BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 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”.
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 2010 financial statement amounts to conform to the 2011 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 through 2011. 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 further discussed in Note. 9. NOTES PAYABLE.
In addition, the Company is behind on payments due for accrued payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, a note payable due an unrelated party, and certain vendor payables. While the Company has received no formal notices of default and is working out these matters on a case by case basis, 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 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 8. OTHER LIABILITIES, Note 9. NOTES PAYABLE, and Note 10. CONVERTIBLE DEBENTURES.
During the third quarter of 2010, the Company settled several lawsuits for infringement of one of the Company’s patents. The settlement was in the form of cash and inventory credits, and the Company was granted exclusive distributor rights in the United States of the products of the settling parties, as well as non-exclusive distributor rights for others as further discussed in Note 15. PATENT INFRINGEMENT SETTLEMENTS. In addition, the Company introduced some of its own new products to market in mid 2010, including the variable speed electric and battery powered diving units. We believe the combined addition of these products to complement the sales of our other products will allow us to generate enough sales to supply us with sufficient working capital in the future. However, the Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the fourth quarter of 2011. This raises substantial doubt about our ability to continue as a going concern. We will need to raise additional funds and are 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 10. CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities. We have implemented some cost saving measures and will continue to explore more to reduce operating expenses.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Going Concern (continued) – If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
Inventory – Inventory is stated at the lower of cost or market. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.
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 except for the building that is being depreciated over a life of 39 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Revenue recognition – Revenues from product sales are recognized when the Company’s products are shipped or when service is rendered. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost of each contract. This method is used because management considers the percentage of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Revenue and costs incurred for time and material projects are recognized as the work is performed.
Product development costs – Product development expenditures are charged to expenses as incurred.
Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the three months ended September 30, 2011, and 2010, was $28,509 and $8,194, respectively. Advertising and trade show expense incurred for the nine months ended September 30, 2011, and 2010, was $42,981 and $9,802, respectively.
Customer deposits and return 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.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
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.
For the three and nine months ended September 30, 2010, the Company amortized prepaid stock based compensation associated with stock options granted October 1 and December 1, 2009. See Note 12. EQUITY INCENTIVE PLAN for further discussion. For the three and nine months ended September 30, 2010, the Company recorded stock based compensation associated with warrants granted on December 31, 2009. See Note 11. STOCK WARRANTS FOR LEGAL SERVICES for further discussion. For the three and nine months ended September 30, 2011, the company granted stock for consulting services. See Note 13. STOCK ISSUED FOR CONSULTING SERVICES.
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 Note10. CONVERTIBLE DEBENTURES for further discussion.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
Fair value of financial instruments – The carrying amounts and estimated fair values of the Company’s financial instruments approximate their fair value due to the short-term nature.
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 and nine months ended September 30, 2011, and 2010, since their effect was antidilutive.
New accounting pronouncements – In January 2011, the FASB released Accounting Standards Update No. 2011-01 (“ASU 2011-01”), Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, which deferred the disclosure requirements surrounding troubled debt restructurings. These disclosures are effective for reporting periods ending on or after June 15, 2011. We do not expect the disclosure requirements to have a material impact on our current disclosures.
In April 2011, the FASB released Accounting Standards Update No. 2011-02 (“ASU 2011-02”), Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 clarifies the guidance for determining whether a restructuring constitutes a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must conclude that 1) the restructuring constitutes a concession and 2) the debtor is experiencing financial difficulties. ASU 2011-02 also requires companies to disclose the troubled debt restructuring disclosures that were deferred by ASU 2011-01. The guidance in ASU 2011-02 is effective for public companies in the first reporting period ending on or after June 15, 2011, but the amendment must be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-02 is not expected to materially impact our consolidated financial statements.
Inventory consists of the following as of:
| | | September 30, 2011 | | | December 31, 2010 | |
| | | | | | | |
| Raw materials | | $ | 344,243 | | | $ | 333,107 | |
| Work in process | | | — | | | | — | |
| Finished goods | | | 218,357 | | | | 192,488 | |
| | | $ | 562,600 | | | $ | 525,595 | |
| 3. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets totaling $166,964 at September 30, 2011, consists of $135,402 of prepaid inventory, $15,000 of prepaid advertising and promotion, and $16,562 of prepaid insurance.
