-in capital 7,784,619 7,464,679
Accumulated deficit (9,481,350 ) (8,289,444 )
Total stockholders' deficit (1,439,326 ) (777,645 )
Total liabilities and stockholders' deficit $ 1,006,304 $ 1,008,270
See Accompanying Unaudited Notes to Consolidated Financial Statements
2
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2013 2012
Net revenues
Net revenues $ 423,282 $ 446,060
Net revenues - related parties 165,381 162,066
Total net revenues 588,663 608,126
Cost of net revenues
Cost of net revenues 458,255 457,580
Royalties expense - related parties 14,283 14,966
Total cost of net revenues 472,538 472,546
Gross profit 116,125 135,580
Operating expenses
Selling, general and administrative 561,674 438,071
Research and development costs 15,599 1,877
Total operating expenses 577,273 439,948
Loss from operations (461,148 ) (304,368 )
Other expense, net
Other expense, net 91,779 4,808
Change in derivative liability 565,689 --
Interest expense 68,850 116,775
Interest expense - related parties 657 2,134
Total other expense, net 726,975 123,717
Net loss before provision for income taxes (1,188,123 ) (428,085 )
Provision for income tax expense 3,783 13,116
Net loss $ (1,191,906 ) $ (441,201 )
Basic loss per common share $ (0.00 ) $ (0.01 )
Diluted loss per common share $ (0.00 ) $ (0.01 )
Basic weighted average common
shares outstanding 1,271,681,196 57,572,639
Diluted weighted average common
shares outstanding 1,271,681,196 57,572,639
See Accompanying Unaudited Notes to Consolidated Financial Statements
3
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Prepaid Additional Total
Common stock Preferred stock Common stock payable Equity based paid-in Accumulated stockholders'
Shares Amount Shares Amount Shares Amount compensation capital deficit deficit
Balance, December 31, 2012 541,921,900 $ 54,192 425,000 $ 425 1,299,969,461 $ 129,997 (137,494 ) $ 7,464,679 $ (8,289,444 ) $ (777,645 )
Issuance of stock payable from prior reporting periods 1,149,999,999 115,000 -- -- (1,149,999,999 ) (115,000 ) -- -- -- --
Stock granted for consulting, legal, and other professional services 94,267,713 9,427 -- -- -- -- -- 35,173 -- 44,600
Equity based incentive/retention bonuses to consultants -- -- -- -- 14,000,001 1,400 -- 11,200 -- 12,600
Discounts on convertible debentures -- -- -- -- -- -- -- 58,720 -- 58,720
Equity based compensation and incentive/ retention bonus to Chief Executive Officer -- -- -- -- 194,309,999 19,431 -- 73,998 -- 93,429
Amortization of prepaid equity based compensation to Chief Executive Officer -- -- -- -- -- -- 125,001 -- -- 125,001
Conversion of Board of Director's fees payable to stock 16,666,666 1,667 -- -- -- -- -- 13,333 -- 15,000
Equity based Board of Director fee for first quarter of 2013 plus April fee prepaid 11,111,112 1,111 -- -- -- -- -- 8,889 -- 10,000
Conversion of employee compensation payable to stock 18,992,999 1,899 -- -- -- -- -- 7,101 -- 9,000
Equity based incentive/retention bonuses to employees -- -- -- -- 2,750,001 275 -- 2,200 -- 2,475
Conversion of accrued interest and fees convertible debentures to stock 31,132,413 3,113 -- -- -- -- -- 1,149 -- 4,262
Conversion of convertible debentures to stock 469,455,645 46,946 -- -- -- -- -- 55,279 -- 102,225
Extinguishment of convertible debentures -- -- -- -- -- -- -- 46,913 -- 46,913
Equity based compensation for exclusivity pursuant to agreement with Precision Paddleboards, Inc. -- -- -- -- 150,000 15 -- 5,985 -- 6,000
Net loss -- -- -- -- -- -- -- -- (1,191,906 ) (1,191,906 )
Balance, March 31, 2013 (Unaudited) 2,333,548,447 $ 233,355 425,000 $ 425 361,179,463 $ 36,118 $ (12,493 ) $ 7,784,619 $ (9,481,350 ) $ (1,439,326 )
See Accompanying Unaudited Notes to Consolidated Financial Statements
4
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2013 2012
Cash flows (used in) provided by operating activities:
Net loss $ (1,191,906 ) $ (441,201 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 4,724 9,669
Change in derivative liability 565,689 --
Change in deferred tax asset, net 3,783 13,116
Equity based compensation for consulting and legal services 44,600 79,200
Equity based compensation for product exclusivity 6,000 --
Equity based employee and consultant bonuses 15,075 --
Equity based non-employee Board of Directors' compensation 7,500 --
Accretion of convertible debenture discounts 49,918 81,020
Equity based Chief Executive Officer compensation and bonuses 93,429 --
Amortization of prepaid equity based compensation to Chief Executive Officer 125,001 125,001
Stock issued for supplies and other expensed items -- 9,360
Loss on extinguishment of convertible debentures 93,826 75,865
Gain on forgiveness of legal accrual -- (95,054 )
Changes in operating assets and liabilities:
Change in accounts receivable, net (1,114 ) (20,140 )
Change in accounts receivable - related parties (15,816 ) 9,847
Change in inventory (9,861 ) 119,185
Change in prepaid expenses and other current assets (794 ) (15,637 )
Change in other assets -- (3,888 )
Change in accounts payable and accrued liabilities 150,354 22,542
Change in customer deposits and unearned revenue 45,735 (6,851 )
Change in other liabilities (7,808 ) 42,099
Change in other liabilities and accrued interest - related parties (67,000 ) (2,973 )
Change in royalties payable - related parties 3,703 1,226
Net cash (used in) provided by operating activities (84,962 ) 2,386
Cash flows from investing activities:
Purchase of fixed assets -- (13,980 )
Net cash used in investing activities -- (13,980 )
Cash flows from financing activities:
Proceeds from borrowing on convertible debentures 156,750 133,224
Principal payment on convertible debentures (72,250 ) (95,724 )
Principal payments on note payable (2,924 ) --
Principal payments on note payable - related party (20,158 ) (12,985 )
Net cash provided by financing activities 61,418 24,515
Net change in cash (23,544 ) 12,921
Cash, beginning of period 69,292 27,182
Cash, end of period $ 45,748 $ 40,103
See Accompanying Unaudited Notes to Consolidated Financial Statements
5
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2013 2012
Supplemental disclosures of cash flow information:
Cash paid for interest $ 983 $ 34,736
Cash paid for income taxes $ -- $ --
Supplemental disclosures of non-cash investing activities and future operating activities:
Discounts on convertible debentures $ 58,720 $ 37,500
Stock issued for Non-Employee Board of Director Fees $ 10,000 $ --
Stock and additional paid-in capital for assets purchased from Florida Dive Industries, Inc. $ -- $ 50,040
Conversion of convertible debentures to stock $ 102,225 $ 54,851
Conversion of accrued payroll to stock $ 9,000 $ 45,000
Conversion of accrued interest and fees on convertible debentures to stock $ 10,599 $ 6,298
Conversion of accrued Non-employee Board of Directors fees to stock $ 15,000 $ --
Equity based compensation vesting to Chief Executive Officer $ 93,429 $ --
Equity based compensation vesting for exclusivity pursuant to agreement with Precision Paddleboards, Inc. $ 6,000 $ --
Equity based compensation vesting for employee and consultant incentive/retention bonuses $ 15,075 $ --
See Accompanying Unaudited Notes to Consolidated Financial Statements
6
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business –Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company”, “We”, or “BWMG”) designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, and scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Fort Lauderdale, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. The Company’s common stock is quoted on the OTCBB under the symbol “BWMG”.
