U.S. SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC  20549




FORM 10-K




(MARK ONE)




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


For the fiscal year ended December 31, 2010




 ̈           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)





Securities registered pursuant to Section 12(b) of the Act:




Title of each class
Name of each exchange on which registeredNone
None





Securities registered pursuant to Section 12(g) of the Act:




Common Stock


(Title of class)




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.


Yes   ̈    No  x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.


Yes   ̈    No  x




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)


Yes   ̈    No   ̈




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.


 ̈




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 file   ̈

Accelerated file
 ̈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




The aggregate market value of the Company's voting stock held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter June 30, 2010, was approximately $450,826 based on the average closing bid and asked price of such stock on that date as quoted on the Over the-Counter Bulletin Board.




There were 26,813,414 shares of common stock outstanding as of April 30, 2011.









FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS




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.









PART I




Item 1.               Business.




Overview




Brownie’s Marine Group, Inc., a Nevada corporation (formerly United Companies 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 located at 940 N.W. 1st Street, Fort Lauderdale, Florida 33311. 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, Acting Principal Accounting Officer and Acting 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.




Executive Summary and Business Strategy




From a garage based business making hookah diving systems in the late 1960’s, the Company has grown into a niche manufacturing and distribution Company with dive-oriented products classified into three categories: Brownie’s Third Lung, Brownie’s Tankfill, and Brownie’s Public Safety.  The Company serves middle income boat owners, higher income yacht owners, recreational divers, and military and public safety officers.




The Company strives for meticulous attention to detail and high quality product innovation.  We believe in the boat/diving industry Brownie’s Marine Group is known as the industry standard for surface supplied “family” dive systems and Scuba Tankfill Systems for yacht diving.  Brownie’s products and support services begin in shallow-water dive systems and extend into deep-water with mixed gas support systems for exploration divers and submersibles/submarines.




The Company holds numerous patents and has a dedicated product development and intellectual property program.  For the Company, 2009 and 2010 produced milestone achievements in core technologies that translated into new product development.  We believe the release of new products will clearly establish Brownie’s as the leader in the diving industry.




The Company is dedicated to designing and building the world’s finest and most innovative products, and to setting the industry standard for the world’s best yacht based diving systems.  While Brownie’s Third Lung hookah diving units were the very first product sold by the Company, the Company recognized early on that there was a need for tank filling systems and unique diving application.  This realization was the catalyst for the addition of the two product categories: Brownie’s Tankfill and Brownie’s Public Safety.   Brownie’s Tankfill designs, builds, and sells diving solutions from marine-ready tank filling compressors, Nitrox MakersTM, complete dive lockers, and full submarine support systems.  Brownie’s Public Safety features highly specialized diving gear for rescue and safety professionals and a unique automatic floatation device for body-armor that can also be integrated into foul weather jackets, traditional load bearing harnesses and other garments (GI-PFD).  The following paragraphs further describe the business and sales models for each of the categories of products sold:




1




Brownie’s Third Lung hookah systems have long been a dominant figure in gasoline powered, high-performance, and feature rich hookah systems. Taking full advantage of the proprietary compressor system, a complete series of traditional “fixed speed” electric compressors were developed for the built-in-boat market in 2005. Brownie’s has never offered for sale a floating battery powered hookah due to the inadequate performance/runtime afforded by previous technology. After years of inventing, testing and development, Brownie’s introduced multiple battery powered models in 2010 that we believe provide performance and runtimes as great as 300% better than the best device on the market at the end of 2009. Our battery powered hookah system  provides divers with gasoline-free all day shallow diving experiences. We believe the multiple inventions incorporated into the development of this product will produce multiple patents over the next few years.  The Company has begun the patent application process.




Brownie’s Tankfill designs, manufactures, sells and installs Scuba tank fill systems for on-board yacht use under the brand “Yacht-Pro”.  Brownie’s Tankfill provides complete diving packages and dive training solutions for yachts.  Brownie’s Tank Fill installs Nitrox systems which allow yacht owners to fill tanks on board.  The Yacht-Pro compressor systems offer a completely marine-prepared, VFD (variable frequency drive)-driven, automated alternative to other compressors on the market.  Brownie’s Tankfill also designs complete dive lockers, mixed gas production and distribution systems, and the unique Nitrox MakerTM.  Nitrox is oxygen-enriched air, which reduces the effects of nitrogen on divers; it is the industry standard for dive professionals. The Nitrox MakerTM continuously generates the oxygen rich breathing gas directly from low-pressure air; no stored oxygen or other gases are required onboard. We believe a parallel product analogy to this device is the fresh water-maker that swept through the yachting industry over the last two-decades.  While less yacht owners may opt for diving systems then fresh water-makers, there is a broad market potential for yacht owners that will want to have an uninterrupted supply of the premium breathing gas.




Brownie’s Public Safety designs, manufactures, distributes, and sells the RES (Rapid Entry System)/ HELOTM system, a complete mini SCUBA system designed for quick water rescues.  The HELO tm system can be donned in less than 60 seconds and stored in a briefcase-size padded bag.  Brownie's Public Safety recently introduced the GI-PFDTM (Garment Integrated Personal Flotation DeviceTM) System for body armor flotation. This system can reliably support the distressed or unconscious wearer in a true life-saving position.  This patented device addresses a heretofore unaddressed need; law-enforcement, coast guard and military personnel are beginning to wear heavy (life-threatening in the water) body armor during waterborne patrol, inspection, and surveillance missions.  The system helps the personnel float in heavy armor, hopefully saving their lives. Multiple avenues of revenue generation are being explored for this unique product group in an effort to maximize value to the Company.




Some of the Company’s Products in Depth




Surface Supplied Air Systems:  The Company produces a line of Surface Supplied Diving products, commonly called hookah systems. These systems allow one to four divers to enjoy the marine environment up to 90 feet without the bulk and weight of conventional SCUBA-gear.  We believe that hookah diving holds greater appeal to families with children of diving age than does conventional SCUBA.  The reduction of weight by eliminating the tank allows smaller divers, especially children, to participate more actively and enjoyably. The design of our product also reduces the effort required to both transport and use it.  We believe the PELETONTM Hose System revolutionizes hose management for recreational surface supplied diving.  It reduces the work required of any single diver by dispersing the load over the entire group. We use a single, larger diameter hose as a main downline with up to four individual hoses attached to it. This configuration not only reduces the weight and bulk of the hose required, but also reduces drag and entanglement. An entire line of deck-mounted systems is available for commercial applications that demand extremely high performance.  In addition to the gasoline-powered units, a series of electric powered systems is also available for light to commercial duty. Powered by battery for portability or household current for virtually unlimited dive duration, these units are used primarily by businesses that work in a marine environment.




E-Reel and Built-in Battery Systems:  Taking convenience one step further, the Company has developed two surface supplied air products that it believes makes boat diving even easier. The Built-in Battery System builds a battery powered electric unit into the boat, eliminating the need to transport the compressor/motor assembly. The need for a flotation tube is also removed, as the boat itself serves in that capacity.  The E-Reel advances this idea by adding a reel system to provide compact storage of up to 150 feet of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. The hose is manually pulled from the reel supporting up to two divers to a depth of fifty feet. When the dive is complete, the hose is automatically recoiled and stowed by the simple activation of a switch.




2




Brownie’s Integrated Air Systems (BIASTM):Compressed air can have many uses on a boat.  The E-Reel and Built in Battery Systems discussed above are just a few examples of BIAS.  In addition to supplying air to divers, integrated air systems provide for the inflating fenders, opening of doors, blowing of air horns, flushing toilets and more.




Kayak Diving Hose Kits: This product allows the use of a conventional SCUBA cylinder, but does not require the diver to wear it.  The cylinder remains above the surface, in a kayak or boat, and a hose ranging from 20 to 150 feet allow the diver to explore the surrounding area.




Drop Weight Cummerbelt:  The patented Drop Weight Cummerbelt is available with all our diving systems, and brings a new dimension to weighting systems.  The belt will accommodate waist sizes from 24 to 54 inches and is depth compensating. It features two pockets, each capable of holding up to 10 pounds of block or shot weight.  Each pocket can be instantly release by either hand, allowing the diver to achieve positive buoyancy in an emergency while retaining the belt itself.  Additionally, the design of this belt provides for expanded capability. By adding an optional sleeve that zips onto the back of the belt, an egress, or bailout system, can be added. The Egressor Add-on Kit contains the sleeve, a 6 or 13 cubic foot SCUBA cylinder, and a SCUBA regulator. In addition to the added safety inherent in this design, many other uses for this present themselves, such as propeller clearing, overboard item retrieval and pool maintenance, to name only a few.