Prepaid expenses and other current assets totaling $36,484 at December 31, 2010, consists of $15,435 credit toward inventory resulting from patent infringement settlements, $8,662 of prepaid inventory, $10,736 of prepaid insurance, $1,651 of prepaid software maintenance.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 4. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consists of the following as of:
| | | September 30, 2011 | | | December 31, 2010 | |
| | | | | | | |
| Building, building improvements, and land | | $ | 1,224,962 | | | $ | 1,224,962 | |
| Furniture, fixtures, vehicles and equipment | | | 104,928 | | | | 124,197 | |
| | | | 1,329,890 | | | | 1,349,159 | |
| Less: accumulated depreciation and amortization | | | ( 214,493 | ) | | | ( 209,248 | ) |
| | | $ | 1,115,397 | | | $ | 1,139,911 | |
| 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 September 30, 2011 and 2010 represented 27.49% and 30.55%, respectively, of total net revenues. Combined sales to these entities for the nine months ended September 30, 2011 and 2010 represented 30.59% and 31.45%, respectively, of total net revenues. For the three and nine months ended September 30, 2011, sales to one unrelated customer represented 22.10% and 10.00%, respectively, of total net revenues. For the three months ended September 30, 2010, sales to one other unrelated customer represented 12.53% of total net revenues. Sales to no other customers represented greater than 10% of net revenues for the three and nine months ended September 30, 2011 and 2010.
| 6. | RELATED PARTIES TRANSACTIONS |
Notes payable – related parties
Notes payable – related parties – consists of the following as of September 30, 2011:
| 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. | | $ | 249,434 | |
| | | | | |
| Less amounts due within one year | | | 187,465 | |
| | | | | |
| Long-term portion of notes payable – related parties | | $ | 61,969 | |
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 6. | RELATED PARTIES TRANSACTIONS (continued) |
Notes payable – related parties (continued)
As of September 30, 2011, principal payments on the notes payable – related parties are as follows:
| 2011 | | $ | 129,104 | |
| 2012 | | | 78,246 | |
| 2013 | | | 42,083 | |
| 2014 | | | — | |
| 2015 | | | — | |
| Thereafter | | | — | |
| | | | | |
| | | $ | 249,434 | |
As of September 30, 2011, the Company was approximately twenty-two months in arrears on payments due under the Note payable to the Chief Executive Officer. No default notice has been received and the Company plans to make payments as able. See Other liabilities and accrued interest– related parties within this Note for the related accrued interest in arrears. On April 21, 2011, the Company issued 425,000 shares of preferred stock, designated as Series “A” Convertible Preferred Stock, to Robert Carmichael in consideration for forgiveness of $42,500 due under the Note payable to Chief Executive Officer. The Series “A” Convertible Preferred Stock may be converted to common stock at a rate of $.01 per share, or 42,500,000 shares of common stock. The fair market value per common share upon which the transaction was based was $.05. Accordingly, the Company recognized $2,082,500 as interest expense – related party as part of the transaction.
On March 18, 2011, the Company's Chief Executive Officer transferred all financial interest in GKR Associates, LLC (GKR). Accordingly, all transactions of the Company with GKR subsequent to March 18, 2011, are not classified with those of related parties. On September 18, 2011, the Company and GKR converted GKR's note payable to a convertible debenture. See Note 10. CONVERTIBLE DEBENTURES for further discussion.
On February 12, 2010, as part of the requirements for conversion of its non-related party, revolving line of credit to a term loan, the Company converted GKR's second mortgage to a third mortgage. See Note 9. NOTES PAYABLE for further discussion. The Company was fifteen months in arrears on mortgage payments due GKR at September 30, 2011. No default notice has been received and the Company plans to make payments as able.
Notes payable – related parties consists of the following as of December 31, 2010:
| 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. | | $ | 291,934 | |
| | | | | |
| Promissory note payable due an entity in which the Company’s Chief Executive Officer has a financial interest, GKR Associates, LLC., secured by third mortgage on real property, having a carrying value of $1,120,994 at December 31, 2010, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012. | | | 37,260 | |
| | | | | |
| | | | 329,194 | |
| | | | | |
| Less amounts due within one year | | | 205,180 | |
| | | | | |
| Long-term portion of notes payable – related parties | | $ | 124,014 | |
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 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 September 30, 2011, and 2010, was $181,249 and $171,682, respectively. Combined net revenues from these entities for nine months ended September 30, 2011, and 2010, was $459,648 and $529,719, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at September 30, 2011, was $30,191, $3,184, and $9,362, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2010, was $13,777, $4,753, and $5,468, respectively.
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 three months ended September 30, 2011, and 2010, is disclosed on the face of the balance sheet. As of September 30, 2011, the Company was approximately twenty-three months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.
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 CRC is 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 a $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 the $8,250. 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. In addition, see Note 15. PATENT INFRINGEMENT SETTLEMENT for further discussion on income earned in the third quarter of 2010, from the Company’s successful settlement of several lawsuits for infringement of one of these patents.
