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BROWNIE'S MARINE GROUP, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Introductory Statements Information included or incorporated by reference in this filing may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology. This filing contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our Company's growth strategies, (c) our Company's future financing plans and (d) our Company's anticipated needs for working capital. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in this prospectus generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. Overview Brownie's Marine Group, Inc., a Nevada corporation (referred to herein as "BWMG","the Company", "we" or "Brownie's"), does business through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie's Third Lung, a Florida corporation. The Company designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, and scuba and water safety products. BWMG sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Fort Lauderdale, Florida. The Company's common stock is quoted on the OTCBB under the symbol "BWMG". The Company's website is www.browniesmarinegroup.com. Mr. Carmichael has operated Trebor as its President since 1986. Since April 16, 2004, Mr. Carmichael has served as President, Principal Accounting Officer and Chief Financial Officer of the Company. From March 23, 2004 to April 26, 2004, Mr. Carmichael served as the Company's Executive Vice-President and Chief Operating Officer. He is the holder or co-holder of numerous patents that are used by Trebor and several other large original equipment manufacturers in the diving industry. The Company's diving and marine based products are generally marketed under the Brownie's Third Lung, Brownie's Tankfill, and Brownie's Public Safety trade names. Results of Operations for the Three Months Ended June 30, 2011, As Compared To the Three Months Ended June 30, 2010 Net revenues. For the three months ended June 30, 2011, we had net revenues of $597,194 as compared to net revenues of $658,065 for the three months ended June 30, 2010, a decrease of $60,871, or 9.25%. Tankfill system and related sales declined approximately $140,000 for the three months ended June 30, 2011, as compared to the same period in 2010. Hookah system and related sales increased approximately $70,000, and sales of public water safety products (ex. life jackets) increased approximately $5,000 as compared to the three months ended June 30, 2010. The Company believes the depressed state of the economy continues to negatively impact sales as seen by the decline in tankfill system sales, but is encouraged by the increase in sales of hookah systems, and public water safety products. The Company's products are largely non-essential, disposable income type items, and therefore are more likely to be sacrificed by consumers in preference for essential goods during depressed economic conditions. 22 --------------------------------------------------------------------------------Cost of net revenues. For the three months ended June 30, 2011, we had cost of net revenues of $398,026 as compared with cost of net revenues of $492,781 for the three months ended June 30, 2010, a decrease of $94,755, or 19.23%. The decrease in cost of net revenues is primarily a result of reduction in quantity of materials used resulting from the 9.25% decrease in net revenues, coupled with an approximate 10% decrease in material costs as a percentage of net revenues. The approximate 10% decline in material prices for the three months ended June 30, 2011, as compared to the same period in 2010 is attributed to the change in the sales mix. In the second quarter of 2011 as compared to the second quarter of 2010, more hookah system and related sales occurred and less tankfill system and related sales occurred. Of these products, those sold in the second quarter of 2011, had better profit margins than those sold in the second quarter of 2010. Gross profit. For the three months ended June 30, 2011, we had a gross profit of $199,168 as compared to gross profit of $165,284 for the three months ended June 30, 2010, an increase of $33,884, or 20.50%. The increase is primarily attributable to the decrease in cost of net revenues resulting from the change in the sales mix, which is discussed in Cost of net revenues above. Operating expenses. For the three months ended June 30, 2011, we had total operating expenses of $408,289 as compared to total operating expenses of $368,731 for the three months ended June 30, 2010, an increase of $39,558, or 10.73%. The $39,558 increase is due to an increase in selling, general and administrative costs of $40,318, net of $760 decrease in research and development costs as compared to the same period in 2010. The net increase in sales, general and administrative costs for the quarter ended June 30, 2011, as compared to the same period in 2010, is primarily attributable to a an increase of approximately $43,709 in legal and accounting expenses, an increase in equity based (non-cash) compensation of approximately $25,000, and net of a decrease in other numerous accounts having individually insignificant increases and decreases. Year-end financial reporting and accounting services from accountants and attorneys occurred in the second quarter of 2011, as compared to the first quarter of 2010, resulting in the increase in their fees during this period. Other expense, net. For the three months ended June 30, 2011, we had other expense, net of $2,233,561 as compared to other expense, net of $115,566 for the three months