Bell Bottom Flag Bag (BBFB):  Is what we believe is a unique product providing the diver with a collection bag at depth, a marker (floating flag) at the surface and a lifting device independent of the diver as well as an ascent safety device.  This product allows the diver to minimize the amount of gear needed for safety or the harvest of seafood.




BC KEEL Counterweight System:  Is what we believe is a revolutionary ballast system designed to offset the inherent buoyancy of a SCUBA tank and provide the diver with a more reliable ‘face -up’ surface position.  We believe our product has the technical and affordable potential to become the “primary ballast system” with the right promotion and education of the diving public.  A weight system is one of the four most popular items that almost ALL divers buy before the completion of Open Water I Certification: Mask, Snorkel, Fins, and Weight system, because these items are affordable, small, universal, and personal.




Tankfill Compressors:  Many yacht owners enjoy the convenience and freedom of filling their own diving tanks with air, NITROX or custom mixed gases while out on cruise, freeing them from carrying extra cylinders or the need to locate a reputable source in various ports-of-call. Brownie’s Tankfill specializes in the design and installation of high-end custom systems to do just that. From surveying the vessel for installation requirements to custom fabrication of the necessary components, Tankfill provides all the services necessary to satisfy this market.  We believe that every large vessel currently in service, being re-fitted, or being built is a potential customer.  Through OEM relationships we have expanded our market to reach these customers.  Our light duty compressor, the Marine Basic is specifically designed and built to withstand the marine environment with all components and hardware impervious to spray from the elements. The Yacht Pro series contains models for both medium-duty applications, such as recreational divers and small groups, and heavy-duty use as found on research vessels, commercial operations and live-aboard dive boats.  All Yacht Pro models come with the Digital Frequency Drive, which is a Brownie’s Tankfill innovation. The Digital Frequency Drive eliminates the spike previously experienced in starting the compressor, eliminating the need to ration the boat’s electrical usage by shutting down components when the compressor is needed.Brownie’s utilizes an AutoCAD industrial drawing program to design, engineer and maintain drawings of its various products.  Custom design work is done in-house for major product installations and in conjunction with other entities.




NitroxMakerTM:  We believe Nitrox has become the gas of choice for informed recreational diving the world over. What was once only available from land based gas mixing facilities is now easily accessible to the yacht diver. With a Brownie’s NitroxMakerTM, the user simply dials-in a desired oxygen level from 21% to 40%, eliminating the need to transport and handle pure oxygen. The resulting diving gas mix is monitored with digital oxygen analyzers, removing the calculations required to blend or mix the gas.




3




Rapid Entry System (RES) and HELOTMSystem:  The Brownie’s Public Safety product line exists to address the needs of the public safety dive market.  The inherent speed and ease of donning our Drop Weight Cummerbelt with Egressor Add-on Kit identified it as a choice for rapid response for water-related emergencies. A first-responder or officer on-scene can initiate the location and extraction of victims while the dive team is en-route, saving valuable time and increasing the chances for survival of victims. The RES is a small SCUBA system that can be quickly donned over clothes, usually in less than sixty seconds.  Its small size allows it to be stored in areas that do not accommodate a full set of SCUBA gear. The 13 cubic foot aluminum tank can provide up to 15 minutes of air at the surface. The air cell remains stowed under the protective cover and can be partially inflated to achieve positive flotation.  The covers specially designed break-away zipper bursts open to provide instant inflation yet “heals” and can be repacked and fastened quickly in the field. The HELO offers all the same features, but has been specially designed and modified for rescue divers working from helicopters. By placing the cylinder in the front and adding leg straps, the HELO allows divers to use the standard seating configurations. The advantages of this system over full sized SCUBA rigs are increased mobility for the diver and diminished space requirements for the gear. Since the bottle is mounted at the diver’s waist, the diver can more easily control his gear during deployment, further adding to the comfort and safety.




The Dive Industry and Growth Strategy




Currently, we believe that no company in the dive industry offers a complete line of products and services to serve all divers’ needs.  The dive equipment manufacturing industry is highly fragmented with multiple manufacturers producing very similar products.  The top-ten volume leaders in the dive manufacturing industry provide the same product mix: Scuba BC’s (buoyancy compensators), regulators, gauges, masks, fins, snorkels, wetsuits, and a few of the necessary accessories.  These mature companies offer the product selection to the “diving” market as defined during their original growth phase of the last 2-3 decades.




New markets and classes of divers have developed during this period.  The sport sector of Third Lung and Kayak diving have emerged as a result of snorkel divers that wanted to sustain depth or Scuba divers that wanted more time in shallow waters with enhanced efficiency.  SNUBA, a licensing company with a scuba tank in raft dive system offered purely as a luxury destination/resort dive experience reports that they have now exceeded the 5-million diver introduction mark (http://www.snuba.com/ did_you_know.asp). We believe our TOOKA device is an improvement over the SNUBA and we intend to use our TOOKA to enter the introductory diver market.  Alternatively, more aggressive and affluent Scuba divers have created the leading or extreme edge of the sport and now use exotic mixed gas rebreathers, Nitrox/Trimix production devices for home and boat use, long-duration underwater lights and propulsion vehicles. There are reportedly some 10-15,000 divers entering the high-tech end of the sport each year. With millions of snorkels and Snuba type divers giving the sport a try at the surface while some 10,000 or so venture in the depths, our plan is to focus on the entry level consumer, introducing more potential customers to diving.




The dive training, travel, and retail sector is highly fragmented, dominated by many mom and pop shops.  These shops are typically operated, more as a hobby by a “lover of diving” than by retail professionals.  A traditional dive store offers a similar selection to a dive shop of 2-3 decades ago while marginally representing the product lines of multiple manufacturers. The result is generally disappointing for both the consumer and the manufacturer. We believe that consumers prefer shopping for the whole dive experience in one place beginning with a full array of products and services. The addition of an audio-visual program throughout the retail facility will help excite the consumer, educate them about travel and equipment use applications, and keep them interested in diving. We intend to deliver a retail experience that offers the full spectrum of education, travel planning, destination outfitting, and product options to service all types of divers.




Brownie’s management has prior experience with the purchase and operation of dive shops in north and south Florida (prior to Brownie’s Marine Group, Inc. with above standard results).  Based on management experience, the Company believes that a unique retail strategy can be employed to increase profitability in many existing retail locations, some that are existing dealers, and to co-locate and partner in existing outdoor retail establishments and to expand to new locations as time and conditions permit.




4




The Company has expanded in the past through internal growth.However,Brownie’s management believes that the most efficient and effective method of future growth will be to acquire existing companies and form strategic alliances.




Diving and Ecotourism Growth Strategy




The diving, boating and ecotourism markets are key to the expansion of the Brownie’s brand. Each of these industries has experienced growth over the past several decades, but we believe each industry also has significant weaknesses.  The dive industry has focused on the initial certification of divers for revenue.  According to industry data, follow up has been poor; causing many divers to quit diving after their first experience. The Company intends to implement a follow-up program, facilitate proper selection of equipment for divers, and institute mentoring programs. We believe an even broader base of consumers will initially be cultivated at the resort level with the new TOOKA and battery Brownie systems.  Starting new divers in an easier to master dive objective, such as moving from snorkeling to hookah, should attract and maintain a greater population of proficient divers, as “comfortable” divers keep diving.




The boating industry has been hard hit by the economic downturn coupled with the recent increase in fuel prices.  We will work with boaters to enhance their on-water experience by exploiting the diving activities that they can easily add as an accessory to their investment in boating. Brownie’s OEM BIAS program will improve the overall value at the manufacturing level and consumer experience by elimination of waste during the design/build phase. They can blow their horns, open air-powered doors and dive directly from a BIAS package.