Basis of Presentation – The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included.
Definition of fiscal year – The Company’s fiscal year end is December 31.
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications – Certain reclassifications have been made to the 2012 financial statement amounts to conform to the 2013 financial statement presentation.
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 in 2013. We have had a working capital deficit since 2009. Although cured effective the fourth quarter 2010, the Company defaulted on its first mortgage in the third quarter of 2010, which resulted in an automatic default on its second mortgage, and was restructured with a forbearance agreement with a maturity date of May 22, 2012. The Company was notified of default under the forbearance agreement on or around April 27, 2012, and the real estate was foreclosed on and purchased at auction by lender on August 16, 2012. See Note 16. COMMITMENTS AND CONTINGENCIES for further discussion related to the mortgage, forbearance agreement and foreclosure.
The Company is behind on payments due for payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, and certain vendor payables. The Company is handling delinquencies on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue. Payment delinquencies are further addressed in Note 6. RELATED PARTIES TRANSACTIONS , Note 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 9. OTHER LIABILITIES , Note 10. NOTES PAYABLE, and Note 11. CONVERTIBLE DEBENTURES .
7
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Going Concern (continued) – During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of 2012, purchased the assets of another, with assumption of their retail location lease. The Company accomplished both transactions predominantly through issuance of restricted common stock in BWMG. The Company believes these transactions will help generate sufficient working capital in the future. However, neither endeavor is currently generating cash flow or net income. See Note 17. JOINT VENTURE EQUITY TRANSACTION and Note 7. ASSET PURCHASE for further discussion of these transactions. As a result, the Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the second quarter of 2013. This raises substantial doubt about BWMG’s ability to continue as a going concern. The Company will need to raise additional funds and is currently exploring alternative sources of financing. We have issued a number of convertible debentures as an interim measure to finance our working capital needs as discussed in Note 11. CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities. We are paying for many legal and consulting services with restricted stock to maximize working capital. We have implemented some cost saving measures and will continue to explore more to reduce operating expenses.
If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
Inventory – Inventory is stated at the lower of cost or fair market value. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.
Property, Plant, 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.
8
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Product development costs – Product development expenditures are charged to expenses as incurred.
Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the three months ended March 31, 2013 and 2012, was $27,262 and $5,014, respectively.
Customer deposits and returns policy – The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice.
Income taxes – The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Comprehensive income – The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods.
Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value has been determined either through use of the quoted stock price 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.
9
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation (continued) – For the three months ended March 31, 2013 and 2012, the Company amortized prepaid equity based compensation for personal guarantees of related party on Company’s bank debt, and additional compensation expense to the Chief Executive Officer payable in stock when vested. See Note 6. RELATED PARTY TRANSACTIONS for further discussion. For the three months ended March 31, 2013 and 2012, the company granted stock for consulting services. See Note 12. EQUITY BASED COMPENSATION FOR CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES . In addition, for the years ended December 31, 2012 and 2011, the Company recognized equity based incentive and/or retention bonuses for some employees, and consultants, as well as payment in stock of amounts due the non-employee Board of Directors. See Note 20. EQUITY BASED INCENTIVE/RETENTION BONUSES AND CONVERSION OF BOARD OF DIRECTORS’ LIABILITY for further information. Similarly, for the three months ended March 31, 2013 the Company issued 18,992,999 to an employee in satisfaction of $9,000 accrued payroll for the period. In addition, for the three months ended March 31, 2013, the Company recognized $6,000 in operating expense for exclusivity pursuant to strategic alliance agreement payable in stock when vested. See Note 21. STRATEGIC ALLIANCE AGREEMENT for further discussion.
Beneficial conversion features on convertible debentures – The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value. Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries. See Note 11. CONVERTIBLE DEBENTURES for further discussion.
Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.
10
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments (continued) – At March 31, 2013, and December 31, 2012, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of our convertible debentures was the principal balance due at March 31, 2013, and December 31, 2012, or $739,265 and $703,740, respectively, as presented in Note 11 . CONVERTIBLE DEBENTURES . The principal balance due approximates fair value because of the short maturity of these instruments. On the face of the balance sheet the convertible debentures are presented net of discount, which is less than fair market value at period end dates.
Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. All common stock equivalent shares were excluded in the computation for the three months ended March 31, 2013 and 2012, since their effect was antidilutive.
New accounting pronouncements – In January 2013, the Financial Accounting and Standards Board (FASB) issued Accounting Standards Update (“ASU”) ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosure about Offsetting Assets and Liabilities. The ASU clarifies disclosures required for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with Section 310-20-45 or Section 815-10-46 or subject to an enforceable master netting arrangement or similar agreement. The ASU is effective for annual and interim periods beginning after January 1, 2013. The Company adopted the ASU in the period ended March 31, 2013, without significant impact to disclosures to its financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The ASU is effective for annual and interim periods beginning after January 1, 2013. The Company adopted the ASU in the period ended March 31, 2013, without significant impact to financial condition, results of operations, or cash flows.
The Company believes there are no additional new accounting guidance adopted but not yet effective that is relevant to the readers of our financial statements.
2. INVENTORY
Inventory consists of the following as of:
March 31, 2013
December 31, 2012
Raw materials $ 326,120 $ 324,459
Work in process -- --
Finished goods 287,608 279,408
$ 613,728 $ 603,867
11
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets totaling $152,145 at March 31, 2013, consists of $106,403 prepaid inventory, $11,800 engineering deposit, $2,500 prepaid non-employee Board of Director fee, $23,202 prepaid insurance, $5,000 prepaid legal, and $3,240 prepaid rent.
