U.S. SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC  20549




FORM 10-Q


(mark one)




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




For the quarterly period ended March 31, 2011




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




For the transition period from _______ to _______.




Commission File No. 000-28321




Brownie’s Marine Group, Inc.


(Name of Small Business Issuer in Its Charter)




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




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes  x      No   ̈




Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Website, in any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).




Yes  o    No  o




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer  ̈
Accelerated filer   ̈Non-accelerated filer  ̈ (Do not check if a smaller reporting company)
Smaller reporting company x




Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).


Yes   ̈    No  x




There were 25,347,897 shares of common stock outstanding as of May 16, 2011.









PART I




Item 1.    Financial Statements




Financial Information




BROWNIE'S MARINE GROUP, INC.
 CONSOLIDATED BALANCE SHEETS
 
 March 31,2011


December 31,(Unaudited)


2010ASSETSCurrent assetsCash

$
16,675


$
4,171Accounts receivable, net of $15,000 and $15,000 allowance for doubtful accounts, respectively


10,228



29,553Accounts receivable - related parties


45,961



23,998Inventory


491,195



525,595Prepaid expenses and other current assets


105,108



36,484Deferred tax asset, net - current


444



469Total current assets


669,611



620,270Property, plant and equipment, net


1,131,173



1,139,911Deferred tax asset, net - non-current


128,258



108,309Other assets


2,895



2,895Total assets

$
1,931,937


$
1,871,385LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilitiesAccounts payable and accrued liabilities

$
551,768


$
510,641Customer deposits


61,511



58,390Royalties payable - related parties


94,202



87,048Other liabilities


2,539



13,346Other liabilities and accrued interest - related parties


30,987



31,752Convertible debentures, net


149,108



90,676Notes payable - current portion


25,923



—Notes payable - related parties - current portion


228,110



205,180Total current liabilities


1,144,148



997,033Long-term liabilitiesNotes payable - long-term portion


1,063,124



1,053,993Notes payable - related parties - long-term portion


101,084



124,014Total liabilities


2,308,356



2,175,040Commitments and contingenciesStockholders' deficitPreferred stock; $0.001 par value: 10,000,000 shares authorized; No shares issued and outstanding


—



—Common stock; $0.001 par value; 250,000,000 shares authorized;5,896,081 and  4,051,502 share issued, respectively;4,430,564 and 4,051,502 shares outstanding, respectively


4,431



4,052Common stock payable; $0.001 par value; 223,283 and 543,240 shares, respectively


223



543Prepaid equity based compensation


(19,336
)


(41,586
)Additional paid-in capital


2,411,450



2,233,119Accumulated deficit


(2,773,187
)


(2,499,783
)Total stockholders' deficit


(376,419
)


(303,655
)Total liabilities and stockholders' deficit

$
1,931,937


$
1,871,385
 
 See Accompanying Unaudited Notes to Consolidated Financial Statements
  2
 
 BROWNIE'S MARINE GROUP, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 Three Months Ended March 31,2011


2010Net revenuesNet revenues

$
209,506


$
318,916Net revenues - related parties


153,394



145,267Total net revenues


362,900



464,183Cost of net revenuesCost of net revenues


330,461



378,887Royalties expense - related parties


9,121



12,840Total cost of net revenues


339,582



391,727Gross profit


23,318



72,456Operating expensesSelling, general and administrative


209,052



258,163Research and development costs


20,578



15,560Total operating expenses


229,630



273,723Loss from operations


(206,312
)


(201,267
)Other expense, netOther (income) expense, net


(3,128
)


1,133Interest expense


86,330



20,342Interest expense - related parties


3,814



5,755Total other expense, net


87,016



27,230Net loss before provision for income taxes


(293,328
)


(228,497
)Provision for income tax benefit


(19,924
)


(68,343
)Net loss

$
(273,404
)

$
(160,154
)Basic loss per common share

$
(0.06
)

$
(0.09
)Diluted loss per common share

$
(0.06
)