Other liabilities and accrued interest– related parties
Other liabilities and accrued interest– related parties consists of the following at:
| | | September 30, 2011 | | | December 31, 2010 | |
| | | | | | | |
| Accrued interest on Notes payable – related parties | | $ | 15,570 | | | $ | 23,530 | |
| Due to Principals of Carleigh Rae Corp., net | | | 8,222 | | | | 8,222 | |
| | | | | | | | | |
| Other liabilities – related parties | | $ | 23,792 | | | $ | 31,752 | |
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 6. | RELATED PARTY TRANSACTIONS (continued) |
As of September 30, 2011, the Company was approximately twelve months in arrears on accrued interest due under the Note payable to the Chief Executive Officer. No default notice has been received and the Company plans to make payments as able. The $8,222 due the Principals of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company and further discussed in Note 15. PATENT INFRINGEMENT SETTLEMENTS.
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 will expire 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 and nine months ended September 30, 2011, the Company recognized $125,001, and $237,501, respectively, as amortization of prepaid compensation under this agreement. Prepaid compensation remaining under this agreement as of September 30, 2011 is $762,499.
| 7. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
Accounts payable and accrued liabilities of $538,851 at September 30, 2011, consists of $198,530 accounts payable trade, $60,574 balance of legal expense that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $71,837 accrued payroll and related fringe benefits, $133,415 accrued payroll taxes and withholding, $34,549 accrued real estate taxes, $34,613 accrued interest, and $5,333 other accrued liabilities. Accrued payroll taxes and withholding were approximately nine months in arrears at September 30, 2011. Balances due certain vendors are also due in arrears to varying degrees. The Company is handling both matters and each instance on a case by case basis.
Accounts payable and accrued liabilities of $510,641 at December 31, 2010, consists of $324,560 accounts payable trade, $60,574 balance of legal expense that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $73,689 accrued payroll and related fringe benefits, $18,978 accrued real estate taxes, $28,295 accrued interest, and $4,545 other accrued liabilities.
Other liabilities of $12,147 at September 30, 2011, consists of $10,000 loan payable, and $2,147 on-line training liability. The $10,000 short-term loan, unsecured loan is from one of the Board of Directors and is without stated terms.
Other liabilities of $13,346 at December 31, 2010, consists of $2,681 of on-line training liability, and $10,665 accrued legal fees and costs associated with default under the Company’s first and second mortgages. See Note 9. NOTES PAYABLE for discussion related to consolidation and restatement of promissory note.
Effective July 1, 2005, the Company began including on-line training certificates with all hookah units sold. The training certificates entitle the holder to an on-line interactive course at no additional charge to the holder. The number of on-line training certificates issued per unit is the same as the number of divers the unit as sold is designed to accommodate (i.e., a three diver unit configuration comes with three on-line training certificates). The certificates have an eighteen-month redemption life after which time they expire. The eighteen-month life of the certificates begins at the time the customer purchases the unit. The Company owes the on-line training vendor the agreed upon negotiated rate for all on-line certificates redeemed payable at the time of redemption. For certificates that expire without redemption, no amount is due the on-line training vendor.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 8. | OTHER LIABILITIES (continued) |
The Company estimates the on-line training liability based on the historical redemption rate of approximately 10%. The Company continues to monitor and maintain a reserve for certificate redemption that approximates the historical redemption rate.
Notes payable consists of the following as of September 30, 2011:
| Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,100,420 at September 30, 2011, bearing interest at 7.5% per annum, due in monthly interest only payments beginning on February 22, 2011, maturing on May 22, 2012, with balloon payment of principal and any accrued and unpaid interest. | | $ | 1,053,993 | |
| | | | | |
| Promissory note payable, secured by third mortgage on real property, having a carrying value of $1,100,420 at September 30, 2011, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012. | | | --- | |
| | | | | |
| Promissory note payable, unsecured, bearing interest at 5% per annum, due in monthly principal and interest payments of $2000, maturing on August 31, 2012. | | | 33,314 | |
| | | | | |
| | | | 1,087,307 | |
| | | | | |
| Less amounts due within one year | | | 1,087,307 | |
| | | | | |
| Long-term portion of notes payable | | $ | — | |
As of September 30, 2011, principal payments on the notes payable are as follows:
| 2011 | | $ | 18,345 | |
| 2012 | | | 1,068,962 | |
| 2013 | | | — | |
| 2014 | | | — | |
| 2015 | | | — | |
| Thereafter | | | — | |
| | | | | |
| | | $ | 1,087,307 | |
| | | | | |
On March 18, 2011, the Company's Chief Executive Officer transferred all financial interest in GKR. Accordingly, all transactions of the Company with GKR subsequent to March 18, 2011, are not classified with those of related parties, and the note payable due them was reclassified to this Note as presented in the table above. On September 18, 2011, the Company and GKR converted this note payable to a convertible debenture. See Note 10. CONVERTIBLE DEBENTURES for further discussion.