Prepaid expenses and other current assets totaling $148,851 at December 31, 2012, consists of $108,823 prepaid inventory, $11,800 engineering deposit, $10,031 employee advances, $8,457 prepaid insurance, $5,000 prepaid legal, $3,240 prepaid rent, and $1,500 trade show deposit.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of:
March 31, 2013 December 31, 2012
Furniture, fixtures, vehicles and equipment $ 181,296 $ 181,296
Less: accumulated depreciation and amortization (113,739 ) (109,015 )
$ 67,557 $ 72,281
On August 16, 2012 the Company’s real estate foreclosed upon was sold through a court ordered auction. At the foreclosure sale, the lender was highest bidder with a bid of $1,300. On July 17, 2012, the Court entered a Final Judgment of Foreclosure against the Company for $1,123,269, plus post-judgment interest. On December 14, 2012, the lender served the Company with Notice of Final Judgment of Foreclosure. Per the Notice, the lender seeks Final Judgment including post-judgment interest and costs through date of sale of $1,127,643 plus post-judgment interest and related expenses. The lender asserts the fair market value of the property on the date of sale was $1,030,000 and is seeking final judgment against the Company for the shortfall amount between the Final Judgment amount and the fair market value of the property, or approximately $100,000 plus post-judgment interest and related expenses. Accordingly, the Company recorded a foreclosure liability of $110,000 to cover the shortfall plus post-judgment expenses. At the time of the sale, carrying value of the building, building improvements, and land was $1,641,075, mortgage balance was $1,053,997, accrued interest was $15,609, and accrued real estate taxes was $45,006. After reversing all amounts associated with the foreclosed property and recording $110,000 adjustment for difference between the sale and final judgment amount the Company recorded $116,539 loss on foreclosure. The adjustment and loss include $10,000 estimate of post-judgment expenses based on managements’ best judgment, and will be periodically reviewed and adjusted as applicable, and/or settled.
On November 1, 2012, the Company entered into a one year lease on the real estate foreclosed upon, which the Company continues to occupy as it manufacturing facility and headquarters. 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.
5. CUSTOMER CREDIT CONCENTRATIONS
The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer as further discussed in Note 6 – RELATED PARTIES TRANSACTIONS. Combined sales to these entities for the three months ended March 31, 2013 and 2012, represented 27.90% and 26.65%, respectively, of total net revenues. Sales to one unrelated party during the three months ended March 31, 2013 represented 13.30% of total net revenues. Sales to no other customers represented greater than 10% of net revenues for three months ended March 31, 2013, and 2012.
12
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
6. RELATED PARTY TRANSACTIONS
Notes payable – related parties
Notes payable – related parties – consists of the following as of March 31, 2013:
Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013. $ 148,226
Less amounts due within one year 148,226
Long-term portion of notes payable – related parties $ --
As of March 31, 2013, principal payments on the notes payable – related parties are as follows:
2013 $ 148,226
2014 --
2015 --
2016 --
2017 --
Thereafter --
$ 148,226
As of March 31, 2012, the Company was approximately twenty months in arrears on principal payments due under the Note payable to the Chief Executive Officer. 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.
Notes payable – related parties – consists of the following as of December 31, 2012:
Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013. $ 168,384
Less amounts due within one year 168,384
Long-term portion of notes payable – related parties $ --
As of December 31, 2012, the Company was approximately twenty months in arrears on principal payments due under the Note payable to the Chief Executive Officer.
13
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
6. RELATED PARTY TRANSACTIONS (continued)
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 three months ended March 31, 2013 and 2012, was $164,245 and $162,066, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at March 31, 2013, was $34,799, $8,954, and $11,473, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2012, was $24,471, $2,593, and $18,776, respectively. Sales to Pompano Dive Center for the three months ended March 31, 2013 was $11,473. Accounts Receivable from Pompano Dive Center was $12,293 at March 31, 2013. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further discussion regarding Pompano Dive Center, Sales to the Company’s Chief Executive Officer for the three months ended March 31, 2013 was $50.
Royalties expense – related parties – The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns. Under the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing 5% annually. Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three months ended March 31, 2013 and 2012, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of December 31, 2012, the Company was approximately twenty-six months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.
Non-employee Board of Director – Non-employee Board of Director (BOD) compensation is $2,500 per month. Non-Employee BOD fees for the three months ended March 31, 2013 and 2012, was $15,000 and $7,500, respectively. One of the two non-employee Board of Directors (“BOD”), Wesley Armstrong, of the three person BOD, which included the Chief Executive Officer, resigned his position on April 18, 2012. As of December 31, 2012, $22,500 of the accrued BOD fees had been converted to stock, leaving $15,000 still due and unpaid, $7,500 due to Wesley Armstrong from first quarter of 2012, and $7,500 due Mikkel Pitzner from fourth quarter of 2012. Because the remaining non-employee BOD, Mikkel Pitzner, now accounts for 50% of the BOD, the Company reclassified him to related party as of April 2012. See Other liabilities and accrued interest - related parties below for inclusion of the $7,500 payable to him as of December 31, 2102. Prior to April 2012, the two non-employee BOD were not classified as related parties. The $7,500 payable to the non-employee director that resigned is included in other liabilities at December 31, 2012. During the three months ended March 31, 2013, the liability due both non-employee BODs was satisfied with stock. Further, first quarter 2013 BOD fees due Mr. Pitzner plus April 2013 prepaid BOD fee was satisfied with stock during the three months ended March 31, 2013. On June 20, 2012, Mr. Pitzner converted a $20,000 short-term loan to 2,666,667 restricted shares payable per BOD consent. Conversion price per share was $.0075, which was the same price granted to another unrelated equity investor. In addition, on February 23, 2013 the Company declared a bonus payable for the year ended 2012 for certain employees, service providers, and consultants. As part of this bonus, Mikkel Pitzner was awarded 243,333,333 shares of restricted stock valued at $.0003 per share price on the date of the transaction, or $73,000. This amount is included in operating expenses and on the statement of stockholders’ deficit as shares payable as of and for the year ended December 31, 2012. The shares were issued to Mr. Pitzner during the first quarter ended March 31, 2013.
14
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
6. RELATED PARTY TRANSACTIONS (continued)
Patent purchase agreements – In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the Company of patents previously subject to Non-Exclusive License Agreements. Effective September 24, 2010, the Company finalized and executed terms of the purchase from CRC for payment of $25,500 and 371,250 shares of the Company’s common stock. In addition, the principals of CRC are entitled to a percentage of future sales amounting to $8,250 of products the Company is to receive in conjunction with two patent infringement lawsuits settled in the third quarter of 2010. For financial reporting purposes the Company valued the group of patents at $0 which is the lower of CRC’s historical cost as compared to the fair market value of the stock. Accordingly, the Company realized $182,250 loss on the transaction comprised of $148,500 fair market value of the stock on the September, 30, 2010 grant date less the $0 historical cost, plus the $25,500 cash, plus the $8,250 liability. See Other liabilities and accrued interest– related parties below for inclusion of $6,017 remaining on the liability due the Principals of CRC. By acquiring the IP the Company (i) has an opportunity to further develop the IP, (ii) has the ability to incorporate the IP into current and future products, and (iii) has the opportunity to license the IP to third parties.