Finally, we will work with authentic ecotourism promoters and providers to help protect our natural resources world while carefully exploring them. We believe these markets offer tremendous potential to Brownie’s future growth.  Further, we believe the following points indicate the inherent attractiveness to the Brownie’s brand:




Divers




·
Studies indicate that there are between 1.6 and 2.4 million active divers in the United States, with a 25% increase between 1997 and 2006. [(source: Professional Association of Dive Instructors (PADI) / Dive Equipment Manufacturers Association (DEMA)]




·
There are over 500,000 new divers certified each year worldwide by PADI and PADI certifies fewer than 50% of divers internationally.  PADI certifies approximately 56% of US divers. (PADI)




·
In 2006, PADI provided continuing education certifications for 386,437 divers worldwide, this is an increase of 77,607 diver continuing education certifications from 2000 when it provided continuing education to 308,830 divers.  This is an increase of 25%.




Boaters




·
Use increased in outboard, inboard and stern drive boats from 1997-2006.  The number of boats in use increased from 16.23 million in 1997 to 17.73 million in 2006, an increase of 1.5 million boats in use.  [(source:  United States Coast Guard (USCG) /  National Marine Manufacturers Association (NMMA)]




·
Almost 73 million adults went boating in the US in 2006; this represents 32.1 % of the adult population. (source: NMMA)




Tourism:“Travel undertaken for pleasure”(source: International Ecotourism Society)




As the largest business sector in the world economy, the travel & tourism industry is responsible for over 230 million jobs and over 10% of the gross domestic product worldwide.  In over 150 countries, tourism is one of five top export earners. In 60 countries, tourism is the number one export.




Global Growth of Tourism:




·
1950: 25 million tourist arrivals.




5




·
1990’s: Tourism grew globally at 7% per year.


·
2004: 760 million tourism arrivals corresponded to a 10% global growth.


·
2005: The number of international tourist arrivals recorded worldwide grew by 5.5% and exceeded 800 million for the first time ever.


·
2020: Global tourism is forecast to reach 1.56 billion international arrivals.




Ecotourists(source: www.ecotourism.org)




Size of Global Ecotourism:




·
Beginning in the 1990s, ecotourism has been growing 20% - 34% per year


·
In 2004, ecotourism/nature tourism was growing globally 3 times faster than the tourism industry as a whole.


·
Nature tourism is growing at 10%-12% per annum in the international market.


·
Sun-and-sand resort tourism has now “matured as a market” and its growth is projected to remain flat. In contrast, “experiential” tourism—which encompasses ecotourism, nature, heritage, cultural, and soft adventure tourism, as well as sub-sectors such as rural and community tourism—is among the sectors expected to grow most quickly over the next two decades.


·
United Nations Environment Program (UNEP) and Conservation International have indicated that most of tourism’s expansion is occurring in and around the world’s remaining natural areas.


·
Sustainable tourism could grow to 25% of the world’s travel market within six years, taking the value of the sector to US$473.6 billion a year.


·
Analysts predict a growth in eco-resorts and hotels, and a boom in nature tourism — a sector already growing at 20% a year — and suggest early converts to sustainable tourism will make market gains.




Brownie’s is closely monitoring the momentum being produced by ecotourism and modeling our business practices and products to assist in the development of a new class of divers - shallow-water, low-impact and trendy-Diving Made Easy.




Trade names and Patents




The Company has a product development and intellectual property program.  It holds numerous patents and trademarks on its own and or through licensing agreements.




Trade names




The Company has licensed from two entities in which the Chief Executive Officer has an ownership interest, the exclusive use of the following registered and unregistered trade names, trademarks and service marks for the terms of their indefinite lives: Brownie’s Third LungTM, browniedive.com, Brownie’s, Brownie’s Third Lung oval symbol, browniedive, NitroxMakerTM, HELO, RES, fast float rescue harness, tankfill.com, browniestankfill, browniestankfill.com, browniespublicsafety.com, and browniespublicsafety, Peleton Hose System, Twin-Trim, Kayak Diving Hose Kit, Bell Bottom Flag Bag, and Brownie’s Dogsnare.




The Company has licensed from an entity that the Chief Executive Officer has an ownership interest, the non-exclusive use of the following registered and unregistered trademarks, trade names, and service marks for the terms of their indefinite lives: SHERPA, BC keel, and Garment integrated personal flotation device (GI-PFD).




6





Patents




The Company owns a number of patents acquired as follows:




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.




Effective December 31, 2009, the Company acquired from Mr. Carmichael six patents, four issued and the rights to intellectual property in progress.  The four issued patents relate to Inflatable dive marker and collection bags.  The intellectual property in progress relates to a three dimensional dive flag, and a novel dive raft and float system for divers.




Effective March 3, 2009 the Company acquired from Mr. Carmichael, six other patents both issued and pending, some previously licensed by the Company.  These patents were acquired from Mr. Carmichael in exchange for stock options.  The patents include the patents on the Drop Weight Cummerbelt, a filed dive belt patent, and a series of filed patents on a Buoyancy Compensator, Utility Backpack, Transport Harness or Like Garment with Adjustable One Size Component for Use by a Wide Range of Individuals  The transactions are further detailed in the Related Party and the Subsequent Event Notes to the year end 2009 financial statements.  Mr. Carmichael believes that the equity based transfers of the Intellectual Property to the Company are in the best interest of the Company because by acquiring the Intellectual Property, the Company (i) eliminated an estimated $41,000 net discounted cash flows it would otherwise have had to pay related to the Intellectual Property through 2018, (ii) is provided with an opportunity to further develop the Intellectual Property, (iii) is provided with the ability to incorporate the Intellectual Property into current and future products, and (iv) is provided with the opportunity to license the Intellectual Property to third parties.




The Company owns a patent for an Active Control Releasable Ballast.  This patent is utilized in the drop weight cummerbelt.  The patent was acquired on July 31, 2008 from Robert Carmichael, the Chief Executive Officer of the Company.




Marketing




Print Literature, Public Relations, and Advertising




We have in-house graphic design and public relations department to create and maintain product support literature, catalogs, mailings, web-based advertising, newsletters, editorials, advertorials, and press releases.  We also target specific markets by selectively advertising in journals and magazines that we believe reach our potential customers.




Tradeshows




In 2010, the Company was represented either through their own presence or by a dealer at the following annual trade shows: Miami Yacht and Brokerage Show, The Fort Lauderdale International Boat Show, the Palm Beach Boat Show, the Seattle Boat Show and the Annapolis Boat Show. In 2009, the shows were limited to the Miami Yacht and Brokerage Show and the Fort Lauderdale International Boat Show.




Websites




The Company’s main website is Browniesmarinegroup.com.  Additionally, all our products are marketed on our primary customers’ websites.  In addition, to these websites, numerous other websites have quick links to the Company’s website.  Our products are available domestically and internationally.  Internet sales and inquiries are also supported by the Company as a preferred method of many of our customers, particularly International customers.




7




Distribution




Our products are distributed to our customers primarily by common carrier.




Product Research and Development (R&D)




We continuously work to provide our customers with both new and improved products. We offer research and development services to not only the related entities we license our patents and trademarks from, but also to other customers as well. R&D services for customers and the related entities are invoiced in the normal course of business.  In addition, we are working on internal research and development projects as well as collaborating with others toward the goal of developing some of our own patentable products. Research and development costs for the year ended December 31, 2010 and 2009, were $135,593 and $64,508, respectively.




Government Regulations




The SCUBA industry is self-regulating; therefore, the Company is not subject to government industry specific regulation.  Nevertheless, the Company strives to be a leader in promoting safe diving practices within the industry and believes it is at the forefront of self-regulation through responsible diving practices.  The Company 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 the Company’s operation and profitability will not be subject to more restrictive regulation or increased taxation by federal, state, or local agencies in the future.




Customers




We are predominantly a wholesale distributor to retail dive stores, marine stores, and shipyards.  This includes approximately 250 active independent Brownie dealers.  We retail our products to including, but not limited to, boat owners, recreational divers and commercial divers.  The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer: Brownie’s Southport Divers, Brownie’s Palm Beach Divers and Brownie’s Yacht Toys.  Combined sales to these entities for the years ended December 31, 2010 and 2009 represented 31.06% and 21.18%, respectively, of total net revenues.  Our largest customer and Brownie dealer is Brownie’s Southport Divers.  In addition, for the year ended December 31, 2009 sales to one unrelated customer represented 20.49% of total net revenues.  Sales to no other customers represented greater than 10% of net revenues for the years ended December 31, 2010 and 2009.