On February 18, 2011, the Company’s wholly owned subsidiary, Trebor Industries, Inc., entered into a Forbearance Agreement with Branch Banking and Trust Company (“BBT”) for the promissory note in the principal amount of $1,000,000 in favor of BBT (the “Term Loan”) and the promissory note in the principal amount of $199,991 in favor of BBT (the “Second Note”). The Term Loan and Second Note are collectively referred to as the “Secured Notes”. The Secured Notes are secured by the Company's Fort Lauderdale facilities and personally guaranteed by the Company’s chief executive officer. As previously disclosed, the Company failed to bring the Secured Notes current and in January 2011 BBT accelerated the full principal and accrued interest due under the Secured Notes, as well as initiated collection and legal action. The Forbearance Agreement effectively extends the maturity date of the Secured Notes to May 22, 2012. The Secured Notes were consolidated under a Consolidated and Restated Promissory Note in the principal amount of $1,053,993, effective November 22, 2010, (the “Consolidated Note”). The maturity date of the Consolidated Note is May 22, 2012, and may be prepaid at any time. The interest rate on the Consolidated Note is 7.5% per annum. Pursuant to the Forbearance Agreement the Company paid $33,000 to BBT at closing. In addition to the monthly interest only payments required under the Consolidated Note, Trebor was required to pay BBT $6,028 by February 28, 2011, and monthly payments of approximately $3,555 on March 10, 2011, April 10, 2011, and May 10, 2011, to satisfy disbursements, costs and expenses associated with the Forbearance Agreement.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 9. | NOTES PAYABLE (continued) |
Under the Consolidated note, the Company accrued $10,665 of legal fees and costs as of December 31, 2010, which is reflected in Other liabilities. In addition, the Company accrued interest through December 31, 2010, and this is reflected in Accounts payable and accrued liabilities.
In February 2011, the Company converted a vendor payable into an unsecured promissory note as reflected above in table summarizing notes payable as of September 30, 2011. Principal and interest payments of $2,000 per month were to begin on February 28, 2011, and continue through August 31, 2012, maturity. As of September 30, 2011, the Company was in arrears on approximately four-month’s payments. No default notice has been received and the Company plans to make payments as soon as it is able.
Notes payable consists of the following as of December 31, 2010:
| Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,120,994 at December 31, 2010, bearing interest at 7.5% per annum, due in monthly interest only payments beginning on February 22, 2011, maturing on May 22, 2012, with balloon payment of principal and any accrued and unpaid interest. | | $ | 1,053,993 | |
| | | | | |
| Less amounts due within one year | | | — | |
| | | | | |
| Long-term portion of notes payable | | $ | 1,053,993 | |
| 10. | CONVERTIBLE DEBENTURES |
The Company has outstanding convertible debentures as of September 30, 2011, as follows:
Effective October 4, 2010, the Company converted an accounts payable for legal services to a $20,635 convertible debenture. The debenture matured on April 4, 2011, and bears interest at 5% per annum. At the option of the lender, the principal amount of the note plus any accrued interest may be converted in whole or in part into Common Stock at the conversion price per share of $.001 by written notice. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term.
The Company valued the beneficial conversion feature (BCF) of the convertible debenture at $20,635, the “ceiling” of its intrinsic value. Accordingly, the $20,635 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture and recognize interest expense through its maturity on April 4, 2011. At maturity the Company did not redeem the convertible debenture, but rather the holder sold and assigned it to an unrelated third party for the face value of the debenture. At September 30, 2011, the balance of the convertible debenture, net is $15,135, which is $20,635 debenture, less $20,635 discount, plus $20,635 discount accretion, less $5,500 converted to stock. At December 31, 2010, the balance of the convertible debenture, net is $10,318 which is $20,635 debenture, less $20,635 discount, plus $10,318 of accretion.