$
(0.09
)Basic weighted average common shares outstanding


4,329,081



1,803,497Diluted weighted average common shares outstanding


4,329,081



1,803,497
 
 See Accompanying Unaudited Notes to Consolidated Financial Statements
  3
  BROWNIE'S MARINE GROUP, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
 
 Prepaid


Additional





TotalCommon stock


Common stock payable


equity based


paid-in


Accumulated


stockholders'Shares


Amount


Shares


Amount


compensation


capital


deficit


deficitBalance, December 31, 2010


4,051,502


$
4,052



543,240


$
543


$
(41,586
)

$
2,233,119


$
(2,499,783
)

$
(303,655
)Issuance of stock payable from prior reporting periods


337,290



337



(337,290
)


(337
)


—



—



—



—Discounts on convertible debentures


—



—



—



—



—



168,500



—



168,500Stock granted for consulting and legal services


41,772



42



17,333



17



—



9,831



—



9,890Current period amortization of prepaid equity based compensation


—



—



—



—



22,250



—



—



22,250Net loss


—



—



—



—



—



—



(273,404
)


(273,404
)Balance, March 31, 2011 (Unaudited)


4,430,564


$
4,431



223,283


$
223


$
(19,336
)

$
2,411,450


$
(2,773,187
)

$
(376,419
)
  See Accompanying Unaudited Notes to Consolidated Financial Statements
  4
  BROWNIE'S MARINE GROUP, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 
 Three Months Ended March 31,2011


2010Cash flows from operating activities:Net loss

$
(273,404
)

$
(160,154
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


8,738



8,567Change in deferred tax asset, net


(19,924
)


(68,343
)Equity based compensation for consulting and legal services


9,890



6,250Accretion of convertible debt discounts


58,432Amortization of prepaid equity based compensation expense


22,250



21,774Changes in operating assets and liabilities:Change in accounts receivable, net


19,325



(4,066
)Change in accounts receivable - related parties


(21,963
)


(32,059
)Change in inventory


34,400



(60,948
)Change in prepaid expenses and other current assets


7,376



29,419Change in other assets


—



4,073Change in accounts payable and accrued liabilities


41,127



132,394Change in customer deposits


3,121



73,255Change in income tax refunds receivable


—



9,357Change in other liabilities


(10,807
)


(635
)Change in other liabilities and accrued interest - related parties


(765
)


4,558Change royalties payable  - related parties


7,154



10,839Net cash used in operating activities


(115,050
)


(25,719
)Cash flows from investing activities:Purchase of fixed assets


—



(1,630
)Net cash used in investing activities


—



(1,630
)Cash flows from financing activities:Proceeds from borrowing on convertible debenture


92,500



—Proceeds from borrowing on loan payable


—



100,000Proceeds from borrowings on notes payable


35,764



—Principal payments on notes payable


(710
)


(11,935
)Principal payments on notes payable - related parties


—



(5,107
)Net cash provided by financing activities


127,554



82,958Net change in cash


12,504



55,609Cash, beginning of period


4,171



2,713Cash, end of period

$
16,675


$
58,322Supplemental disclosures of cash flow information:Cash paid for interest

$
37,891


$
20,510Cash paid for income taxes

$
—


$
—Supplemental disclosures of non-cash investing activities and future operating activities:Convertible debenture issued for prepaid inventory

$
76,000


$
—Discounts on convertble debentures

$
168,500


$
—
  See Accompanying Unaudited Notes to Consolidated Financial Statements
  5
  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.  However, we have incurred losses since 2009, and expect to have losses into a portion 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.
 
 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 14. 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 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 Note 18. SUBSEQUENT EVENTS. We have implemented some cost saving measures and will continue to explore more to reduce operating expenses.
 
 If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
  6
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
  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 March 31, 2011, and 2010, was $5,415 and $6,041, 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.
  7
  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 using the market price of the stock on the date of the related agreement.
 
 For the three months ended March 31, 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 months ended March 31, 2010, the Company recorded stock based compensation associated with warrants granted on December 31, 2009.  See Note 11. STOCK WARRANTS ISSUED FOR LEGAL SERVICES for further discussion.  For the three months ended March 31, 2011, the company granted stock for consulting services.  See Note 13.  STOCK ISSUED FOR CONSULTING SERVICES.
 