Raw Materials




Principal raw materials for our business include machined parts such as rods, pistons, bearings; hoses; regulators; compressors; engines; high-pressure valves and fittings; sewn goods; and various plastic parts including pans, covers, intake staffs, and quick release connections.  Principal suppliers of these materials to us are Kuriyama, Advantage Plastics of New York, Gates Rubber, Ocean Divers Supply, Anderson Metals, East Coast Plastics, Center Star, Bauer, Leeson Electric, Sagittarius, Robin America Subaru, and Florida Fluid Systems Technology Inc.  Most materials are readily available from multiple vendors. Some materials require greater lead times than others.  Accordingly, we strive to avoid out of stock situations through careful monitoring of these inventory lead times, and through avoiding single source vendors whenever possible.




8




Competition




We consider the most significant competitive factors in our business to be low prices, shopping convenience, the variety of available of products, knowledgeable sales personnel, rapid and accurate fulfillment of orders, and prompt customer service.  We currently recognize one significant competitor in hookah sales and two significant competitors in high pressure tankfill sales. Products from the hookah competitor and those from one of the tankfill competitors are very similar to ours as the principals in both received their training in the industry from Brownie’s as previous employees of the Company. Brownie’s other competitor in high pressure tankfill is a large multi-national company that does not offer significant customization; thereby we believe reducing our head-to-head competition in many cases.  We believe we do not have significant competitors in the Brownie’s Tankfill line of high-end custom yacht packages.




Overall, we are operating in a moderately competitive environment.  We believe that the price structure for all the products we distribute compares favorably with the majority of our competitors based on quality and available features.  While certain of our competitors offer lower prices on some similar products, we believe that few can offer products and services which are comparable to those of ours in terms of convenience, available features, reliability, and quality.  In addition, most of our competitors offer only high or low-pressure products and services where we are able to fulfill both needs.




Personnel




We currently have seventeen (17) full time employees and (2) part time employee at our facility in Fort Lauderdale, Florida:  ten (10) are classified as exempt sales and administrative or management, and nine (9) are classified as nonexempt factory or administrative support. We utilize consultants when needed in the absence of available in-house expertise.  Our employees are not covered by a collective bargaining agreement.




Seasonality




The main product categories of our business, Brownie’s Third Lung and Brownie’s Tankfill, are seasonal in nature.  The peak season for Brownie’s Third Lung’s products is the second and third quarters of the year.  The peak season for Brownie’s Tankfill’s products is the fourth and first quarters of the year.  Since the seasons complement one another, we are able to shift cross-trained factory and warehouse personnel between the two product categories as needed.  Thus, the Company is able to avoid the down time normally associated with seasonal business.




Subsequent Events




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.  As part of this transaction, 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)  highest closing bid prices over the preceding five (5) trading days.





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 10, 2011.  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.  Furthermore, the conversion price shall be adjusted in the even the Company issues shares of common stock at a price per share less than the conversion price. 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.  Substantially all of such proceeds were paid to Branch Banking and Trust Company in connection with the Forbearance Agreement discussed below.




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 $1,053,993.27, 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 is required to pay BBT $6,028.24 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.


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 as full time employment with the Company.




9





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 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 preceding 10 days weighted average 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 warrants at $.25 and 100,000 warrants at $.35.





On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture which matures on May 5, 2012.  The debenture bears 10% interest per annum payable on November 5, 2011, and May 5, 2012.  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.




Item 1A.
Risk Factors.




The Company is subject to various risks that may materially harm its business, financial condition and results of operations.  These may not be the only risks and uncertainties that the Company faces.  Additional risks that we do not yet know of or that we currently think are immaterial may also impair our future business operations.  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 ability to continue as a going concern is in substantial doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.





We incurred net losses of approximately $1.19 million in 2010, and $.45 million in 2009. We anticipate these losses will continue for the foreseeable future. Additionally, we have negative cash flows from operations and negative working capital. This raises a substantial doubt about our ability to continue as a going concern. Our continued existence is dependent upon generating working capital and obtaining adequate new debt or equity financing. Because of our continuing losses, we may not have working capital to permit us to remain in business through the end of the year, without improvements in our cash flow from operations or new financing. Working capital limitations continue to impinge on our day-to-day operations, thus contributing to continued operating losses.




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 has been 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.




10




Our Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For Investors to Sell Their Shares Due To Suitability Requirements




Our common stock is deemed to be “penny stock” as that term is defined under the Securities Exchange Act of 1934.  Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Our common stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.




Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks.  Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.




We Depend On the Services of Our Chief Executive Officer




Our success largely depends on the efforts and abilities of Robert M. Carmichael, our President and Chief Executive Officer.  Mr. Carmichael has been instrumental in securing our existing financing arrangements.  Mr. Carmichael is primarily responsible for the development of our technology and the design of our products.  The loss of the services of Mr. Carmichael could materially harm our business because of the cost and time necessary to recruit and train a replacement.  Such a loss would also divert management attention away from operational issues. We do not presently maintain a key-man life insurance policy on Mr. Carmichael.




We Require Additional Personnel and Could Fail To Attract or Retain Key Personnel




In addition, 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 to assist the Chief Executive Officer with finance and operations.  The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or Chief Operations Officer or further assistance in these areas 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 and Enforce Intellectual Property Protection May 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.




11




Reliance on Vendors and Manufacturers




We deal with suppliers on an order-by order basis and have no long-term purchase contracts or other contractual assurances of continued supply or pricing.  In addition, we have no long-term contracts with our manufacturing sources and compete with other companies for production facility capacity.  Historically, we have purchased enough inventories of products or their substitutes to satisfy demand.  However, unanticipated failure of any manufacturer or supplier to meet our requirements or our inability to build or obtain substitutes could force us to curtail or cease operations.




Dependence on Consumer Spending




The success of the our business depends largely upon a number of factors related to consumer spending, including current and future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates.  In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products.  Any significant deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect our financial results.  The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher fuel prices; declines in the value of investments and residential real estate; and increases in federal and state taxation can all negatively affect our results.  There can be no assurance that in this type of environment consumer spending will not decline, 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 or cease 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.




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.




12




Item 2.
Properties.




The corporate headquarters, factory and distribution center of the Company are located at 936/940 NW 1st Street, Ft. Lauderdale, FL  33311.  The facilities are comprised of approximately 16,000 square feet of space of which approximately 7,500 square feet is office, and the remainder is factory and warehouse space.  We believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.  The facilities are encumbered by a first mortgage.  In addition, another mortgage exists on the property subordinate to the first.  Information regarding the mortgages is disclosed in the Notes Payable and Related Party Notes to the Company’s year ended December 31, 2010 financial statements.




Item 3.
Legal Proceedings.




On March 18, 2011, a legal settlement was reached between the Estate of Lester Metz and Brownie’s Marine Group, Inc.  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 4.
Removed and Reserved




PART II




Item 5.
Market for Common Equity, Related Stockholder Matters, and Small Business Issuer Purchases of Equity Securities.




The Company’s common stock is quoted on the Over-the-Counter Bulletin Board under the symbol “BWMG”.  The Company’s high and low bid prices by quarter during 2010 and 2009, as provided by the Over the Counter Bulletin Board are provided below. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.  On April 18, 2011, the closing price of our common stock, as reported on the Over-the-Counter Bulletin Board, was $0.15 per share.




Calendar Year 2011High Bid


Low BidFirst Quarter

$
1.90


$
.10




Calendar Year 2010High Bid


Low BidFirst Quarter

$
.99


$
.25Second Quarter

$
2.50


$
.28Third Quarter

$
.30


$
.42Fourth Quarter

$
.30


$
.05





Calendar Year 2009High Bid


Low BidFirst Quarter

$
.20


$
.15Second Quarter

$
1.01


$
.13Third Quarter

$
.25


$
.25Fourth Quarter

$
.25


$
.25





13




Holders of Common Stock




As of April 18, 2011, we believe the Company had in excess of 250 shareholders of record.




Dividends




We have not paid any dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future.  We intend to retain any earnings to finance the growth of the business. We cannot assure you that we will ever pay cash dividends.  Whether we pay any cash dividends in the future will depend on the financial condition, results of operations and other factors that the Board of Directors will consider.