Other liabilities and accrued interest– related parties
Other liabilities and accrued interest– related parties consists of the following at:
March 31, 2012
December 31, 2012
Year-end bonus payable to Chief Executive Officer $ 67,000 $ 67,000
BOD fee payable to non-employee – related party -- 7,500
Due to Principals of Carleigh Rae Corp., net 6,017 6,017
Other liabilities – related parties $ 73,017 $ 80,517
The $6,017 due to the Principals of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company and is discussed above as is the non-employee BOD Fee.
Restricted common stock issued for personal guarantee – On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 20,000,000 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, if Mr. Carmichael continues his full time employment with the Company. The company valued the stock at $.05 per share and will record $1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expire. The unearned balance of the compensation is recorded as prepaid compensation as a component of shareholders’ deficit. As of the three months ended March 31, 2013 and 2012, the Company recognized $125,001 and $125,001, respectively, as amortization of prepaid compensation under this agreement. Prepaid compensation remaining under this agreement as of March 31, 2013, and December 31, 2012, was $12,493 and $137,494, respectively, and is reflected as a component of Stockholders’ Deficit.
Equity based compensation for Chief Executive Officer and non-employee Board of Directors Bonuses and fees – On November 2, 2012 the Board of Directors 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 as $.0009 based on last closing price per the OCBB for a total of $75,100. The number of shares that will be set aside and reserved for this transaction is 80,500,000. Of the 80,500,000 shares, 50,000,000 shares were awarded to the Chief Executive Officer, or $45,000 of the $75,100 of the fair market value of the bonuses. The Company will record compensation expense ratably over the vesting period. All equity based compensation to the Chief Executive Officer is reflected on the face of the Statement of Stockholders’ Deficit. In addition, on February 23, 2013 the Company declared a bonus payable for the year ended 2012 for certain employees, service providers, and consultants. As part of this bonus, Mikkel Pitzner was awarded 243,333,333 shares of restricted stock valued at $.0003 per share price on the date of the transaction, or $73,000. This amount is included in operating expenses and on the face of the statement of stockholders’ deficit as shares payable as of and for the year ended December 31, 2012. In addition, on February 23, 2013 the Company declared a bonus payable for the year ended 2012 for certain employees, service providers, and consultants. As part of this bonus, the Chief Executive Officer was awarded $67,000 to be paid out in cash or stock based on later determination by the BOD. This amount is included in operating expense for the year ended December 31, 2012. See table above for inclusion in other liabilities and accrued interest – related parties. See Note 20. EQUITY BASED INCENTIVE/RETENTION BONUSES AND CONVERSION OF BOARD OF DIRECTORS’ LIABILITY for further discussion.
15
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
6. RELATED PARTY TRANSACTIONS (continued)
Equity Based Compensation for Chief Executive Officer – Pursuant to a Written Consent of the Board of Directors (BOD) of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012, the BOD declared a $83,333 bonus due the Chief Executive Officer payable in 6,944,444 shares of restricted stock. The shares vested as of January 2, 2013. The grant price per share of $.012 was based on the closing price of the stock on May 31, 2012. For accounting purposes, the Company recognized $83,333 operating expense ratably over the seven months the share vested. Further, 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. The shares will not vest until six months after the last day of each month, continued employment is also a requirement for vesting, and shares will not be issuable until vested. The Company will record $23,801 operating expense each month related to the salary increase, which is $16,667 with the discount added back to record at full monthly weighted average price per market.
7. ASSET PURCHASE
On February 3, 2012, the Company entered into an asset purchase agreement with Florida Dive Industries, Inc. (“Seller”). On March 5, 2012, the same parties executed an amendment (“Amendment”) to the agreement (collectively, the “Agreement”). Under the terms of the Agreement, the Company acquired certain diving and related inventory, and Seller provided a three year non-compete agreement within a 10-mile wide radius. In addition, the Company assumed a commercial lease obligation for a retail dive store in Boca Raton, Florida beginning in April 1, 2012. The lease is automatically renewable on an annual basis through May 31, 2014, with 90 days written notice assuming the Leasee is in compliance with all terms of the lease. The lease amount is base rental plus an allocated amount of common areas maintenance (‘CAM”). Base rental increases annually by the greater of 5% or the annual consumer price index. The current monthly rental including CAM at the time of assignment is approximately $3,200.
As a purchase price, the Company agreed to pay Seller, on a monthly basis, beginning April 1, 2012, and thereafter until May 13, 2013, in equal payments, the total cash purchase price of $22,500. In addition, the Company was to issue Seller 2,200,000 shares of restricted stock as part of the purchase price as provided for in the Amendment. The fair market value of the Company’s 2,200,000 shares of restricted stock on March 5, 2012, was $59,400, or $.027 per share. Both the restricted stock and the monthly payments due Seller were maintained in an escrow account for six months as a purchase price holdback for contingent liabilities not otherwise settled by Seller. If such items including rent and any building or zoning code violations had not been paid by Seller during this period, the Company would settle said liabilities with the purchase price holdback. On October 26, 2012, the Company issued the seller the 2,200,000 shares previous heldback. As of March 31, 2013, the Company had paid Seller $9,643 toward the $22,500 cash purchase price leaving a balance of $12,857.
Quarterly Report (10-q)
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(mark one)
þ Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934
For the quarterly period ended March 31, 2013
o Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______.
Commission File No. 333-99393
Brownie’s Marine Group, Inc.
(Name of Small Business Issuer in Its Charter)
Nevada 90-0226181
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
940 N.W. 1 st Street, Fort Lauderdale, Florida 33311
(Address of Principal Executive Offices) (Zip Code)
(954) 462-5570
(Issuer’s Telephone Number, Including Area Code)
(Former Name, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Website, in any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes ¨ No x
There were 2,517,133,137 shares of common stock outstanding as of April 26, 2013.