 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 months ended March 31, 2011, and 2010, since their effect was antidilutive.
  8
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 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.
 
 In April 2010, the FASB issued ASU No. 2010-13 which will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades.  This ASU will be effective for the first fiscal quarter beginning after December 15, 2010.  The Company adopted this ASU in the quarter ended March 31, 2011.  Adoption of this ASU did not have a material financial impact on our consolidated financial statements.
 
 2.
INVENTORY
 
 Inventory consists of the following as of:
 
 March 31, 2011


December 31, 2010Raw materials

$
295,807


$
333,107Work in process


—



—Finished goods


195,388



192,488$
491,195


$
525,595
 
 3.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
 Prepaid expenses and other current assets totaling $105,108 at March 31, 2011, consists of $78,820 of prepaid inventory, $25,453 of prepaid insurance, and $835 other prepaid expenses and current assets.
 
 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.
  9
  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:
 
 March 31, 2011


December 31, 2010Building, building improvements, and land

$
1,224,962


$
1,224,962Furniture, fixtures, vehicles and equipment


124,197



124,1971,349,159



1,349,159Less:  accumulated depreciation and amortization


( 217,986
)


( 209,248
)$
1,131,173


$
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 March 31, 2011 and 2010 represented 42.1% and 31.18%, respectively, of total net revenues.  For the three months ended March 31, 2010, sales to one unrelated customer represented 17.07% of total net revenues.  Sales to no other customers represented greater than 10% of net revenues for the three months ended March 31, 2011 and 2010.
 
 6.
RELATED PARTIES TRANSACTIONS
 
 Notes payable – related parties
 
 Notes payable – related parties consists of the following as of March 31, 2011:
 
 Promissory note payable to the Chief Executive Officer of the Company,unsecured, bearing interest at 7.5% per annum, due in monthly principaland interest payments of $7,050, maturing on August 1, 2013.

$
291,934Promissory note payable due an entity in which the Company’s ChiefExecutive Officer has a financial interest, GKR Associates, LLC., securedby third mortgage on real property, having a carrying value of $1,114,136at March 31, 2011, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012.


37,260329,194Less amounts due within one year


228,110Long-term portion of notes payable – related parties

$
101,084
  10
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 6.
RELATED PARTY TRANSACTIONS (continued)
 
 Notes payable – related parties (continued)
 
 As of March 31, 2011, principal payments on the notes payable – related parties are as follows:
 
 2011

$
205,1802012


82,1592013


41,8552014


—2015


—Thereafter


—$
329,194
 
 As of March 31, 2011, the Company was approximately twenty-one 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 also in arrears.
 
 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 Associates, LLC’s (GKR) second mortgage to a third mortgage.  See Note 9. NOTES PAYABLEfor further discussion. The Company was nine months in arrears on mortgage payments due GKR at March 31, 2011.  No default notice has been received and the Company plans to make payments as able.
 
 Notes payable – related parties
 
 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 principaland interest payments of $7,050, maturing on August 1, 2013.

$
291,934Promissory note payable due an entity in which the Company’s ChiefExecutive Officer has a financial interest, GKR Associates, LLC., securedby third mortgage on real property, having a carrying value of $1,120,994at December 31, 2010, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012.


37,260329,194Less amounts due within one year


205,180Long-term portion of notes payable – related parties

$
124,014
 
 Net revenues and accounts receivable – related parties – The Company sells products to three entities, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer.  Terms of sale are no more favorable than those extended to any of the Company’s other customers.  Combined net revenues from these entities for three months ended March 31, 2011, and 2010, was $153,394 and $145,267, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at March 31, 2011, was $29,824, $8,334, and $7,415, 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.
  11
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 6.
RELATED PARTY TRANSACTIONS (continued)
 
 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 March 31, 2011, and 2010, was $9,121 and $12,840, respectively.  As of March 31, 2011, the Company was approximately twenty-one 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 14. 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:
 