Sales of Unregistered Securities




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.  The securities were issued with a legend restricting their transferability absent registration of applicable exemption.




Effective December 31, 2010, the Company issued 343,230 shares of stock to an outside attorney in settlement of a $34,323 legal expense debt.  The fair market value per share at December 31, 2010, was $.10.  Accordingly, the Company recognized no gain or loss on the transaction.





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 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.





Effective October 4, 2010, the Company converted an accounts payable for legal services to a $20,635 convertible debenture.  The debenture had a maturity date of April 4, 2011, and bore 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 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 did not pay the balance due under the debenture on the maturity 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.





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 $179,337 as operating expense under the agreements for the year ended December 31, 2010.  As of December 31, 2010, prepaid equity based compensation under these agreements totaled $41,584 and is reflected as a component of shareholders’ equity for the related consulting services as yet to be provided as of that date.





Effective December 31, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company.  In exchange for the Intellectual Property (“IP), the Company granted Mr. Carmichael 400,000 shares of common stock.  For financial reporting purposes the Company has valued the group of patents at $0 which is the lower of Mr. Carmichael’s historical cost as compared to the fair market value of the stock.  Accordingly, the Company realized a $100,000 loss on the transaction, the fair market value of the stock on the December 31, 2009 grant date less the $0 historical cost.  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.




14




Pursuant to an Agreement and Release effective December 31, 2009, the Company granted 52,140 shares of restricted common stock to an outside attorney for legal and advisory services valued at $13,035 provided through December 31, 2009.  Accordingly, the stock granted was valued at the fair market price on the date of the Agreement, or $51,619.  Accordingly, as of December 31, 2010, $13,035 was recognized as legal expense, and $38,584 was recognized as a loss on the transaction.




Item 6.
Selected Financial Data.




Information not required by smaller reporting company.




Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.




Overview




The Company through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation, 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 does business as (dba) Brownie’s Third Lung.




Financial Performance




For the years ended December 31, 2010 and 2009, BWMG had net losses of $1,189,576 and $451,227, respectively.




Significant Accounting Policies




The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a wide variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements.  Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain.  As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex.  We have identified certain accounting policies that are most important to the portrayal of our current financial condition and results of operations.  Our significant accounting policies are as follows:




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 is 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.




15




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 years ended December 31, 2010 and 2009, was $37,465 and $22,105, 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 has been accepted, nor return of the custom ordered product.  Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice.




Income taxes – The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.




The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition.  In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.




The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods.  Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.




Comprehensive income – The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods.




16




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 pricing 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 years ended December 31, 2010, and 2009, the Company amortized prepaid stock based compensation associated with stock options granted October 1 and December 1, 2009.  See Note 13. EQUITY INCENTIVE PLAN for further discussion.  For the year ended December 31, 2010, the Company recorded stock based compensation associated with warrants granted on December 31, 2009.  See Note 12. STOCK WARRANTS ISSUED FOR LEGAL SERVICES for further discussion.  For the year ended December 31, 2010, the company granted stock for legal and consulting services.  See Note 11. STOCK ISSUED FOR LEGAL SERVICES, and Note 14. STOCK ISSUED FOR CONSULTING SERVICES. For the year ended December 31, 2010, the Company issued capital stock to the Carleigh Rae Corp, a related party which the Company’s Chief Executive Officer has a financial interest, upon finalization of a patent purchase agreement.  The Company granted stock options for the year ended December 31, 2009 associated with the purchase of intellectual property from the Company’s Chief Executive Officer.  See Note 6. RELATED PARTY TRANSACTIONS, Patent Purchase Agreements, for further discussion.  During the year ended December 31, 2010, the Company converted a loan payable to capital stock and warrants.  See Note 6. RELATED PARTY TRANSACTIONS, Loan conversion and other equity transactions, for further discussion of the transaction.





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 years ended December 31, 2009 and 2008 since their effect was antidilutive.




Recent Accounting Pronouncements




In June 2009, FASB established the Accounting Standards Codification (“ASC”) as the single source of authoritative US GAAP to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants.  The ASC is a new structure which took existing accounting pronouncements and organized them by accounting topic.  The ASC did not change current US GAAP, but was intended to simplify user access to all authoritative US GAAP by providing all the relevant literature related to a particular topic in one place.  All previously existing accounting standards were superseded and all other accounting literature not included in the ASC is considered non-authoritative.  New accounting standards issued since  December 31, 2009 are communicated by the FASB through Accounting Standards Updates (“ASU”).  The ASC was effective during the period ended  December 31, 2009.  Adoption of the ASU did not have a financial impact on the Company’s consolidated financial position, results of operations or cash flows.





In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements.  This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers.  Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The adoption of this ASU did not have a material impact on our consolidated financial statements.




17




In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events and amendments to certain recognition and disclosure requirements.  Under this ASU, a public company that is a SEC filer, as defined, is not required to disclose the date through which subsequent events have been evaluated.  This ASU is effective upon the issuance of this ASU.  The adoption of this ASU did not have a material impact on our consolidated financial statements.





In March 2010, the FASB issued ASU No. 2010-11 which clarifies the transfer of credit risk that is only in the form of subordination of one financial instrument to another is an embedded derivative feature that should not be subject to potential bifurcation and separate accounting.  This ASU will be effective for the first fiscal quarter beginning after June 15, 2010, with early adoption permitted.  The Company adopted this ASU without material financial impact.





The following discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluates its estimates, including those related to allowance for doubtful accounts and deferred income tax assets.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.




Results of Operations for the Year Ended December 31, 2010, As Compared To the Year Ended December 31, 2009




Net revenues.  For the year ended December 31, 2010, we had net revenues of $2,181,073 as compared to net revenues of $2,384,705, for the year ended December 31, 2009, a decrease of $203,632, or 8.54%.    Tankfill system sales declined approximately $203,000 for the year ended December 31, 2010 as compared to the same period in 2009.  Hookah system and related sales remained relatively flat for the year ended December 31, 2010 as compared to the year ended December 31, 2009. 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.




Cost of net revenues.  For the year ended December 31, 2010, we had cost of net revenues of $1,687,599 as compared with cost of net revenues of $1,714,341 for the year ended December 31, 2009, a decrease of $26,742, or 1.56%.  The decrease in cost of net revenues during the year ended December 31, 2010, is primarily attributable to a decrease in net revenues, net of an approximate 3% increase in cost of materials as a percentage of net revenues over the same period in 2009. In addition, based on the sales mix during the year ended December 31, 2010 as compared to the year ended December 31, 2009, royalties expense increased approximately $26,000.




Gross profit.  For the year ended December 31, 2010, we had a gross profit of $493,474 as compared to gross profit of $670,364 for the year ended December 31, 2009, a decrease of $176,890 or 26.39%.  This decrease is primarily attributable to a decrease in net revenues, an increase in material costs as a percentage of net revenues, and an increase in royalties expense for the year ended December 31, 2010, as compared to the year ended 2009.




Operating expenses.  For the year ended December 31, 2010, we had total operating expenses of $1,488,593 as compared to total operating expenses of $975,972 for the year ended December 31, 2009, an increase of $512,621, or 52.52%.  The $512,622 increase is due to an increase in selling, general and administrative costs of $441,536 and an increase in research and development expenses of $71,085 for the year ended December 31, 2010, as compared to the same period in 2009.  The increase in research and development expense was primarily for payment to an unrelated party for exclusive license for intellectual property owned by the third party who the Company is collaborating with to assist with design, prototype, and first production run.  Since there is no assurance of success of the invention, and since it is in the design and pre-prototype phase, the Company accounted for this activity as research and development.




18




Other (income) expense, net.  For the year ended December 31, 2010, we had other expense, net of $260,331 as compared to other expense, net of $304,401 for the year ended December 31, 2009, a decrease of $44,070, or 14.48%.  This account is comprised of other (income) expense, net, and interest expense.  Interest expense for the period increased $196,731 and other expense, net decreased $240,801.  Interest Other (income) expense, net, is comprised of transactions that are generally of a non-recurring nature.  The increase in interest expense of $196,731 was primarily attributable to approximately $181,000 interest attributable to common stock and warrants granted upon conversion of $180,000 loan payable, and approximately $19,000 interest on amortization of convertible debenture discount as of December 31, 2010.  There were no comparable transactions to interest expense during the year ended December 31, 2009. The $240,801 change in other expense, net, from the year ended December 31, 2009, to other income, net, in the year ended December 31, 2010, is primarily due to gain on patent infringement settlement of approximately $207,000, and loss on purchase of intellectual property which was approximately $15,000 less during the year ended December 31, 2010, as compared to the same period in 2009.