PART I
Item 1. Financial Statements
Financial Information
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2013 2012
ASSETS
Current assets
Cash $ 45,748 $ 69,292
Accounts receivable, net of $44,000 and $36,000 allowance
for doubtful accounts, respectively 21,670 20,556
Accounts receivable - related parties 67,519 51,703
Inventory 613,728 603,867
Prepaid expenses and other current assets 152,145 148,851
Deferred tax asset, net - current 277 304
Total current assets 901,087 894,573
Furniture, fixtures and equipment, net 67,557 72,281
Deferred tax asset, net - non-current 6,025 9,781
Other assets 31,635 31,635
Total assets $ 1,006,304 $ 1,008,270
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities $ 564,970 $ 508,715
Customer deposits and unearned revenue 99,413 53,678
Royalties payable - related parties 141,266 137,563
Other liabilities 163,019 170,827
Other liabilities and accrued interest - related parties 73,017 80,517
Convertible debentures, net 665,390 638,667
Derivative liability 565,689 --
Notes payable - current portion 12,067 12,152
Notes payable - related parties - current portion 148,226 168,384
Total current liabilities 2,433,057 1,770,503
Long-term liabilities
Notes payable - long-term portion 12,573 15,412
Notes payable - related parties - long-term portion -- --
Total liabilities 2,445,630 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;
3,678,090,568 and 3,182,745,767 shares issued, respectively;
2,333,548,447 and 541,921,900 shares outstanding, respectively 233,355 54,192
Common stock payable; $0.0001 par value; 361,179,463 and 1,299,969,461
shares, respectively 36,118 129,997
Prepaid equity based compensation (12,493 ) (137,494 )
Additional paid-in capital 7,784,619 7,464,679
Accumulated deficit (9,481,350 ) (8,289,444 )
Total stockholders' deficit (1,439,326 ) (777,645 )
Total liabilities and stockholders' deficit $ 1,006,304 $ 1,008,270
See Accompanying Unaudited Notes to Consolidated Financial Statements
2
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2013 2012
Net revenues
Net revenues $ 423,282 $ 446,060
Net revenues - related parties 165,381 162,066
Total net revenues 588,663 608,126
Cost of net revenues
Cost of net revenues 458,255 457,580
Royalties expense - related parties 14,283 14,966
Total cost of net revenues 472,538 472,546
Gross profit 116,125 135,580
Operating expenses
Selling, general and administrative 561,674 438,071
Research and development costs 15,599 1,877
Total operating expenses 577,273 439,948
Loss from operations (461,148 ) (304,368 )
Other expense, net
Other expense, net 91,779 4,808
Change in derivative liability 565,689 --
Interest expense 68,850 116,775
Interest expense - related parties 657 2,134
Total other expense, net 726,975 123,717
Net loss before provision for income taxes (1,188,123 ) (428,085 )
Provision for income tax expense 3,783 13,116
Net loss $ (1,191,906 ) $ (441,201 )
Basic loss per common share $ (0.00 ) $ (0.01 )
Diluted loss per common share $ (0.00 ) $ (0.01 )
Basic weighted average common
shares outstanding 1,271,681,196 57,572,639
Diluted weighted average common
shares outstanding 1,271,681,196 57,572,639
See Accompanying Unaudited Notes to Consolidated Financial Statements
3
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Prepaid Additional Total
Common stock Preferred stock Common stock payable Equity based paid-in Accumulated stockholders'
Shares Amount Shares Amount Shares Amount compensation capital deficit deficit
Balance, December 31, 2012 541,921,900 $ 54,192 425,000 $ 425 1,299,969,461 $ 129,997 (137,494 ) $ 7,464,679 $ (8,289,444 ) $ (777,645 )
Issuance of stock payable from prior reporting periods 1,149,999,999 115,000 -- -- (1,149,999,999 ) (115,000 ) -- -- -- --
Stock granted for consulting, legal, and other professional services 94,267,713 9,427 -- -- -- -- -- 35,173 -- 44,600
Equity based incentive/retention bonuses to consultants -- -- -- -- 14,000,001 1,400 -- 11,200 -- 12,600
Discounts on convertible debentures -- -- -- -- -- -- -- 58,720 -- 58,720
Equity based compensation and incentive/ retention bonus to Chief Executive Officer -- -- -- -- 194,309,999 19,431 -- 73,998 -- 93,429
Amortization of prepaid equity based compensation to Chief Executive Officer -- -- -- -- -- -- 125,001 -- -- 125,001
Conversion of Board of Director's fees payable to stock 16,666,666 1,667 -- -- -- -- -- 13,333 -- 15,000
Equity based Board of Director fee for first quarter of 2013 plus April fee prepaid 11,111,112 1,111 -- -- -- -- -- 8,889 -- 10,000
Conversion of employee compensation payable to stock 18,992,999 1,899 -- -- -- -- -- 7,101 -- 9,000
Equity based incentive/retention bonuses to employees -- -- -- -- 2,750,001 275 -- 2,200 -- 2,475
Conversion of accrued interest and fees convertible debentures to stock 31,132,413 3,113 -- -- -- -- -- 1,149 -- 4,262
Conversion of convertible debentures to stock 469,455,645 46,946 -- -- -- -- -- 55,279 -- 102,225
Extinguishment of convertible debentures -- -- -- -- -- -- -- 46,913 -- 46,913
Equity based compensation for exclusivity pursuant to agreement with Precision Paddleboards, Inc. -- -- -- -- 150,000 15 -- 5,985 -- 6,000
Net loss -- -- -- -- -- -- -- -- (1,191,906 ) (1,191,906 )
Balance, March 31, 2013 (Unaudited) 2,333,548,447 $ 233,355 425,000 $ 425 361,179,463 $ 36,118 $ (12,493 ) $ 7,784,619 $ (9,481,350 ) $ (1,439,326 )
See Accompanying Unaudited Notes to Consolidated Financial Statements
4
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2013 2012
Cash flows (used in) provided by operating activities:
Net loss $ (1,191,906 ) $ (441,201 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 4,724 9,669
Change in derivative liability 565,689 --
Change in deferred tax asset, net 3,783 13,116
Equity based compensation for consulting and legal services 44,600 79,200
Equity based compensation for product exclusivity 6,000 --
Equity based employee and consultant bonuses 15,075 --
Equity based non-employee Board of Directors' compensation 7,500 --
Accretion of convertible debenture discounts 49,918 81,020
Equity based Chief Executive Officer compensation and bonuses 93,429 --
Amortization of prepaid equity based compensation to Chief Executive Officer 125,001 125,001
Stock issued for supplies and other expensed items -- 9,360
Loss on extinguishment of convertible debentures 93,826 75,865
Gain on forgiveness of legal accrual -- (95,054 )
Changes in operating assets and liabilities:
Change in accounts receivable, net (1,114 ) (20,140 )
Change in accounts receivable - related parties (15,816 ) 9,847
Change in inventory (9,861 ) 119,185
Change in prepaid expenses and other current assets (794 ) (15,637 )
Change in other assets -- (3,888 )
Change in accounts payable and accrued liabilities 150,354 22,542
Change in customer deposits and unearned revenue 45,735 (6,851 )
Change in other liabilities (7,808 ) 42,099
Change in other liabilities and accrued interest - related parties (67,000 ) (2,973 )
Change in royalties payable - related parties 3,703 1,226
Net cash (used in) provided by operating activities (84,962 ) 2,386
Cash flows from investing activities:
Purchase of fixed assets -- (13,980 )
Net cash used in investing activities -- (13,980 )
Cash flows from financing activities:
Proceeds from borrowing on convertible debentures 156,750 133,224
Principal payment on convertible debentures (72,250 ) (95,724 )
Principal payments on note payable (2,924 ) --
Principal payments on note payable - related party (20,158 ) (12,985 )
Net cash provided by financing activities 61,418 24,515
Net change in cash (23,544 ) 12,921
Cash, beginning of period 69,292 27,182
Cash, end of period $ 45,748 $ 40,103
See Accompanying Unaudited Notes to Consolidated Financial Statements
5
BROWNIE'S MARINE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2013 2012
Supplemental disclosures of cash flow information:
Cash paid for interest $ 983 $ 34,736