Effective November 27, 2010, the Company purchased exclusive rights for license of certain intellectual property from an unrelated party for an initial sum of $125,000. Payment was in the form of a convertible debenture bearing simple interest of 10% per annum to accrue until paid in full or converted. The parties agreed to a royalty of 2.5% of net revenues generated from the sale, sub-license or use of the technology or a reasonable negotiated rate based on similar invention. The debenture is convertible to common shares of the Company at May 27, 2011, along with accrued interest at the option of the lender. Conversion price per share is 30% discount as determined from the weighted average of the preceding 12 trading days’ closing market price.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 10. | CONVERTIBLE DEBENTURES (continued) |
The Company valued the BCF of the convertible debenture at $53,517, its intrinsic value. Accordingly, the $125,000 debenture is discounted by the amount of the BCF. The Company accreted the discount to the convertible debenture and will recognize interest expense through repayment in full or conversion. The debenture matured on May 27, 2011. At September 30, 2011, the balance of the convertible debenture, net is $125,000, which is $125,000 debenture, less $53,571 discount, plus $53,571 of accretion. At December 31, 2010, the balance of the convertible debenture, net is $80,358, which is $125,000 debenture, less $53,571 discount, plus $8,929 of accretion. Because there is no assurance of success and the invention is still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense. Both parties have agreed to confidentiality regarding the invention during the pre-prototype stage. In addition, the Company has agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services.
Effective January 7, 2011, the Company ratified a technology and license agreement with commitment for purchase of inventory related to an agreement signed in 2010, which set pricing for products if minimum quantity purchases were met. Since the Company did not purchase the minimum quantities, but desired to maintain the technology and licensing rights along with the pricing, it agreed to purchase the 2010 balance shortage in 2011, as well as the 2011 minimum quantities. The agreement required the Company issue a convertible debenture for $76,000, and $38,000 of restricted common stock at $.15 per share. On January 7, 2011, the Company issued a $76,000 convertible debenture for purchase of the product with $28,000 maturing on June 7, 2011, and $48,000 maturing on November 12, 2011. The debenture bears interest at 5% per annum. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) deep highest closing bid prices over the preceding five (5) trading days. On June 1, 2011, the Company issued 253,334 shares of restricted common stock at $.15 per share, or $38,000 as required by the agreement.
The Company valued the BCF of the convertible debenture at $76,000, the “ceiling” of its intrinsic value. Accordingly, the $76,000 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture and recognize interest expense through paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $34,667, which is $76,000 debenture, less $76,000 discount, plus $58,667 discount accretion, less $24,000 repayment.
On February 10, 2011, the Company borrowed $42,500 in exchange for a convertible debenture. The debenture bears 8% interest per annum and matures on November 14, 2011. The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due. Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same. Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time. The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest. There is a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture. The Company issued and reserved 1,465,517, related to this debenture.
The Company valued the BCF of the convertible debenture at $42,500, the “ceiling” of its intrinsic value. Accordingly, the $42,500 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture through its maturity on November 14, 2011 and recognize interest expense until paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $11,416, which is $42,500 debenture, less $42,500 discount, plus $35,416 accretion, less $24,000 conversion. As of September 30, 2011, the Company issued 2,026,568 shares to lender related to the $24,000 conversion. The 2,026,568 shares included all 1,465,517 shares reserved related to this debenture, plus an additional 561,051 of 19,600,000 shares reserved for the same lender as part of another debenture issued September 12, 2011 for $42,500, as discussed below.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 10. | CONVERTIBLE DEBENTURES (continued) |
On March 9, 2011, the Company borrowed $50,000 in exchange for a convertible debenture maturing on March 9, 2012. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 50,000 and 100,000 warrants at $.25 and $.35 per share, respectively. As a result, the Company had to allocate fair market value (“FMV”) to both the BCF and to the warrants. The Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.
Since the combined FMV allocated to the warrants and BCF cannot exceed the convertible debenture amount (“the ceiling”), the BCF was valued at $50,000, the “ceiling” of its intrinsic value. Accordingly, the $50,000 debenture is discounted by the BCF and the warrants. The Company will accrete the discount to the convertible debenture through its maturity on March 9, 2012 and recognize interest expense until paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $27,957, which is $50,000 debenture, net $50,000 discount, plus $27,957 discount accretion.
On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture maturing on May 5, 2012. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 300,000 and 600,000 warrants at $.25 and $.35 per share, respectively. As a result, the Company had to allocate fair market value (“FMV”) to both the BCF and to the warrants. The Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.
Since the combined FMV allocated to the warrants and BCF cannot exceed the convertible debenture amount (“the ceiling”), the BCF was valued at $300,000, the “ceiling” of its intrinsic value. Accordingly, the $300,000 debenture is discounted by the BCF and the warrants. The Company will accrete the discount to the convertible debenture through its maturity on May 5, 2012 and recognize interest expense until paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $125,000, which is $300,000 debenture, less $300,000 discount, plus $125,000 discount accretion.