Provision for income tax benefit.  For the year ended December 31, 2010, we had a provision for income tax benefit of $65,874 as compared to $158,782 for the year ended December 31, 2009, a decrease in provision for income tax benefit of $92,908, or 58.51%.  The decrease in provision for income tax benefit is primarily a result of the increase in the valuation allowance against the deferred tax asset attributable to realization of the net operating loss carryforward.




Net loss.For the year ended December 31, 2010, we had net loss of $1,189,576 as compared to net loss of $451,227 for the year ended December 31, 2009, an increase of $738,349, or 163.63%.  The increase in net loss is attributable to $176,890 decrease in gross profit, $512,621 increase in operating expenses, $44,070 decrease in other expenses, net, and $92,908 decrease in provision for income tax benefit.





19




Liquidity and Capital Resources




As of December 31, 2010, the Company had cash and current assets of $620,270 and current liabilities of $997,034 or a current ratio of .62.  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.




Contractual obligations of the Company as of December 31, 2010 are set forth in the following table:




Payments due by period


Contractual Obligations

Total


Less than
1 year


1-3 years


3-5 years


More than 5
yearsLong-Term Debt Obligations

$
1,383,187


$
205,180


$
1,178,007



—



—Operating Lease Obligations


24,593



7,378



17,215



—



—Purchase Obligations


—



—



—



—



—Other Long-Term Liabilities Reflected on the Company’s Balance Sheet under GAAP


—



—



—



—



—Total

$
1,407,780


$
212,558


$
1,195,222



—



—




As discussed in the Company’s Report of Independent Registered Public Accounting Firm included herein, the Company has a working capital deficiency and recurring losses and will need to secure new financing or additional capital in order to pay its obligations.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plan as to these matters is also described in Note 1 of the Company’s financial statements included herein.


Item 7A.
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 8.
Financial Statements.




Our consolidated financial statements appear beginning at page F-1.




Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.




None.




Item 9A.
Controls and Procedures




Evaluation of disclosure controls and procedures




As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  This evaluation was done under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy our disclosure obligations under the Exchange Act.




20





Management’s Report on Internal Control over Financial Reporting




Management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




Management, including the Company's Chief Executive Officer and Principal Accounting Officer, has conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria for effective internal control described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.




This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.




This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.




Changes in internal controls




There were no changes in our internal controls or in other factors during the period covered by this report that have materially affected or are likely to materially affect the Company’s internal controls over financial reporting.




Item 9B.
Other Information




None.




21




PART III




Item 10.
Directors, Executive Officers, and Corporate Governance;




The following is a list of our executive officers and directors. All directors serve one-year terms or until each of their successors are duly qualified and elected.




Name:

Age:

Position:Robert M. Carmichael

48

President, Chief Executive Officer, Principal Financial Officer and DirectorMikkel Pitzner

43

DirectorWesley G.Armstrong

50

Director




Robert M. Carmichael.  Since April 16, 2004, Mr. Carmichael has served as BWMG’s President, Chief Executive Officer, Principal Financial Officer, and Director.  From March 23, 2004 through April 16, 2004, Mr. Carmichael served as United’s Executive Vice-President and Chief Operating Officer.  Mr. Carmichael has served as president of Trebor Industries since 1986.  Mr. Carmichael is the holder and co-holder of numerous patents that are used by Trebor Industries and several other major companies in the diving industry.




Mikkel Pitzner. Mr. Pitzner was appointed to the board in December 2010.  Since 1996, Mr. Pitzner has served as chief executive officer of Copenhagen Limousine Service, a corporate limousine service company based in Denmark. Since 2001 he has served as chief executive officer of The Private Car Company, also a corporate transportation company located in Denmark. Since 2007, he has been a partner and board member with FT Group Holding, an advertising company based in Denmark and Sweden. From 2003 through 2005 he owned and operated Halcyon Denmark, an importer and distributor of Halcyon diving products.  The Company’s chief executive officer is an affiliate of Halcyon Manufacturing, Inc.  He also serves on the board of directors of VMC Pitzner, AGJ Pitzner, SMCE Pitzner, Corona Pitzner, construction companies in Denmark. Mr. Pitzner was selected as a director for his general business management with specific experience in diving industry.





Wesley G. Armstrong.Mr. Armstrong was appointed to the board in December 2010.  Mr. Armstrong has over 25 years of experience in business and government.  Since 2008, he has served as vice president of myplaninput, llc, an economic and community development consulting firm.  He also currently serves as president of westhefinancialplanner, llc a registered investment advisor in North Carolina. From 2007 to 2008 Armstrong was a financial consultant with Southern Community Bank in Greensboro, NC.  From 2006 to 2007 he was Vice President at Wachovia Securities in Greensboro, North Carolina.  Mr. Armstrong serves on the Board of Advisors for the Department of Interior Architecture at UNC-Greensboro.  He holds advanced certifications in City Planning and Financial Planning.  From 2004 through 2006 he served as vice president at First Tennessee Bank. Mr. Armstrong was selected as a director for his accounting, financial and professional management experience.





Directors




Our Board of Directors may consist of up to five (5) seats.  Pursuant to our Bylaws, a majority of directors may appoint a successor to fill any vacancy on the Board of Directors without shareholder vote.  Our Board has determined that Messrs. Pitzner and Armstrong are independent under the NASDAQ Stock Market listing rules.




Committees




Currently, the Company has not established any committees of the Board of Directors.  Because the board of directors consists of only three members, the board has not delegated any of its functions to committees.  The entire board of directors acts as our audit committee as permitted under Section 3(a)(58)(B) of the Exchange Act.  We do not have any independent directors who would qualify as an audit committee financial expert. We believe that it has been, and may continue to be, impractical to recruit independent directors unless and until we are significantly larger.  None of the current members of the Board of Directors is considered a “financial expert” as defined under item 407 of Regulation S-K.




22




Compensation of Directors




Members of the Company’s Board of Directors are reimbursed for all out of pocket expenses incurred in connection with the attendance at any Board meeting or in connection with any services they provide for and on behalf of the Company.  In April 2011,  the Board of Directors approved a new director compensation plan whereby each non-employee director would be paid the equivalent of $2,500 per month by the Company.





Compliance with Section 16(a) Of the Securities Act Of 1934




Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other of our equity securities.  Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us copies of all Section 16(a) forms they file.  Based on available information, filings required under Section 16(a) were complied with for the period covered by this report, except Mr. Carmichael filed a Form 4 late.  The Form 4 contained one transaction covering issuance of Common Stock effective September 24, 2010.




Code of Ethics




The Company has adopted a formal code of ethics that applies to our principal executive officer and principal accounting officer, all other officers, directors and employees.  The code of ethics was provided as an exhibit to the 10-K for the year ended December 31, 2008.  The Company undertakes to provide to any person without charge, upon written request to the Company’s Chief Executive Officer, a copy of the code of ethics.




Shareholder Communications





Although we do not have a formal policy regarding communications with our Board, shareholders may communicate with the Board by writing to us at Brownie’s Marine Group, Inc., 940 N.W. 1st Street, Fort Lauderdale, Florida 33311, Attention: Mr. Robert Carmichael.  Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.





23




Item 11.
Executive Compensation




The following table shows all the cash compensation paid by the Company, as well as certain other compensation paid or accrued, during the fiscal years ended December 31, 2010 and 2009 to BWMG’s named executive officers.  No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the chart below, were paid to these executive officers during these fiscal years.




Summary Compensation Table





Name and Principal
Position(s)

Year

Salary


Bonus


Stock

Awards


Option
Awards


Non Equity
Incentive Plan Compensation


All Other
Compen-
sation


TotalRobert M. Carmichael,

2010

$
104,139


$
—


$
—


$
—


$
—


$
—


$
104,139
(1)President, Principal Executive Officer, and Principal Financial Officer

2009

$
83,544


$
—


$
—


$
—


$
—


$
—


$
83,544
(1)





(1) Executivecompensation excludes certain transactions which are disclosed under “Item 13. Certain Relationships and Related Transactions, and Director Independence.”