Cash paid for income taxes $ -- $ --
Supplemental disclosures of non-cash investing activities and future operating activities:
Discounts on convertible debentures $ 58,720 $ 37,500
Stock issued for Non-Employee Board of Director Fees $ 10,000 $ --
Stock and additional paid-in capital for assets purchased from Florida Dive Industries, Inc. $ -- $ 50,040
Conversion of convertible debentures to stock $ 102,225 $ 54,851
Conversion of accrued payroll to stock $ 9,000 $ 45,000
Conversion of accrued interest and fees on convertible debentures to stock $ 10,599 $ 6,298
Conversion of accrued Non-employee Board of Directors fees to stock $ 15,000 $ --
Equity based compensation vesting to Chief Executive Officer $ 93,429 $ --
Equity based compensation vesting for exclusivity pursuant to agreement with Precision Paddleboards, Inc. $ 6,000 $ --
Equity based compensation vesting for employee and consultant incentive/retention bonuses $ 15,075 $ --
See Accompanying Unaudited Notes to Consolidated Financial Statements
6
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business –Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company”, “We”, or “BWMG”) designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, and scuba and water safety products through its wholly owned subsidiary Trebor Industries, Inc. The Company sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Fort Lauderdale, Florida. The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. The Company’s common stock is quoted on the OTCBB under the symbol “BWMG”.
Basis of Presentation – The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included.
Definition of fiscal year – The Company’s fiscal year end is December 31.
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications – Certain reclassifications have been made to the 2012 financial statement amounts to conform to the 2013 financial statement presentation.
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 in 2013. We have had a working capital deficit since 2009. Although cured effective the fourth quarter 2010, the Company defaulted on its first mortgage in the third quarter of 2010, which resulted in an automatic default on its second mortgage, and was restructured with a forbearance agreement with a maturity date of May 22, 2012. The Company was notified of default under the forbearance agreement on or around April 27, 2012, and the real estate was foreclosed on and purchased at auction by lender on August 16, 2012. See Note 16. COMMITMENTS AND CONTINGENCIES for further discussion related to the mortgage, forbearance agreement and foreclosure.
The Company is behind on payments due for payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, and certain vendor payables. The Company is handling delinquencies on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue. Payment delinquencies are further addressed in Note 6. RELATED PARTIES TRANSACTIONS , Note 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 9. OTHER LIABILITIES , Note 10. NOTES PAYABLE, and Note 11. CONVERTIBLE DEBENTURES .
7
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Going Concern (continued) – During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of 2012, purchased the assets of another, with assumption of their retail location lease. The Company accomplished both transactions predominantly through issuance of restricted common stock in BWMG. The Company believes these transactions will help generate sufficient working capital in the future. However, neither endeavor is currently generating cash flow or net income. See Note 17. JOINT VENTURE EQUITY TRANSACTION and Note 7. ASSET PURCHASE for further discussion of these transactions. As a result, the Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the second quarter of 2013. This raises substantial doubt about BWMG’s ability to continue as a going concern. The Company will need to raise additional funds and is currently exploring alternative sources of financing. We have issued a number of convertible debentures as an interim measure to finance our working capital needs as discussed in Note 11. CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities. We are paying for many legal and consulting services with restricted stock to maximize working capital. We have implemented some cost saving measures and will continue to explore more to reduce operating expenses.
If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
Inventory – Inventory is stated at the lower of cost or fair market value. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.
Property, Plant, 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.
8
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Product development costs – Product development expenditures are charged to expenses as incurred.
Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the three months ended March 31, 2013 and 2012, was $27,262 and $5,014, respectively.
Customer deposits and returns policy – The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice.
Income taxes – The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Comprehensive income – The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods.
Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value has been determined either through use of the quoted stock price 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.
9
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation (continued) – For the three months ended March 31, 2013 and 2012, the Company amortized prepaid equity based compensation for personal guarantees of related party on Company’s bank debt, and additional compensation expense to the Chief Executive Officer payable in stock when vested. See Note 6. RELATED PARTY TRANSACTIONS for further discussion. For the three months ended March 31, 2013 and 2012, the company granted stock for consulting services. See Note 12. EQUITY BASED COMPENSATION FOR CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES . In addition, for the years ended December 31, 2012 and 2011, the Company recognized equity based incentive and/or retention bonuses for some employees, and consultants, as well as payment in stock of amounts due the non-employee Board of Directors. See Note 20. EQUITY BASED INCENTIVE/RETENTION BONUSES AND CONVERSION OF BOARD OF DIRECTORS’ LIABILITY for further information. Similarly, for the three months ended March 31, 2013 the Company issued 18,992,999 to an employee in satisfaction of $9,000 accrued payroll for the period. In addition, for the three months ended March 31, 2013, the Company recognized $6,000 in operating expense for exclusivity pursuant to strategic alliance agreement payable in stock when vested. See Note 21. STRATEGIC ALLIANCE AGREEMENT for further discussion.
Beneficial conversion features on convertible debentures – The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value. Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries. See Note 11. CONVERTIBLE DEBENTURES for further discussion.
Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.
10
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments (continued) – At March 31, 2013, and December 31, 2012, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of our convertible debentures was the principal balance due at March 31, 2013, and December 31, 2012, or $739,265 and $703,740, respectively, as presented in Note 11 . CONVERTIBLE DEBENTURES . The principal balance due approximates fair value because of the short maturity of these instruments. On the face of the balance sheet the convertible debentures are presented net of discount, which is less than fair market value at period end dates.
Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. All common stock equivalent shares were excluded in the computation for the three months ended March 31, 2013 and 2012, since their effect was antidilutive.