On August 31, 2011, the Company borrowed $10,000 in exchange for a convertible debenture maturing August 31, 2013. The debenture bears interest at 5% per annum. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) deep highest closing bid prices over the preceding five (5) trading days.
The Company valued the BCF of the convertible debenture at $4,286. Accordingly, the $4,286 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture and recognize interest expense through paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $5,893, which is $10,000 debenture, less $4,286 discount, plus $179 discount accretion.
On September 8, 2011, the Company converted a note payable and related accrued interest of $39,724 into a convertible debenture. The debenture bears interest at 10% per annum and matured on September 20, 2011. The lender at thier option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) deep highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $17,025. Because the debenture was issued and matured in the third quarter of 2011, the full amount of the discount, $17,025 was accreted and recognized as interest expense during the period. As of September 30, 2011, the balance of the convertible debenture, net is $39,724.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 10. | CONVERTIBLE DEBENTURES (continued) |
On September 12, 2011, the Company borrowed $37,500 in exchange for a convertible debenture. The debenture bears 8% interest per annum and matures on June 14, 2012. The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due. Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same. Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time. The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest. There is a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture. The Company issued and reserved 19,600,000 shares related to this debenture. As of September 30, 2011, the Company converted 561,051 of these reserved shares as part of a conversion by the lender on another debenture due them dated February 10, 2011, as discussed above. This left a balance of 19,038,949 shares reserved for this lender.
The Company valued the BCF of the convertible debenture at $37,500, the “ceiling” of its intrinsic value. Accordingly, the $42,500 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture through its maturity on June 12, 2012 and recognize interest expense until paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $2,083, which is $37,500 debenture, less $37,500 discount, plus $2,083 discount accretion.
| 11. | STOCK WARRANTS FOR LEGAL SERVICE |
Effective December 30, 2009, the Company issued to an outside attorney warrants to purchase 100,000 shares of restricted common stock for certain legal and advisory services to be performed in 2010, as evidenced by a signed proposal. The warrants are exercisable at fair market value as of the date of grant, and vested in two tranches of 50,000 each, on September 30, 2010 and December 31, 2010, respectively. In addition, the agreement provides for a cashless exercise of the tranches. The fair value of the warrants was determined to be $25,000 using the Black-Scholes valuation model. The stock warrants are in lieu of payment for these services and as such the Company recognized operating expense over the term of the agreement. Accordingly, the Company recognized operating expense for the three and nine months ended September 30, 2010 of $6,250 and $18,750, respectively. As of September 30, 2011, the two tranches of warrants were unexercised.
On August 22, 2007, the Company adopted an Equity Incentive Plan (the “Plan”). Under the Plan, Stock Options may be granted to Employees, Directors, and Consultants in the form of Incentive Stock Options or Nonstatutory Stock Options. Stock Purchase Rights, time vested and/performance invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan. The initial maximum number of shares that may be issued under the Plan shall be 400,000 shares, and no more than 100,000 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period. Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company. The term of the Plan shall be ten years. The Board of Directors may amend, alter, suspend, or terminate the Plan at any time.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 12. | EQUITY INCENTIVE PLAN (continued) |
Effective October 1, 2009 and December 1, 2009 the Company granted 75,000 and 115,000 incentive stock options, respectively, to certain consultants under the Plan. The granting of these options exhausted all the options outstanding for grant under the plan. The fair value of the options was determined to be $47,500 using the Black-Scholes Model. The options that have a term of five years were issued in conjunction with consulting agreements business and financial advisory services. The stock options are in lieu of payment for these services and as such the Company will recognize operating expense over the term of the agreements. Accordingly, for the three and nine months ended September 30, 2010, the Company recognized operating expense of $7,158 and $21,638, respectively. Prepaid equity based compensation is reflected as a component of shareholders’ deficit for the related consulting services yet to be provided at the end of the period. As of September 30, 2011, all consulting services under this plan had been provided.