Outstanding Equity Awards at Fiscal Year End




Option Awards

Stock AwardsName

Number of
securities
underlying
unexercised
options (#)
exercisable

Number of
securities
underlying
unexercised
option (#) 
un-

exercisable

Equity
Incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)

Option
exercise
price ($)
per share

Option
expiration date

Number
of shares
or units
of stock
that have
not
vested

(#)

Market
value of
shares of
units of
stock
that have
not
vested
($)

Equity Incentive
plan awards:
Number of
unearned shares,
units or other
rights that have
not vested (#)

Incentive
plan
awards:
Market or
payout value
of unearned
shares, units
or other
rights that
have not
vested ($)Robert M. Carmichael,


100,000
(1)




$
1.07

December 31, 2013Principal Executive Officer, and Principal Financial Officer


315,000
(2)




$
1.00

None




(1)
See Footnote (1) to the Summary Compensation Table above.


(2)
See discussion of options issued for purchase of Intellectual Property as disclosed under “Item 13. Certain Relationships and Related Transactions, and Director Independence.”




Director Compensation




None paid during 2010.  See also “Certain Relationships and Related Transactions, and Director Independence”.  In April 2011, the Board of Directors approved a new director compensation plan whereby each non-employee director would be paid the equivalent of $2,500 per month by the Company.




Employment Agreements




None.




24





Securities Authorized for Issuance under Equity Compensation Plans




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.  The table below includes information as of December 31, 2010.




Equity Compensation Plan Information as of December 31, 2010




Number of securities

to be issued upon

exercise of

outstanding options,

warrants and rights

(a)


Weighted – average

exercise price of

outstanding options,

warrants and rights

(b)


Number of securities

remaining available for

future issuances under equity

compensation plans

(excluding securities

reflected in column (a))

(c)Equity Compensation PlansApproved by Security Holders


400,000


$
.68



0Equity Compensation Plans Not Approved by Security Holders


—



—



—Total


400,000


$
.68



0




Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters




Security Ownership of Certain Beneficial Owners and Management




The following table sets forth information about the beneficial ownership of our common stock as of April 30, 2011 by (i) each person who we know is the beneficial owner of more than 5% of the outstanding shares of common stock (ii) each of our directors or those nominated to be directors, and executive officers, and (iii) all of our directors and executive officers as a group.  Applicable percentage of ownership is based on 27,422,854 shares of common stock outstanding as of April 30, 2011, together with securities exercisable or convertible into shares of common stock within 60 days of April 30, 2011 for each stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of April 30, 2011, are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.




25




Title of Class

Name and Address of Beneficial

Owner

Amount and Nature of

Beneficial Owner


Percent of ClassCommon

Robert M Carmichael

C/O Brownie’s Marine Group, Inc.

940 NW 1st Street

Fort Lauderdale, FL  33311


64,188,379
(1)(2)


88.9
%Common

Wesley G. Armstrong

C/O Brownie’s Marine Group, Inc.

940 NW 1st Street

Fort Lauderdale, FL  33311


175,000
(3)


*Common

Mikkel Pitzner

C/O Brownie’s Marine Group, Inc.

940 NW 1st Street

Fort Lauderdale, FL


1,065,182
(3)


3.9
%Common

All officers and directors as a

Group (1 person)


65,428,561,
(1)(2)(3)


93.6
%





* less than 1%.





(1)
Includes an aggregate of 415,000 shares underlying currently exercisable options. Also includes 42,500,000 shares issuable upon conversion of 425,000 shares of Series A Preferred Stock.  The preferred stock votes with the Company’s common stock, except as otherwise required under Nevada law and may be voted on a 250 vote to one share basis.


(2)
Includes 44,440 shares owned by GKR Associates, LLC, a Company that Mr. Carmichael has a financial interest.


(3)
Includes 75,000 shares underlying currently exercisable options.




Equity Compensation Plan




See Equity Incentive Plan Note to the financial statements for the year ended December 31, 2010, for discussion of the stock options authorized and outstanding.




26





Item 13.
Certain Relationships and Related Transactions, and Director Independence.




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 principal and interest payments of $7,050, maturing on August 1, 2013.

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


37,260329,194Less amounts due within one year


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

$
124,014




As of December 31, 2010, principal payments on the notes payable – related parties are as follows:





2011

$
205,1802012


82,1592013


41,8552014


—2015


—Thereafter


—$
329,194




As of December 31, 2010, the Company was approximately eighteen 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 six months in arrears on mortgage payments due GKR at December 31, 2010.  No default notice has been received and the Company plans to make payments as able.





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 years ended December 31, 2010 and 2009, was $677,380 and $505,154, 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. Combined net revenues from Robert Carmichael, the Company’s Chief Executive Officer,  940 Associates, Inc, an entity owned by the Company’s Chief Executive Officer, for the years ended December 31, 2010 and 2009, was $303 and $39,165, respectively.  Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2009, was $1,178, $1,726, and $4,688, respectively.




27




Royalties expense – related parties- The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940AI”), 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 940AI $2.00 per licensed product sold, rates increasing 5% annually.  Also with 940AI, 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 940AI, 2.5% of gross revenues per quarter.





Total royalty expense for the above agreements for years ended December 31, 2010 and 2009, was $59,787 and $69,787, respectively.  As of December 31, 2010, the Company was approximately nineteen months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.





Patent purchase agreements – In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the Company of patents previously subject to Non-Exclusive License Agreements.  Effective September 24, 2010, the Company finalized and executed terms of the purchase from CRC for payment of $25,500 and 371,250 shares of the Company’s common stock.   In addition, the CRC is entitled to a percentage of future sales amounting to $8,250 of products the Company is to receive in conjunction with two patent infringement lawsuits settled in the third quarter of 2010.  For financial reporting purposes the Company valued the group of patents at $0 which is the lower of CRC’s historical cost as compared to the fair market value of the stock.  Accordingly, the Company realized a $182,250 loss on the transaction comprised of $148,500 fair market value of the stock on the September, 30, 2010 grant date less the $0 historical cost, plus the $25,500 cash, plus the $8,250 liability.  See Other liabilities and accrued interest– related parties below for inclusion of the $8,250. By acquiring the IP the Company (i) has an opportunity to further develop the IP, (ii) has the ability to incorporate the IP into current and future products, and (iii) has the opportunity to license the IP to third parties. In addition, see Note 15. PATENT INFRINGEMENT SETTLEMENT for further discussion on income earned in the third quarter of 2010, from the Company’s successful settlement of several lawsuits for infringement of one of these patents.





Effective December 31, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company.  In exchange for the Intellectual Property (“IP), the Company granted Mr. Carmichael 400,000 shares of common stock.  For financial reporting purposes the Company valued the group of patents at $0 which is the lower of Mr. Carmichael’s historical cost as compared to the fair market value of the stock.  Accordingly, the Company realized a $100,000 loss on the transaction, the fair market value of the stock on the December 31, 2009, grant date less the $0 historical cost.  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.





Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company.  The Company purchased several patents it had previously been paying royalties on and several related unissued patents.  In exchange for the Intellectual Property (“IP), the Company issued Mr. Carmichael 315,000 stock options at a $1.00 exercise price.  For financial reporting purposes the Company has valued the group of patents at $0 which is the lower of Mr. Carmichael’s historical cost as compared to the fair market value of the stock options on the date of the transaction as determined using the Black-Scholes valuation model.  Accordingly, the Company realized a $63,000 loss on the transaction, the fair market value of the options on the March 3, 2009 grant date using the Black-Scholes valuation model less the $0 historical cost.  By acquiring the IP the Company (i) eliminated an estimated $41,000 net discounted cash flows it would otherwise have had to pay related to the IP through 2018, (ii) has an opportunity to further develop the IP, (iii) has the ability to incorporate the IP into current and future products, and (iv) has the opportunity to license the IP to third parties.