 March 31, 2011


December 31, 2010Accrued interest on Notes payable – related parties

$
22,765


$
23,530Due to Principals of Carleigh Rae Corp., net


8,222



8,222Other liabilities – related parties

$
30,987


$
31,752
 
 As of March 31, 2011, the Company was approximately twenty-one 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 14. PATENT INFRINGEMENT SETTLEMENTS.
  12
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 7.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
 Accounts payable and accrued liabilities of $551,768 at March 31, 2011, consists of $343,264 accounts payable trade, $60,574 balance of legal expense that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $64,020 accrued payroll and related fringe benefits, $45,152 accrued sales and payroll taxes and withholding, $24,169 accrued real estate taxes, $12,745  accrued interest, and $1,844 other accrued liabilities.
 
 Accounts payable and accrued liabilities of $510,642 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 $4,546 other accrued liabilities.
 
 8.
OTHER LIABILITIES
 
 Other liabilities of $2,539 at March 31, 2011, consists of on-line training liability.
 
 Other liabilities of 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.
 
 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.
  13
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 9.
NOTES PAYABLE
 
 Notes payable consists of the following as of March 31, 2011:
 
 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.

$
1,053,993Promissory note payable, unsecured, bearing interest at 5% per annum, due in monthly principal and interest payments of $2000,  maturing on August 31, 2012.


35,0541,089,047Less amounts due within one year


25,923Long-term portion of notes payable

$
1,063,124
 
 As of March 31, 2011, principal payments on the notes payable are as follows:
 
 2011

$
20,0852012


1,068,9622013


—2014


—2015


—Thereafter


—$
1,089,047
 
 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 $199,990.98 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.
 
 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.
  14
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 9.
NOTES PAYABLE (continued)
 
 In February 2011, the Company converted a vendor payable into an unsecured promissory note as reflected above in table summarizing notes payable as of March 31, 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 March 31, 2011, the Company was in arrears on approximately one and half 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.

$
1,053,993Less amounts due within one year—Long-term portion of notes payable

$
1,053,993
 
 10.
CONVERTIBLE DEBENTURES
 
 The company had five outstanding convertible debentures as of March 31, 2011.  The first was issued on October 4, 2010, the second on November 27, 2010, the third on January 1, 2011, the fourth on February 10, 2011, and the fifth on March 4, 2011,  as discussed below.
 
 Effective October 4, 2010, the Company converted an accounts payable for legal services to a $20,635 convertible debenture.  The debenture matures 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 March 31, 2011, the balance of the convertible debenture is $20,635 which is $20,635 debenture, net $20,635 discount, plus $20,635 accretion.  At December 31, 2010, the balance of the convertible debenture is $10,318 which is $20,635 debenture, net $20,635 discount, plus $10,318 of amortization.
 
 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 maturity.  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.
  15
  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 will accrete the discount to the convertible debenture and recognize interest expense through its maturity on May 27, 2011.  At March 31, 2011, the balance of the convertible debenture is $107,141 which is $125,000 debenture, net $53,571 discount, plus $35,712 of accretion.  At December 31, 2010, the balance of the convertible debenture is $80,358 which is $125,000 debenture, net $53,571 discount, plus $8,929 of amortization.   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.  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 as 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 $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 its maturity on November 12, 2011.  At March 31, 2011, the balance of the convertible debenture is $11,291 which is $76,000 debenture, net $76,000 discount, plus $11,291 accretion.
 
 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 has issued and reserved 1,465,517 shares through March 31, 2011, 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 and recognize interest expense through its maturity on November 14, 2011.  At March 31, 2011, the balance of the convertible debenture is $7,083 which is $42,500 debenture, net $42,500 discount, plus $7,083 accretion.
  16
  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 $22,500 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 $27,500, resulting in a combined FMV of $50,000.  Accordingly, the $50,000 debenture is discounted by the combined FMV of the BCF and the warrants.  The Company will accrete the discount to the convertible debenture and recognize interest expense through its maturity on March 9, 2012.  At March 31, 2011, the balance of the convertible debenture is $2,957 which is $50,000 debenture, net $50,000 discount, plus $2,957 accretion.
 
