Brownie's Marine Group, Inc filed on Thursday, August 15 10-Q

Brownie's Marine Group, Inc files 10-Q in a filing on Aug 15, 2019.

Customer deposits and unearned revenue and returns policy – The Company typically takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice. Customer deposits and unearned revenue totaled $234,813 and $245,907 at June 30, 2019 and December 31, 2018, respectively.

The Company sells to three (3) entities owned by the brother of Robert Carmichael, the Company’s Chief Executive Officer, and three (3) companies owned by the Chief Executive Officer as further discussed in Note 7 – RELATED PARTIES TRANSACTIONS. Combined sales to these six (6) entities for the six month periods ended June 30, 2019 and 2018, represented 25.24 % and 24.31% respectively, of total net revenues.

In excess of 90% of our total net revenues are made up of product sales to customers within the state of Florida.

Royalties expense – related parties – The Company has Exclusive License Agreements with 940A, an entity owned by the Company’s Chief Executive Officer, to license the trademark ‘Brownies Third Lung’, ‘Tankfill’, ‘Brownies Public Safety’ and various other related trademarks as listed in the agreement. This license agreement requires the Company to pay 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three and six months ended June 30, 2019 and 2018 as disclosed on the face of the Company’s Consolidated Statements of Operations totaled $13,894, $24,117, $13,468 and $23,395, respectively.

(*) Initial balance of $200,000 non-convertible note dated July 7, 2013. The note carries a 0% interest rate and is due on demand.

(1) The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the beneficial conversion feature of the convertible debenture at $4,286, which was accreted to interest expense over the period of the note. The discount has been fully amortized as of December 31, 2018. The company has not received any demand of payment or a notice of default from the lender.

(2) The Company entered into a 6% Secured Convertible Promissory Note, due December 1, 2018, subject to extension. The Note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor Industries, Inc. and Brownie’s High Pressor Compressor Services, Inc. and the personal guarantee of Robert M. Carmichael, the Company’s Chief Executive Officer. The conversion price under the Note range from $0.02 per share if converted in the first year to $0.125 if converted in year five. The lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of the outstanding Common Stock of the Company at any one time. The Note was extended subsequent to year end for one additional year with a reduction in the conversion price to $0.01 per share. The Company recorded a debt discount initially of $12,500 which was fully amortized as of December 31, 2018.

(3) The Company entered into a 6% Secured Convertible Promissory Note, due December 4, 2018, subject to extension. The Note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor Industries, Inc. and Brownie’s High Pressure Compressor Services, Inc. and the personal guarantee of Robert M. Carmichael, the Company’s Chief Executive Officer. The conversion price under the Note range from $0.02 per share if converted in the first year to $0.125 if converted in year five. The lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 9.99% of the outstanding Common Stock of the Company at any one time. The Note was extended subsequent to year end for one additional year with a reduction in the conversion price to $0.01 per share. The Company recorded a debt discount initially of $12,500 which was fully amortized as of December 31, 2018.

On August 14, 2014, the Company entered into a new lease commitment. Terms of the new lease include thirty-seven-month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term.

On November 11, 2018, the Company entered a new lease agreement for approximately 8,025 square feet adjoining its existing facility in Pompano Beach, Florida. Terms of the new lease include a sixty-nine month term commencing on January 1, 2019, or the date the Company takes possession of the premises, if earlier; a $6,527 security deposit; initial base rent of approximately $4,848 per month escalating at 3% per year during the term of the lease plus Florida state sales tax and payment of 10.11% of the buildings annual operating expenses (i.e. common area maintenance) which is approximately $1,679 per month subject to adjustment as provided in the lease.

Net revenues. For the three months ended June 30, 2019, we had net revenues of $870,720, a 34% increase over the three months ended June 30, 2018. The sale of BHPC’s High Pressure Compressors accounted for an approximately $232,000 increase, while Brownie’s Third Lung Sales decreased by approximately $12,000.