New accounting pronouncements – In January 2013, the Financial Accounting and Standards Board (FASB) issued Accounting Standards Update (“ASU”) ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosure about Offsetting Assets and Liabilities. The ASU clarifies disclosures required for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with Section 310-20-45 or Section 815-10-46 or subject to an enforceable master netting arrangement or similar agreement. The ASU is effective for annual and interim periods beginning after January 1, 2013. The Company adopted the ASU in the period ended March 31, 2013, without significant impact to disclosures to its financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The ASU is effective for annual and interim periods beginning after January 1, 2013. The Company adopted the ASU in the period ended March 31, 2013, without significant impact to financial condition, results of operations, or cash flows.
The Company believes there are no additional new accounting guidance adopted but not yet effective that is relevant to the readers of our financial statements.
2. INVENTORY
Inventory consists of the following as of:
March 31, 2013
December 31, 2012
Raw materials $ 326,120 $ 324,459
Work in process -- --
Finished goods 287,608 279,408
$ 613,728 $ 603,867
11
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets totaling $152,145 at March 31, 2013, consists of $106,403 prepaid inventory, $11,800 engineering deposit, $2,500 prepaid non-employee Board of Director fee, $23,202 prepaid insurance, $5,000 prepaid legal, and $3,240 prepaid rent.
Prepaid expenses and other current assets totaling $148,851 at December 31, 2012, consists of $108,823 prepaid inventory, $11,800 engineering deposit, $10,031 employee advances, $8,457 prepaid insurance, $5,000 prepaid legal, $3,240 prepaid rent, and $1,500 trade show deposit.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of:
March 31, 2013 December 31, 2012
Furniture, fixtures, vehicles and equipment $ 181,296 $ 181,296
Less: accumulated depreciation and amortization (113,739 ) (109,015 )
$ 67,557 $ 72,281
On August 16, 2012 the Company’s real estate foreclosed upon was sold through a court ordered auction. At the foreclosure sale, the lender was highest bidder with a bid of $1,300. On July 17, 2012, the Court entered a Final Judgment of Foreclosure against the Company for $1,123,269, plus post-judgment interest. On December 14, 2012, the lender served the Company with Notice of Final Judgment of Foreclosure. Per the Notice, the lender seeks Final Judgment including post-judgment interest and costs through date of sale of $1,127,643 plus post-judgment interest and related expenses. The lender asserts the fair market value of the property on the date of sale was $1,030,000 and is seeking final judgment against the Company for the shortfall amount between the Final Judgment amount and the fair market value of the property, or approximately $100,000 plus post-judgment interest and related expenses. Accordingly, the Company recorded a foreclosure liability of $110,000 to cover the shortfall plus post-judgment expenses. At the time of the sale, carrying value of the building, building improvements, and land was $1,641,075, mortgage balance was $1,053,997, accrued interest was $15,609, and accrued real estate taxes was $45,006. After reversing all amounts associated with the foreclosed property and recording $110,000 adjustment for difference between the sale and final judgment amount the Company recorded $116,539 loss on foreclosure. The adjustment and loss include $10,000 estimate of post-judgment expenses based on managements’ best judgment, and will be periodically reviewed and adjusted as applicable, and/or settled.
On November 1, 2012, the Company entered into a one year lease on the real estate foreclosed upon, which the Company continues to occupy as it manufacturing facility and headquarters. 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.
5. CUSTOMER CREDIT CONCENTRATIONS
The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer as further discussed in Note 6 – RELATED PARTIES TRANSACTIONS. Combined sales to these entities for the three months ended March 31, 2013 and 2012, represented 27.90% and 26.65%, respectively, of total net revenues. Sales to one unrelated party during the three months ended March 31, 2013 represented 13.30% of total net revenues. Sales to no other customers represented greater than 10% of net revenues for three months ended March 31, 2013, and 2012.
12
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
6. RELATED PARTY TRANSACTIONS
Notes payable – related parties
Notes payable – related parties – consists of the following as of March 31, 2013:
Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013. $ 148,226
Less amounts due within one year 148,226
Long-term portion of notes payable – related parties $ --
As of March 31, 2013, principal payments on the notes payable – related parties are as follows:
2013 $ 148,226
2014 --
2015 --
2016 --
2017 --
Thereafter --
$ 148,226
As of March 31, 2012, the Company was approximately twenty months in arrears on principal payments due under the Note payable to the Chief Executive Officer. 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.
Notes payable – related parties – consists of the following as of December 31, 2012:
Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013. $ 168,384
Less amounts due within one year 168,384
Long-term portion of notes payable – related parties $ --
As of December 31, 2012, the Company was approximately twenty months in arrears on principal payments due under the Note payable to the Chief Executive Officer.
13
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
6. RELATED PARTY TRANSACTIONS (continued)
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 three months ended March 31, 2013 and 2012, was $164,245 and $162,066, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at March 31, 2013, was $34,799, $8,954, and $11,473, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2012, was $24,471, $2,593, and $18,776, respectively. Sales to Pompano Dive Center for the three months ended March 31, 2013 was $11,473. Accounts Receivable from Pompano Dive Center was $12,293 at March 31, 2013. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further discussion regarding Pompano Dive Center, Sales to the Company’s Chief Executive Officer for the three months ended March 31, 2013 was $50.
Royalties expense – related parties – The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns. Under the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing 5% annually. Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three months ended March 31, 2013 and 2012, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of December 31, 2012, the Company was approximately twenty-six months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.
Non-employee Board of Director – Non-employee Board of Director (BOD) compensation is $2,500 per month. Non-Employee BOD fees for the three months ended March 31, 2013 and 2012, was $15,000 and $7,500, respectively. One of the two non-employee Board of Directors (“BOD”), Wesley Armstrong, of the three person BOD, which included the Chief Executive Officer, resigned his position on April 18, 2012. As of December 31, 2012, $22,500 of the accrued BOD fees had been converted to stock, leaving $15,000 still due and unpaid, $7,500 due to Wesley Armstrong from first quarter of 2012, and $7,500 due Mikkel Pitzner from fourth quarter of 2012. Because the remaining non-employee BOD, Mikkel Pitzner, now accounts for 50% of the BOD, the Company reclassified him to related party as of April 2012. See Other liabilities and accrued interest - related parties below for inclusion of the $7,500 payable to him as of December 31, 2102. Prior to April 2012, the two non-employee BOD were not classified as related parties. The $7,500 payable to the non-employee director that resigned is included in other liabilities at December 31, 2012. During the three months ended March 31, 2013, the liability due both non-employee BODs was satisfied with stock. Further, first quarter 2013 BOD fees due Mr. Pitzner plus April 2013 prepaid BOD fee was satisfied with stock during the three months ended March 31, 2013. On June 20, 2012, Mr. Pitzner converted a $20,000 short-term loan to 2,666,667 restricted shares payable per BOD consent. Conversion price per share was $.0075, which was the same price granted to another unrelated equity investor. In addition, on February 23, 2013 the Company declared a bonus payable for the year ended 2012 for certain employees, service providers, and consultants. As part of this bonus, Mikkel Pitzner was awarded 243,333,333 shares of restricted stock valued at $.0003 per share price on the date of the transaction, or $73,000. This amount is included in operating expenses and on the statement of stockholders’ deficit as shares payable as of and for the year ended December 31, 2012. The shares were issued to Mr. Pitzner during the first quarter ended March 31, 2013.