 11.
STOCK WARRANTS ISSUED 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 $6,250 as operating expense for the three months ended March 31, 2010.  As of March 31, 2011, the two tranches of warrants were unexercised.
 
 12.
EQUITY INCENTIVE PLAN
 
 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.
 
 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 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, the Company recognized $11,874 operating expense for these options during the three months ended March 31, 2010. 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 March 31, 2011 all Stock Options authorized under Plan had been granted.
  17
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 13.
STOCK ISSUED FOR CONSULTING SERVICES
 
 From April 16, 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 expire 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, the Company recognized $22,250 as operating expense under the agreements for the three months ended March 31, 2011.  As of March 31, 2011, prepaid equity based compensation under these agreements totaled $19,336 and is reflected as a component of shareholders’ equity for the related consulting services as yet to be provided as of that date.
 
 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.
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.
 
 15.
INCOME TAXES
 
 The components of the provision for income tax benefit are as follows for the three months ended:
 
 March 31, 2011


March 31, 2010Current taxesFederal

$
—


$
—State


—



—Current taxes


—



—Change in deferred taxes


(93,639
)


(119,826
)Change in valuation allowance


73,715



51,483Provision for income tax benefit

$
(19,924
)

$
(68,343
)
 
  18
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 15.
INCOME TAXES (continued)
 
 The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at March 31, 2011:
 
 Deferred tax assets:Equity based compensation

$
21,743Allowance for doubtful accounts


5,100Depreciation and amortization timing differences


(6,218
)Net operating loss carryforward


543,414On-line training certificate reserve


888Total deferred tax assets


564,927Valuation allowance


(436,225
)Deferred tax assets net of valuation allowance


128,702Less deferred tax assets – non-current, net of valuation allowance


128,258Deferred tax assets – current, net of valuation allowance

$
444
  The effective tax rate used for calculation of the deferred taxes as of March 31, 2011 was 34%.  The Company has established a valuation allowance against deferred tax assets of $443,875 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, and a 76% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.
 
 The significant differences between the statutory tax rate and the effective tax rates for the Company for the three months ended are as follows:
 
 March 31, 2011


March 31, 2010Statutory tax rate benefit


—
%


—
%Increase (decrease) in rates resulting from:Net operating loss carryforward or carryback


(32
)%


(44
)%Equity based compensation and loss


—
%


(3
)%Book/tax depreciation and amortization differences


—
%


(6
)%Change in valuation allowance


25
%


23
%Other


—
%


—
%Effective tax rate benefit


(7
)%


(30
)%
 
  19
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 15.
INCOME TAXES (continued)
 
 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

$
21,743Allowance for doubtful accounts


5,100Depreciation and amortization timing differences


(6,199
)Net operating loss carryforward


449,707On-line training certificate reserve


938Total deferred tax assets


471,289Valuation allowance


(362,511
)Deferred tax assets net of valuation allowance


108,778Less deferred tax assets – non-current, net of valuation allowance


108,309Deferred 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, and a 75% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.
 
 16.
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 18.  SUBSEQUENT EVENTS for discussion of issuance of preferred stock.
 
 17.
LEGAL
 
 On March 18, 2011, a legal settlement was reached between the Estate of Lester Metz and Brownie’s Marine Group, Inc. under a claim brought in the U.S. District Court for the Eastern District of Pennsylvania.  The settlement amount did not exceed the limits of the Company’s insurance coverage, and the Company admitted no fault or liability in the case.
  20
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 18.
SUBSEQUENT EVENTS
 
 On April 4, 2011, a convertible debenture as discussed in Note 10. CONVERTIBLE DEBENTURES matured.  The Company did not pay the balance due under the debenture on that date, nor did the owner of the debenture provide notice for conversion to Common Shares.  Instead, as allowable per the terms of the debenture, the lender assigned his interest to a third party who assumed the agreement.  Through May 14, 2011, the new owner of the debenture has called for and been issued 900,000 shares under the agreement.
 