While there can be no assurance, the Company expects revenues to increase in the future due to increase in our customer base, product modifications, improved geographical reach and improved marketing, which we anticipate will result in additional sales both from Brownie’s Third Lung and also under the Exclusive Distribution Agreement with L&W. The sales for BHPCS increased by 92% compared to the three months ended June 30, 2018. This revenue increase is due to increase in the customer base, increase in market penetration, increase in customer awareness and our efforts to revive previous market exposure. As we have been marketing our BHPCS compressors for approximately two years and we believe our customers are becoming more receptive to our brand of L&W compressors. Related party revenues increased by approximately 54% between periods, as a result of an increased in demand in recreational dive products primarily.

Cost of net revenues. Cost of net revenues increased during the three months ended June 30, 2019, a 45% increase compared to the three months ended June 30, 2018. The increase was due to the increase in sales, the decrease in gross profit was due to discounts given to retailers that decreased the gross margin.

Operating expenses. Operating expenses, consisting of selling, general and administrative expenses and research and development costs increased sharply between the periods. Selling, general and administrative expenses and research and development costs totaled $443,626 for the three months ended June 30, 2019, an increase of $158,282 or 55% over the prior year. The large bulk of this increase in general and administrative was due to an increase in the number of employees between the periods with an associated increase in salaries and benefits and an increase in consulting fees and employee benefits paid in stock totaling $56,832 compared to $7,786 in 2018. Employees were added in large part due to the formation of BHPCS and BLU3 including, two engineers, a consultant for business development, a director of marketing and public relations and an additional mechanic. This increase in operating expenses is expected to continue as the Company adds additional production personnel in support of our expanding product lines with BHPCS and BLU3 and associated administrative support.

Research and development costs decreased to $34,676 during the three months ended June 30, 2019, as compared to $36,744 in 2018. This decrease 5.63% is primarily attributable to streamlining of our production processes to expand our product lines including our portable shallow dive system currently under development as described above. We expect research and development costs to continue to increase as we continue development of products aimed at increasing what we believe to be new innovative product offerings.

Net revenues. For the six months ended June 30, 2019, we had net revenues increase of $227,240, a 20% increase over the six months ended June 30, 2018. The bulk of this increase was attributable to increase in sales of our Brownies Third Lung products due to product modifications, new product releases, improved geographical reach and increased marketing effort, and change in pricing. In addition, sales of BHPCS compressors increased by $135,313.

The sales for our subsidiary, BHPCS increased 22.57% compared to the six months ended June 30, 2018. We had an increase in the customer base for LWA and increase in High Pressure Compressor buyers for their yachts. Related party revenues from primarily the sale of high pressure compressor and low pressure diving products increased by approximately 20% between periods as a result of an increase in demand in recreational dive products. Our Third Lung products sales decreased approximately 2% due to reduction of sales prices in the second quarter.

Cost of net revenues. Cost of net revenues increased during the six months ended June 30, 2019, a 20% increase compared to the six months ended June 30, 2018 for the reasons set forth above. The increase was due to a 20% increase in sales. The gross profit percentage decreased approximately 1% due to the discounts given to retailers in the second quarter.

Operating expenses. Operating expenses, consisting of selling, general and administrative expenses and research and development costs increased sharply between the periods. Selling, general and administrative expenses and research and development costs totaled $793,389 for the six months ended June 30, 2019, an increase of $246,504 or 45% over the prior year. The large bulk of this increase in general and administrative was due to an increase in the number of employees between the periods with an associated increase in salaries and benefits and an increase in consulting fees and employee benefits paid in stock totaling $148,883 compared to $32,786 in 2018. Employees were added in large part due to the formation of BHPCS and BLU3 including, two engineers, a consultant for business development, a director of marketing and public relations and an additional mechanic. This increase in operating expenses is expected to continue as the Company adds additional production personnel in support of our expanding product lines with BHPCS and BLU3 and associated administrative support.

Research and development costs increased to $64,244 during the six months ended June 30, 2019, as compared to $43,176 in 2018. This increase of 48.80% is primarily attributable to our efforts to expand our product lines including our portable shallow dive system currently under development as described above. We expect research and development costs to continue to increase as we continue development of products aimed at increasing what we believe to be new innovative product offerings.

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