| 13. | STOCK ISSUED FOR CONSULTING SERVICES |
From April 16, 2010, through December 31, 2010, the Company granted a combined 674,932 shares of restricted common stock to eight consultants pursuant to individual consulting agreements. The consulting services provided for include predominantly management advisory services in the areas of sales, marketing, public relations, financing, and business development. Grant of the stock was in lieu of payment for these services. The length of consulting services under the agreements ranges from completed during the second quarter of 2010 through one year from effective transaction date, or July 1, 2011. The majority of the agreements expired on December 31, 2010. The Company recorded the transactions at the fair market value of the stock on the effective date of each transaction. The Company is recognizing operating expense over the term of the agreements. Accordingly, for the three and nine months ended September 30, 2011, the Company recognized $0 and $41,586, respectively, as operating expense under the agreements. The Company recognized $35,923 and $101,267 as operating expense under the agreements for the three and nine months ended September 30, 2010, respectively
On March 9, 2010, the Company granted 100,000 shares of restricted common stock pursuant to a consulting agreement for assistance in the planning, design, direction, supervision and implementation of Company's web design, marketing and advertising and in such other matters and areas as may be mutually approved by Consultant and Company. This agreement expired on December 31, 2010. The Company recorded the transaction at the fair market value of the stock on the effective date of the transaction, $.99 per share. The Company will amortize the operating expense over the term of the agreement. Accordingly, the Company recognized $9,900 as operating expense for the three months ended March 31, 2010. The agreement expires on December 31, 2010. This same consultant loaned the Company $100,000 during the first quarter of 2010, accepted a conversion of his loan to common stock in the third quarter of 2010, and became a member of the Board of Directors of the Company in December 2010.
| 14. | STOCK ISSUED UNDER PRIVATE OFFERING |
On July 27, 2011, the Company accepted $5,000 under a private offering of shares of restricted common stock at a purchase price per share of $.01. The Company offered the shares through its officers and directors to “accredited investors” as defined in Rule 501 (as amended on July 21, 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act) of Regulation D promulgated under the Securities Act of 1933, as amended.
| 15. | PATENT INFRINGEMENT SETTLEMENTS |
In August 2010, the Company settled several lawsuits for infringement of one of the Company’s patents. The Company granted non-exclusive license of its patent to the settling parties along with future licensing and purchasing terms. In exchange, the Company was granted exclusive distributor rights in the United States of the products of the settling parties, as well as non-exclusive distributor rights for others. The Company acquired the subject patent from the Carleigh Rae Corporation, a related party, in 2010, and it is discussed in Note 6. RELATED PARTY TRANSACTIONS, Patent purchase agreements.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The components of the provision for income tax benefit are as follows for the three months ended:
| | | September 30, 2011 | | | September 30, 2010 | |
| Current taxes | | | | | | |
| Federal | | $ | — | | | $ | — | |
| State | | | — | | | | — | |
| Current taxes | | | — | | | | — | |
| Change in deferred taxes | | | (851,594 | ) | | | (57,749 | ) |
| Change in valuation allowance | | | 889,486 | | | | 18,794 | |
| | | | | | | | | |
| Provision for income tax expense (benefit) | | $ | 37,892 | | | $ | (38,955 | ) |
The components of the provision for income tax benefit are as follows for the nine months ended:
| | | September 30, 2011 | | | September 30, 2010 | |
| Current taxes | | | | | | |
| Federal | | $ | — | | | $ | — | |
| State | | | — | | | | — | |
| Current taxes | | | — | | | | — | |
| Change in deferred taxes | | | (1,079,982 | ) | | | (246,506 | ) |
| Change in valuation allowance | | | 1,114,931 | | | | 111,935 | |
| | | | | | | | | |
| Provision for income tax benefit | | $ | 34,949 | | | $ | (134,571 | ) |
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at September 30, 2011:
| Deferred tax assets: | | | |
| Equity based compensation | | $ | 21,743 | |
| Allowance for doubtful accounts | | | 8,840 | |
| Depreciation and amortization timing differences | | | (4,151 | ) |
| Net operating loss carryforward | | | 1,524,087 | |
| On-line training certificate reserve | | | 751 | |
| Total deferred tax assets | | | 1,551,270 | |
| Valuation allowance | | | (1,477,441 | ) |
| | | | | |
| Deferred tax assets net of valuation allowance | | | 73,829 | |
| | | | | |
| Less deferred tax assets – non-current, net of valuation allowance | | | 73,453 | |
| | | | | |
| Deferred tax assets – current, net of valuation allowance | | $ | 376 | |
The effective tax rate used for calculation of the deferred taxes as of September 30, 2011 was 34%. The Company has established a valuation allowance against deferred tax assets of $1,477,441 due to the uncertainty regarding realization, comprised primarily of a 98% reserve against the deferred tax assets attributable to the equity based compensation, a 100% reserve against the allowance for doubtful accounts, a 95% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 16. | INCOME TAXES (continued) |