 On April 21, 2011, the Company issued 425,000 shares of preferred stock, designated as Series "A" Convertible Preferred Stock, to Robert Carmichael, the Chief Executive of the Company at a price per share of $.001.  The issuance is in consideration of the forgiveness of $42,500 advanced by Mr. Carmichael to the Company.  The Preferred Stock may be converted to common stock at a rate of $.00001 per share, or 42,500,000 shares of common stock.  In addition, the Company granted Mr. Carmichael 20,000,000 shares of restricted 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.
 
 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 and is payable on November   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  detachable warrants to purchase restricted shares of the Company’s common stock at $.25 and $.35 per share, respectively.
  21





Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.




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 March 31, 2011, As Compared To the Three Months Ended March 31, 2010




Net revenues.  For the three months ended March 31, 2011, we had net revenues of $362,900 as compared to net revenues of $464,183 for the three months ended March 31, 2010, a decrease of $101,283, or 21.82%.  Tankfill system sales declined approximately $99,000 for the three months ended March 31, 2011 as compared to the same period in 2010.  Hookah system and related sales remained relatively flat, or an approximate $2,000 decline, for the three months ended March 31, 2011 as compared to the three months ended March 31, 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.  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.




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Cost of net revenues.  For the three months ended March 31, 2011, we had cost of net revenues of $339,582 as compared with cost of net revenues of $391,727 for the three months ended March 31, 2010, a decrease of $52,145, or 13.31%.   The decrease in cost of net revenues is primarily a result of reduction in cost of materials attributable the decrease in net revenues.   Cost of materials as a percentage of net revenues for the three months ended March 31, 2011, as compared to the same period in 2010, declined approximately 5%, but was offset by an increase in freight costs.




Gross profit.  For the three months ended March 31, 2011, we had a gross profit of $23,318 as compared to gross profit of $72,456 for the three months ended March 31, 2010, a decrease of $49,138, or 67.82%.  The decrease is primarily attributable to the decrease in net revenues.




Operating expenses.  For the three months ended March 31, 2011, we had total operating expenses of $229,630 as compared to total operating expenses of $273,723 for the three months ended March 31, 2010, a decrease of $44,093, or 16.11%.  The $44,093 decrease is due to a decrease in selling, general and administrative costs of $49,111, net of $5,018 increase in research and development costs as compared to the same period in 2010.  The net decrease in sales, general and administrative costs for the quarter ended March 31, 2011, as compared to the same period in 2010, is primarily attributable to a decrease of approximately $46,795 in legal and accounting expenses.  This is due to timing difference between 2010 and 2011.  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.




Other expense, net.  For the three months ended March 31, 2011, we had other expense, net of $87,016 as compared to other expense, net of $27,230 for the three months ended March 31, 2010, an increase of $59,786, or 219.56%.  This account is comprised of other (income) expense, net, and interest expense.  Interest expense for the period increased $64,047 and other income, net increased $4,261.  Other (income) expense, net, is comprised of transactions that are generally of a non recurring nature.  The increase in interest expense of $64,047 was primarily attributable to approximately $58,000 accretion of discounts on convertible debentures issued during the fourth quarter of 2010, and the first quarter of 2011. In addition, interest expense increased due to the interest  on the convertible debentures.




Provision for income tax benefit.  For the three months ended March 31, 2011, we had a provision for income tax benefit of $19,924, as compared to $68,343 for the three months ended March 31, 2010, a decrease in provision for income tax benefit of $48,419, or 70.85%.  The decrease in provision for income tax benefit is primarily a result of an increase in the valuation allowance against the deferred tax asset attributable to realization of the net operating loss carryforward.




Net loss.For the three months ended March 31, 2011, we had net loss of $273,404 as compared to net loss of $160,154 for the three months ended March 31, 2010, an increase of $113,250, or 70.71%.  The increase in net loss is attributable to $49,138 decrease in gross profit, $44,093 decrease in operating expenses, $59,786 increase in other expense, net, and $48,419 decrease in provision for income tax benefit.




Liquidity and Capital Resources




As of March 31, 2011, the Company had cash and current assets of $669,611 and current liabilities of $1,144,148 or a current ratio of .59 to 1.  This represents a working capital deficit of $474,537.  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.




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 a portion 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.


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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 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.





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 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.