ended June 30, 2010, an increase of $2,117,995, or 1,832.71%. This account is comprised of other (income) expense, net, and interest expense. Interest expense for the period increased $2,115,343 and other income, net decreased $2,652. Other (income) expense, net, is comprised of transactions that are generally of a non recurring nature. The increase in interest expense of $2,115,343 is primarily attributable to approximately $107,234 accretion of discounts (non-cash) on convertible debentures issued during the fourth quarter of 2010 through the second quarter of 2011, as well as $2,082,500 interest expense (non-cash) on forgiveness of debt for preferred stock. The remaining net decrease is primarily due to a decrease in interest resulting from pay down of a portion of a note-payable with restricted stock, net an increase in interest on convertible debentures, which did not exist during the second quarter of 2010. Provision for income tax expense (benefit). For the three months ended June 30, 2011, we had a provision for income tax expense (benefit) of $16,981, as compared to a provision for income tax expense (benefit) of ($27,273) for the three months ended June 30, 2010, an increase in the provision for income tax expense of $44,254, or 162.26%. The increase in provision for income tax expense is primarily a result of the increase in valuation allowance against the deferred tax asset attributable to realization of the net operating loss carryforward. Net loss. For the three months ended June 30, 2011, we had net loss of $2,459,663 as compared to net loss of $291,740 for the three months ended June 30, 2010, an increase of $2,167,923, or 743.10%. The increase in net loss is attributable to $33,884 increase in gross profit, $39,558 increase in operating expenses, $2,117,995 increase in other expense, net, and $44,254 increase in provision for income tax expense. Results of Operations for the Six Months ended June 30, 2011, As Compared To the Six Months ended June 30, 2010 Net revenues. For the six months ended June 30, 2011, we had net revenues of $960,094 as compared to net revenues of $1,122,248 for the six months ended June 30, 2010, a decrease of $162,154, or 14.45%. Tankfill system and related sales declined approximately $250,000 for the six months ended June 30, 2011 as compared to the same period in 2010. Hookah system and related sales increased approximately $65,000, and sales of public water safety products (ex. life jackets) increased approximately $4,000 as compared to the six months ended June 30, 2010. The Company believes the depressed state of the economy continues to negatively impact sales as is seen by the decline in tankfill system sales, but is encouraged by the increase in sales of hookah systems and public water safety products. The Company's products are largely non-essential, disposable income type items, and therefore are more likely to be sacrificed by consumers in preference for essential goods during depressed economic conditions. 23 --------------------------------------------------------------------------------Cost of net revenues. For the six months ended June 30, 2011, we had cost of net revenues of $737,608 as compared with cost of net revenues of $884,508 for the six months ended June 30, 2010, a decrease of $146,900, or 16.61%. The decrease in cost of net revenues is primarily a result of reduction in quantity of materials used resulting from the 14.45% decrease in net revenues, net of an approximate 8% decrease in material costs as a percentage of net revenues, and a 4% increase in freight costs, and 2% increase in other costs. The approximate 8% decline in material prices for the six months ended June 30, 2011, as compared to the same period in 2010 is attributed to the change in the sales mix. In the second quarter of 2011 as compared to the second quarter of 2010, more hookah system and related sales occurred and less tankfill system and related sales occurred. Of these products, those sold during the six months ended June 30, 2011, had better profit margins than those sold during the six months ended June 30, 2010. Gross profit. For the six months ended June 30, 2011, we had a gross profit of $222,486 as compared to gross profit of $237,740 for the six months ended June 30, 2010, a decrease of $15,254, or 6.42%. The decrease is primarily attributable to the decrease in Net revenues. Operating expenses. For the six months ended June 30, 2011, we had total operating expenses of $637,919 as compared to total operating expenses of $642,454 for the six months ended June 30, 2010, a decrease of $4,535, or less than 1%. Other expense, net. For the six months ended June 30, 2011, we had other expense, net of $2,320,577 as compared to other expense, net of $50,796 for the six months ended June 30, 2010, an increase of $2,269,781, or 4,468.42%. This account is comprised of other (income) expense, net, and interest expense. Interest expense for the period increased $2,271,390 and other income, net increased $1,609. Other (income) expense, net, is comprised of transactions that are generally of a non-recurring nature. The increase in interest expense of $2,271,390 is primarily attributable to approximately $165,666 accretion of discounts (non-cash) on convertible debentures issued during the fourth quarter of 2010 through the second quarter of 2011, as well as $2,082,500 interest expense (non-cash) on forgiveness of debt for preferred stock. The remaining net increase is primarily due to an increase in interest on convertible debentures, which did not exist during the six months ended 