14
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
6. RELATED PARTY TRANSACTIONS (continued)
Patent purchase agreements – In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the Company of patents previously subject to Non-Exclusive License Agreements. Effective September 24, 2010, the Company finalized and executed terms of the purchase from CRC for payment of $25,500 and 371,250 shares of the Company’s common stock. In addition, the principals of CRC are entitled to a percentage of future sales amounting to $8,250 of products the Company is to receive in conjunction with two patent infringement lawsuits settled in the third quarter of 2010. For financial reporting purposes the Company valued the group of patents at $0 which is the lower of CRC’s historical cost as compared to the fair market value of the stock. Accordingly, the Company realized $182,250 loss on the transaction comprised of $148,500 fair market value of the stock on the September, 30, 2010 grant date less the $0 historical cost, plus the $25,500 cash, plus the $8,250 liability. See Other liabilities and accrued interest– related parties below for inclusion of $6,017 remaining on the liability due the Principals of CRC. By acquiring the IP the Company (i) has an opportunity to further develop the IP, (ii) has the ability to incorporate the IP into current and future products, and (iii) has the opportunity to license the IP to third parties.
Other liabilities and accrued interest– related parties
Other liabilities and accrued interest– related parties consists of the following at:
March 31, 2012
December 31, 2012
Year-end bonus payable to Chief Executive Officer $ 67,000 $ 67,000
BOD fee payable to non-employee – related party -- 7,500
Due to Principals of Carleigh Rae Corp., net 6,017 6,017
Other liabilities – related parties $ 73,017 $ 80,517
The $6,017 due to the Principals of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company and is discussed above as is the non-employee BOD Fee.
Restricted common stock issued for personal guarantee – On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 20,000,000 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, if Mr. Carmichael continues his full time employment with the Company. The company valued the stock at $.05 per share and will record $1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expire. The unearned balance of the compensation is recorded as prepaid compensation as a component of shareholders’ deficit. As of the three months ended March 31, 2013 and 2012, the Company recognized $125,001 and $125,001, respectively, as amortization of prepaid compensation under this agreement. Prepaid compensation remaining under this agreement as of March 31, 2013, and December 31, 2012, was $12,493 and $137,494, respectively, and is reflected as a component of Stockholders’ Deficit.
Equity based compensation for Chief Executive Officer and non-employee Board of Directors Bonuses and fees – On November 2, 2012 the Board of Directors 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 as $.0009 based on last closing price per the OCBB for a total of $75,100. The number of shares that will be set aside and reserved for this transaction is 80,500,000. Of the 80,500,000 shares, 50,000,000 shares were awarded to the Chief Executive Officer, or $45,000 of the $75,100 of the fair market value of the bonuses. The Company will record compensation expense ratably over the vesting period. All equity based compensation to the Chief Executive Officer is reflected on the face of the Statement of Stockholders’ Deficit. In addition, on February 23, 2013 the Company declared a bonus payable for the year ended 2012 for certain employees, service providers, and consultants. As part of this bonus, Mikkel Pitzner was awarded 243,333,333 shares of restricted stock valued at $.0003 per share price on the date of the transaction, or $73,000. This amount is included in operating expenses and on the face of the statement of stockholders’ deficit as shares payable as of and for the year ended December 31, 2012. In addition, on February 23, 2013 the Company declared a bonus payable for the year ended 2012 for certain employees, service providers, and consultants. As part of this bonus, the Chief Executive Officer was awarded $67,000 to be paid out in cash or stock based on later determination by the BOD. This amount is included in operating expense for the year ended December 31, 2012. See table above for inclusion in other liabilities and accrued interest – related parties. See Note 20. EQUITY BASED INCENTIVE/RETENTION BONUSES AND CONVERSION OF BOARD OF DIRECTORS’ LIABILITY for further discussion.
15
BROWNIE’S MARINE GROUP, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL
6. RELATED PARTY TRANSACTIONS (continued)
Equity Based Compensation for Chief Executive Officer – Pursuant to a Written Consent of the Board of Directors (BOD) of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012, the BOD declared a $83,333 bonus due the Chief Executive Officer payable in 6,944,444 shares of restricted stock. The shares vested as of January 2, 2013. The grant price per share of $.012 was based on the closing price of the stock on May 31, 2012. For accounting purposes, the Company recognized $83,333 operating expense ratably over the seven months the share vested. Further, 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. The shares will not vest until six months after the last day of each month, continued employment is also a requirement for vesting, and shares will not be issuable until vested. The Company will record $23,801 operating expense each month related to the salary increase, which is $16,667 with the discount added back to record at full monthly weighted average price per market.
7. ASSET PURCHASE
On February 3, 2012, the Company entered into an asset purchase agreement with Florida Dive Industries, Inc. (“Seller”). On March 5, 2012, the same parties executed an amendment (“Amendment”) to the agreement (collectively, the “Agreement”). Under the terms of the Agreement, the Company acquired certain diving and related inventory, and Seller provided a three year non-compete agreement within a 10-mile wide radius. In addition, the Company assumed a commercial lease obligation for a retail dive store in Boca Raton, Florida beginning in April 1, 2012. The lease is automatically renewable on an annual basis through May 31, 2014, with 90 days written notice assuming the Leasee is in compliance with all terms of the lease. The lease amount is base rental plus an allocated amount of common areas maintenance (‘CAM”). Base rental increases annually by the greater of 5% or the annual consumer price index. The current monthly rental including CAM at the time of assignment is approximately $3,200.
As a purchase price, the Company agreed to pay Seller, on a monthly basis, beginning April 1, 2012, and thereafter until May 13, 2013, in equal payments, the total cash purchase price of $22,500. In addition, the Company was to issue Seller 2,200,000 shares of restricted stock as part of the purchase price as provided for in the Amendment. The fair market value of the Company’s 2,200,000 shares of restricted stock on March 5, 2012, was $59,400, or $.027 per share. Both the restricted stock and the monthly payments due Seller were maintained in an escrow account for six months as a purchase price holdback for contingent liabilities not otherwise settled by Seller. If such items including rent and any building or zoning code violations had not been paid by Seller during this period, the Company would settle said liabilities with the purchase price holdback. On October 26, 2012, the Company issued the seller the 2,200,000 shares previous heldback. As of March 31, 2013, the Company had paid Seller $9,643 toward the $22,500 cash purchase price leaving a balance of $12,857.
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