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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.




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.




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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.




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.


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Item 3.  Quantitative and Qualitative Disclosures About Market Risk.





Market risk generally represents the risk of loss that may be expected to result from the potential change in value of a financial instrument as a result of fluctuations in credit ratings of the issuer, equity prices, interest rates or foreign currency exchange rates. We do not use derivative financial instruments for any purpose.




Item 4.  Controls and Procedures




Evaluation of Disclosure Controls and Procedures




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




Based on this evaluation, our Chief Executive Officer and principal financial and accounting officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective such that the information relating to our company required to be disclosed in our SEC reports (i) is recorded processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management to allow timely decisions regarding required disclosures. Our management concluded that our disclosure controls and procedures were not effective as described in more detail below.  A material weakness is a control deficiency, or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected.




The specific weakness identified by our management was a lack of a timely review by corporate management.  The weakness is principally due to lack of working capital to retain the legal, accounting and external audit services, which are integral to the Company’s process for timely disclosure and financial reporting.  This deficiency resulted in the delinquent filing of our annual report on Form 10-K for the year ended December 31, 2010, as well as failure to timely file a number of 8-Ks relating to convertible debenture agreements executed in the first quarter of 2011.  The convertible debenture transactions are discussed below in Item 2. Unregistered Sales of Equity Securities and Use of Proceeds, and are disclosed in the notes to the Company’s Financial Statements for the period covered by this report included herein.




To mitigate the chance for reoccurrence of this noted deficiency, as disclosed in the Liquidity and Capital Resources section of this 10-Q Report, the company is currently in the process of addressing its working capital shortfall whereby this would provide the needed funds to retain the legal, accounting, and external audit services required for timely disclosure and financial reporting.





Changes in Internal Controls Over Financial Reporting




There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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PART II – OTHER INFORMATION




Item 1.  Legal Proceedings




On March 18, 2011, a legal settlement was reached between the Estate of Lester Metz and Brownie’s Marine Group, Inc. under a claim brought in the U.S. District Court for the Eastern District of Pennsylvania.  The settlement amount did not exceed the limits of the Company’s insurance coverage, and the Company admitted no fault or liability in the case.




Item 1a. Risk Factors




Not Applicable to Smaller Reporting Company.




Item 2.  Unregistered Sales of Equity Securitiesand Use of Proceeds




During the period covered by this report, the Company sold securities without registration under the Securities Act of 1933 (the “Securities Act”) in reliance upon the exemption provided in Section 4(2) as described below or as otherwise previously disclosed on Form 8-K.  The securities were issued with a legend restricting their transferability absent registration of applicable exemption.





During  the three months ended March 31, 2011, the Company issued 41,772 shares of restricted common stock to a consultant pursuant to a consulting agreement for financial services provided.





During the three months ended March 31, 2011, the Company issued 337,290 shares of restricted common stock that was disclosed as payable to three different consultants at December 31, 2010, for financial and legal 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.  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 as 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 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.





Item 3.  Defaults Upon Senior Securities


None.




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Item 4.  (Removed and Reserved)




Item 5.  Other Information




None.


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Item 6.  Exhibits




Exhibit No.

Description

Location2.2

Merger Agreement, dated June 18, 2002 by and among United Companies Corporation, Merger Co., Inc. and Avid Sportswear & Golf Corp.

Incorporated by reference to Exhibit 2.02 Amendment No. 1 to Form S-4 filed June 24, 2002.2.3

Articles of Merger of Avid Sportswear & Golf Corp. with and into Merger Co., Inc.