2011, net a decrease in interest resulting from pay down of a portion of a note-payable with restricted stock in the second quarter of 2011. Provision for income tax expense (benefit). For the six months ended June 30, 2011, we had a provision for income tax expense (benefit) of ($2,943), as compared to a provision for income tax expense (benefit) of ($95,616) for the six months ended June 30, 2010, a decrease in the provision for income tax benefit of $92,673, or 96.92%. The decrease in provision for income tax benefit is primarily a result of increase in the valuation allowance against the deferred tax asset attributable to realization of the net operating loss carryforward. Net loss. For the six months ended June 30, 2011, we had net loss of $2,733,067 as compared to net loss of $359,894 for the six months ended June 30, 2010, an increase of $2,373,173, or 659.41%. The increase in net loss is attributable to $15,254 decrease in gross profit, $4,535 decrease in operating expenses, $2,269,781 increase in other expense, net, and $92,673 decrease in provision for income tax benefit. Liquidity and Capital Resources As of June 30,2011, the Company had cash and current assets of $921,340 and current liabilities of $2,300,433 or a current ratio of .40 to 1. This represents a working capital deficit of $1,379,093. As of December 31, 2010, the Company had cash and current assets of $620,270 and current liabilities of $997,033 or a current ratio of .62 to 1. As of December 31, 2009, the Company had cash and current assets of $704,629 and current liabilities of $859,066, or a current ratio of .82 to 1. 24 --------------------------------------------------------------------------------The accompanying consolidated financial statements included herein 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. However, we have incurred losses since 2009, and expect to have losses into much of 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 of the Company's financial statements. 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 discussed in Note 14. PATENT INFRINGEMENT SETTLEMENTS of the Company's financial statements. 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, we do not expect that our existing cash flow will be sufficient to fund our presently anticipated operations beyond the third 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 shares of restricted common stock to financial our working capital needs as discussed in Note 18. SUBSEQUENT EVENTS of the Company's financial statements. We have implemented some cost saving measures and will continue to explore more to reduce operating expenses. We currently seek to raise capital through private equity offerings and debt financing. Such financing may not be available when we need it or may not be available on terms that are favorable to us. If we raise additional capital through the sale of our securities, your ownership interest will be diluted and the terms of the financing may adversely affect your holdings or rights as stockholders. 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. Certain Business Risks The Company is subject to various risks, which may materially harm its business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase the Company's common stock. These are not the only risks and uncertainties that the Company faces. If any of these risks or uncertainties actually occurs, the Company's business, financial condition or operating results could be materially harmed. In that case, the trading price of the Company's common stock could decline and you could lose all or part of your investment. Our auditors have raised substantial doubt about our ability to continue as a going concern. We do not expect that our existing cash flow will be sufficient to fund our presently anticipated operations beyond the third 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. 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. 25 --------------------------------------------------------------------------------Failure to timely pay obligations as they come due could lead to significant financial obligations We have issued a series of convertible debentures that convert at a discount to the market price of our common stock. We currently do not have working capital available to satify these notes. Failure to repay the notes could lead to significant penalties including acceleration of the due dates on the notes and penalties payable in both cash and stock. If in the future, if we fail to timely meet our financial obligations as they come due, our operating results, balances sheet and future ability to raise capital could be seriously harmed. Furthermore, conversion of the notes could result in substantial dilution to our shareholders. Our Common Stock May Be Affected By Limited Trading Volume and May Fluctuate Significantly Our common stock is traded on the Over-the-Counter Bulletin Board. There is a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders' ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult For Investors to Sell Their Shares Due To Suitability Requirements Our common stock is deemed to be "penny stock" as that term is defined under the Securities Exchange Act of 1934. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Our common stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline. We Depend On the Services of Our Chief Executive Officer Our success largely depends on the efforts and abilities of Robert M. Carmichael, our President and Chief Executive Officer. Mr. Carmichael has been instrumental in securing our existing financing arrangements. Mr. Carmichael is primarily responsible for the development of our technology and the design of our products. The loss of the services of Mr. Carmichael could materially harm our business because of the cost and time necessary to recruit and train a replacement. Such a loss would also divert management attention away from operational issues. We do not presently maintain a key-man life insurance policy on Mr. Carmichael. We Require Additional Personnel and Could Fail To Attract or Retain Key Personnel Our continued growth depends on our ability to attract and retain a Chief Financial Officer, a Chief Operations Officer, and additional skilled associates. We are currently utilizing the services of two professional consultants in the absence of a Chief Financial Officer and Chief Operations Officer. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or Chief Operations Officer may have a material adverse effect upon us. Also, there can be no assurance that we will be able to retain our existing personnel or attract additional qualified associates in the future. 26 --------------------------------------------------------------------------------Our Failure to Obtain Intellectual Property and Enforce Protection Would Have a Material Adverse Effect on Our Business Our success depends in part on our ability, and the ability of our patent and trademark licensors, entities owned and controlled by Robert M. Carmichael, our President and Chief Executive Officer, to obtain and defend our intellectual property, including patent protection for our products and processes, preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing the proprietary rights of third parties, both in the United States and in other countries. Despite our efforts to protect our intellectual proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection. Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future. We May Be Unable To Manage Growth Successful implementation of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management and financial resources. If we fail to manage our growth effectively, our business, financial condition or operating results could be materially harmed, and our stock price may decline. Reliance on Vendors and Manufacturers We deal with suppliers on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued supply or pricing. In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production facility capacity. Historically, we have purchased enough inventories of products or their substitutes to satisfy demand. However, unanticipated failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us to curtail or cease operations. Dependence on Consumer Spending The success of the our business depends largely upon a number of factors related to consumer spending, including current and future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products. Any significant deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect our financial results. The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher fuel prices; declines in the value of investments and residential real estate; and increases in federal and state taxation can all negatively affect our results. There can be no assurance that in this type of environment consumer spending will not decline beyond current levels, thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely affected by continuing or future downturns in the economy, boating industry, or dive industry. If declines in consumer spending on recreational marine accessories and dive gear are other than temporary, we could be forced to curtail operations. Government Regulations May Impact Us The SCUBA industry is self-regulating; therefore, Brownie's is not subject to government industry specific regulation. Nevertheless, Brownie's strives to be a leader in promoting safe diving practices within the industry and is at the forefront of self-regulation through responsible diving practices. Brownie's is subject to all regulations applicable to "for profit" companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive regulations in the future, which could force us to curtail or cease operations. 27 --------------------------------------------------------------------------------Bad Weather Conditions Could Have an Adverse Effect on Operating Results Our business is significantly impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably rough surf, may decrease boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may not be indicative of results of any future period. Investors Should Not Rely On an Investment in Our Stock for the Payment of Cash Dividends We have not paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the future. Investors should not make an investment in our common stock if they require dividend income. Any return on an investment in our common stock will be as a result of any appreciation, if any, in our stock price. The Manufacture and Distribution of Recreational Diving Equipment Could Result In Product Liability Claims We, like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or side effects, if any. We do not anticipate obtaining contractual indemnification from parties-supplying raw materials, manufacturing our products or marketing our products. In any event, any such indemnification if obtained will be limited by our terms and, as a practical matter, to the creditworthiness of the indemnifying party. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our operations and financial conditions, which could force us to curtail or cease our business operations. |