The significant differences between the statutory tax rate and the effective tax rates for the Company for the nine months ended are as follows:
| | | September 30, 2011 | | | September 30, 2010 | |
| Statutory tax rate benefit | | | — | % | | | — | % |
| Increase (decrease) in rates resulting from: | | | | | | | | |
| Net operating loss carryforward or carryback | | | (35 | )% | | | (29 | )% |
| Equity based compensation and loss | | | — | % | | | 1 | % |
| Book/tax depreciation and amortization differences | | | — | % | | | (1 | )% |
| Change in valuation allowance | | | 36 | % | | | 13 | % |
| Other | | | — | % | | | — | % |
| Effective tax rate benefit | | | 1 | % | | | (16 | )% |
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2010:
| Deferred tax assets: | | | |
| Equity based compensation | | $ | 21,743 | |
| Allowance for doubtful accounts | | | 5,100 | |
| Depreciation and amortization timing differences | | | (6,199 | ) |
| Net operating loss carryforward | | | 449,707 | |
| On-line training certificate reserve | | | 938 | |
| Total deferred tax assets | | | 471,289 | |
| Valuation allowance | | | (362,511 | ) |
| | | | | |
| Deferred tax assets net of valuation allowance | | | 108,778 | |
| | | | | |
| Less deferred tax assets – non-current, net of valuation allowance | | | 108,309 | |
| | | | | |
| Deferred tax assets – current, net of valuation allowance | | $ | 469 | |
The effective tax rate used for calculation of the deferred taxes as of December 31, 2010 was 34%. The Company has established a valuation allowance against deferred tax assets of $362,511 due to the uncertainty regarding realization, comprised primarily of a 98% reserve against the deferred tax assets attributable to the equity based compensation, a 100% reserve against the allowance for doubtful accounts, a 75% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.
| 17. | AUTHORIZATION OF PREFERRED STOCK |
During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of Chapter 78 of the Nevada Revised Statutes. Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock. See Note 6. RELATED PARTY TRANSACTIONS – Notes Payable for discussion regarding issuance of 425,000 shares of preferred stock for forgiveness of $42,500 Note payable to Chief Executive Officer of the Company.
BROWNIE’S MARINE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On June 23, 2011, a claim was filed in the U.S. District Court of Dallas County, Texas by the Estate of Christopher Logan. Amount of damages sought were not provided in the claim. The claim lists eight defendants of which the Company is one. The claim asserts Mr. Logan died breathing carbon monoxide while diving with a T80G medium duty compressor (“T80G”). The claim’s cites belief by the plaintiff that the T80G was sold by Brownie’s based on representations made by Keene Engineering, Inc. also a manufacturer of dive compressors and also listed as a defendant. The Company believes the representation is erroneous because Brownie’s does not sell the make/model cited in the claim, and Brownie’s compressors have the brand name forged into the die-casting on the head of each cylinder. Therefore, Brownie’s believes this claim is without merit, and anticipates being dismissed from the lawsuit.
On November 7, 2011, the Company entered into a Joint Venture Agreement (“Agreement”) with Pompano Dive Center, LLC. (“PDC”). PDC owns a retail store, several dive boats, and has a classroom for training divers.
Under the terms of the Agreement, the Company will provide PDC with an assortment of Brownie’s Third Lung products at no cost, and PDC will act as a training and demonstration site for Brownie’s Third Lung products. The inventory will remain the property of BWMG.
In addition, under the terms of the Agreement, the parties have entered into a Non-Binding Letter of Intent for the possible sale of PDC’s business to BWMG. The premise of the transaction, which is still in discussion phase, is the exchange of BWMG’s stock for the yet to be agreed upon value of PDC. In anticipation of a purchase transaction, the Agreement provides BWMG with a 33% interest in PDC, and for BWMG to issue 4,581,505 restricted shares of its common stock to PDC. Further, PDC is required to remit no later than 45 days from the end of each quarter, a 33% share in pre-tax net profits. At least 50% of the total pre-tax profits are required for distribution under the Agreement, and BWMG is not required to share in losses. If PDC decides to sell any inventory provided by the Company, the purchase price will be the same as that offered to other Dealers of the Company’s products.
If this Agreement is terminated by either party and/or a written purchase and sales agreement is not entered into by the parties, then the parties’ respective interests in each other’s business will revert back to the original party. Accordingly, if this should happen, PDC will relinquish the interest acquired in BWMG through this Agreement and BWMG will do the same. All property at PDC owned by BWMG would be returned to BWMG at that time as well.
On November 7, 2011, the Company issued 657,040 restricted shares of its common stock to a Corporation, which one of the Company's Board of Directors has a financial interest, for approximately $4,000 in consulting services.
On November 3, 2011, the Company converted an aged account payable trade of $5,607 for 683,820 shares of restricted common stock.