Incorporated by reference to Exhibit 2.03 Amendment No. 1 to Form S-4 filed June 24, 2002.3.1

Articles of Incorporation

Incorporated by reference to Exhibit 3.1 of 10-Q for the quarter ended September 30, 2009 filed on November 13, 2009.3.4

Designation of Series A Preferred Stock

Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 27, 2011.3.5

Bylaws

Incorporated by reference to Exhibit 3.04 to the Registration Statement on Form 10-SB.5.1

2007 Stock Option Plan

Incorporated by reference to the appendix to the Company's Definitive Information Statement on Schedule 14C filed July 31, 2007.10.1

Share Exchange Agreement, dated March 23, 2004 by and among the Company, Trebor Industries, Inc. and Robert Carmichael

Incorporated by reference to Exhibit 16.1 to Current Report on Form 8-K filed April 9, 200410.2

Non-Exclusive License Agreement – BC Keel Trademark

Incorporated by reference to Exhibit 10.18 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.10.3

Exclusive License Agreement - Brownie's Third Lung, Brownie's Public Safety, Tankfill, and Related Trademarks and Copyrights

Incorporated by reference to Exhibit 10.20 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.10.4

Non-Exclusive License Agreement - Garment Integrated or Garment Attachable Flotation Aid and/or PFD

Incorporated by reference to Exhibit 10.22 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.10.5

Non-Exclusive License Agreement - SHERPA Trademark and Inflatable Flotation Aid/Signal Device Technology

Incorporated by reference to Exhibit 10.24 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.10.6

Non-Exclusive License Agreement - Tank- Mounted Weight, BC or PFD-Mounted Trim Weight or Trim Weight Holding System

Incorporated by reference to Exhibit 10.25 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.10.7

Exclusive License Agreement – Brownie’s Third Lung and Related Trademarks and Copyright

Incorporated by reference to Exhibit 10.26 to Form 10KSB for the year ended December 31, 2006 filed April 4, 2007.


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Exhibit No.

Description

Location10.8

Agreement for Purchase and Sale of Property Between Trebor Industries, Inc. and GKR Associates, Inc. dated February 21, 2007

Incorporated by reference to Exhibit 10.28 to Form 10KSB for the year ended December 31, 2006 filed April 4, 2007.10.9

First Mortgage dated February 22, 2007  between Trebor Industries, Inc. and  Colonial Bank

Incorporated by reference to Exhibit 10.29 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.10.10

Note dated February 22, 2007 payable to GKR Associates, Inc.

Incorporated by reference to Exhibit 10.30 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.10.11

Second Mortgage dated February 22, 2007  between Trebor Industries, Inc. and  GKR Associates, LLC.

Incorporated by reference to Exhibit 10.31 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.10.12

Promissory Note dated January 1, 2007 payable to Robert M. Carmichael.

Incorporated by reference to Exhibit 10.32 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.10.13

Asset Purchase Agreement between Trebor Industries, Inc. and Robert Carmichael.

Incorporated by reference to Exhibt 10.1 to Form 8-K filed on August 1, 2008.10.14

Asset Purchase Agreement between Trebor Industries, Inc. and Robert Carmichael.

Incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 5, 2009.10.15

Asset Purchase Agreement between Trebor Industries, Inc. and Robert Carmichael.

Incorporated by reference to Exhibit 10.1 to Form 8-K filed on January 19, 2010.10.16

Asset Purchase Agreement between Trebor Industries, Inc. and the Carleigh Rae Corporation

Incorporated by reference to  Exhibit 10.1 to Form 8-K filed on January 6, 2011.10.17

Converible Promissory Note issued  to Asher Enterprise , Inc.

Incorporated by reference to Exhibit 4.1 to  Form 8-K filed on March 14, 2011.10.18

Consolidated and Restated Promissory Note issued to BBT.

Incorporated by reference to Exhibit 4.2 to  Form 8-K filed on March 14, 2011.10.19

BBT Forebearance Agreement

Incorporated by reference to Exhibit 10.1 to  Form 8-K filed on March 14, 2011.31.1

Certification Pursuant to Rule 13a-14(a)/15d-14(a)

Provided herewith.31.2

Certification Pursuant to Rule 13a-14(a)/15d-14(a)

Provided herewith.32.1

Certification Pursuant to Section 1350

Provided herewith.32.2

Certification Pursuant to Section 1350

Provided herewith


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SIGNATURES




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




Date:    May 23, 2011
Brownie’s Marine Group, Inc.By:
/s/ Robert M. CarmichaelRobert M. CarmichaelPresident, Chief Executive Officer,Chief Financial Officer/Principal Accounting Officer




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