28





Loan conversion and other equity transactions– On September 30, 2010, the Company converted an $180,000 loan from Mikkel Pitzner, a consultant, to 818,182 shares of common stock.  Mr. Pitzner was also granted a warrant to purchase 147, 727 shares of common stock at $.22 per shares exercisable through November 15, 2010 as part of the conversion.  The Company recognized $181,446 as interest expense on conversion: the fair market value of the Company’s stock on the date of conversion plus the fair market value of the warrant determined using the Black-Scholes valuation model, less the $180,000 value of the loan.  This transaction resulted in classification of Mr. Pitzner as a related party of the Company owning greater than 5% of the outstanding shares of common stock.





Effective October 1, 2009, the Company granted Mr. Pitzner an option to purchase 75,000 shares of common stock for $.25 per share pursuant to an Equity Incentive Plan.  The option expires five years from the date of grant. The option was valued at $18,750 using the Black-Scholes valuation model.  This amount was recognized as prepaid equity compensation and is being amortized over the one-year term of the agreement for business advisory services. As of December 31, 2010, prepaid equity based compensation under this agreement totaled $0 since all services pursuant to the agreement had been provided. In addition, Mr. Pitzner was granted 100,000 shares of the Company’s common stock on March 3, 2010 pursuant to another consulting agreement.  The fair market value of the stock was $99,000 on the effective date of the agreement.  This amount was recognized as prepaid equity compensation and is being amortized over the approximate nine-month term of the agreement for marketing advisory services. As of December 31, 2010, prepaid equity based compensation totaled $0 under the agreement since all services pursuant to the agreement had been provided.  For the years ended December 31, 2010 and 2009, the Company recognized consulting expense of $116,188 and $1,562, respectively, under these two combined agreements.





Other liabilities and accrued interest– related parties





Other liabilities and accrued interest– related parties consists of the following at:





December 31, 2010


December 31, 2009Accrued interest on Notes payable – related parties

$
23,530


$
18,205Due to Principals of Carleigh Rae Corp.


8,222



—Accounts payable – 940 Associates, Inc.


—



365Other liabilities – related parties

$
31,752


$
18,570





As of December 31, 2010, the Company was approximately eighteen months in arrears on accrued interest due under the Note payable to the Chief Executive Officer.  No default notice has been received and the Company plans to make payments as able.  The $8,222 due the Principals of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company and further discussed in Note 15. PATENT INFRINGEMENT SETTLEMENTS.


29




Principal Accounting Fees and Services.




Fees to Auditors Fiscal Year ended December 31, 2010




Audit Fees: The aggregate fees, including expenses, billed by principal accountants for professional services rendered for the audit of the Company’s consolidated financial statements during fiscal year ending December 31, 2010 and for the review of the Company’s financial information included in its quarterly reports on Form 10-Q during the fiscal year ending December 31, 2010 or services that are normally provided in connection with statutory and regulatory filings or engagements during the fiscal year ending December 31, 2010 was $45,645.




Audit Related Fees:  The aggregate fees, including expenses, billed by principal accountants for assurance and related services reasonably related to the performance of the Company’s audit or review of the Company’s financial statements during the year ended December 31, 2010 were $-0-.




Tax Fees:  The aggregate fees, including expenses, billed by principal accountants for tax compliance, tax advice and tax planning during year 2010 was $3,500.




All Other Fees:  The aggregate fees, including expenses, billed for all other services rendered to the Company by principal accountants during year 2010 was $-0-.




The Company has no audit committee.  The Company's board of directors has considered whether the provisions of the services covered above under the captions is compatible with maintaining the auditor’s independence.  All services were approved by the board of directors prior to the completion of the respective audit.




Fees to Auditors Fiscal Year ended December 31, 2009




Audit Fees: The aggregate fees, including expenses, billed by the Company's principal accountants for professional services rendered for the audit of the Company’s consolidated financial statements during the fiscal year ending December 31, 2009 and for the review of the Company’s financial information included in its quarterly reports on Form 10-Q during the fiscal year ending December 31, 2009 or services that are normally provided in connection with statutory and regulatory filings or engagements during the fiscal year ending December 31, 2009 was $39,819.




Audit Related Fees:  The aggregate fees, including expenses, billed by principal accountants for assurance and related services reasonably related to the performance of the Company’s audit or review of the Company’s financial statements during the year ended December 31, 2009 were $-0-.




Tax Fees:  The aggregate fees, including expenses, billed by principal accountants for tax compliance, tax advice and tax planning during year 2009 was $3,000.




All Other Fees:  The aggregate fees, including expenses, billed for all other services rendered to the Company by principal accountants during year 2009 was $-0-.


The Company has no audit committee.  The Company's board of directors has considered whether the provisions of the services covered above under the captions is compatible with maintaining the auditor’s independence.  All services were approved by the board of directors prior to the completion of the respective audit.




30





PART IV




Item 14.
Exhibits, Financial Statements Schedules




Our consolidated financial statements appear beginning at F-1.




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, 2009.3.2

Articles of Amendment

Incorporated by reference to the appendix to the Company's Definitive Information Statement on Schedule 14C filed July 31, 2007.3.3

Articles of Amendment Authorization of Preferred Stock

Incorporated by reference to Schedule 14C filed on June 1, 20103.4

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 - SHERPATrademark and Inflatable Flotation Aid/SignalDevice Technology

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


31





Exhibit No.

Description

Location10.6

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, 2007.10.8

Agreement for Purchase and Sale of PropertyBetween Trebor Industries, Inc. and GKRAssociates, 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, 2007between Trebor Industries, Inc. andColonial 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 payableto 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, 2007between 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, 2007payable 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 TreborIndustries, Inc. and Robert Carmichael.

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

Asset Purchase Agreement between TreborIndustries, Inc. and Robert Carmichael.

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

Asset Purchase Agreement between TreborIndustries, Inc. and Robert Carmichael.

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

Loan Conversion for Restricted Common Stock

Incorporated by reference to Form 8K filed on October 5, 2010.10.17

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

Incorporated by reference to Form 8K filed on January 6, 201131.1

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


32





SIGNATURES




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




Date:     May 17, 2011
Brownie’s marine group,  Inc.By:
/s/ Robert M. CarmichaelRobert M. CarmichaelPresident, Chief Executive Officer,Chief Financial Officer andPrincipal Accounting Officer




Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.




Date: May 17, 2011
By:
/s/ Robert M. CarmichaelRobert M. CarmichaelDirector




Date: May 17, 2011
By:
/s/ Wesley G. ArmstrongWesley G. ArmstrongDirectorDate: May 17, 2011
By:
/s/ Mikkel PitznerMikkel PitznerDirector




BROWNIE'S MARINE GROUP, INC.TABLE OF CONTENTS FOR CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
  PAGE(S)REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM


F-1CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2010 AND 2009


F-2CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDEDDECEMBER 31, 2010 AND 2009


F-3CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


F-4CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDEDDECEMBER 31, 2010 AND 2009


F-5NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-7 TO F-24
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors and
 Stockholders of Brownie’s Marine Group, Inc.
 
 We have audited the accompanying consolidated balance sheets of Brownie’s Marine Group, Inc. as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ (deficit) equity, and cash flows for each of the years in the two-year period ended December 31, 2010.  Brownie’s Marine Group, Inc. management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Brownie’s Marine Group, Inc as of December 31, 2010 and 2009, and the results of its operations and cash flows for each of the years in the two-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States.
 
 The accompanying financial statements have been prepared assuming Brownies Marine Group, Inc. will continue as a going concern.  As more fully discussed in Note 1 to the financial statements, the Company has a working capital deficiency and recurring losses and will need to secure new financing or additional capital in order to pay its obligations.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plan as to these matters is also described in Note 1.  These financial statements do not include adjustments that might result from the outcome of this uncertainty.
 
 /s/ L.L Bradford & Company, LLC.
 L.L Bradford & Company, LLC.
 Las Vegas, Nevada
 May 17, 2011
  F-1
  BROWNIE'S MARINE GROUP, INC.
 CONSOLIDATED BALANCE SHEETS
  December 31,


December 31,2010


2009ASSETSCurrent assetsCash

$
4,171


$
2,713Accounts receivable, net of $15,000 and $31,000 allowancefor doubtful accounts, respectively


29,553



9,704Accounts receivable - related parties


23,998



14,419Inventory


525,595



488,694Income tax refunds receivable


--



121,802Prepaid expenses and other current assets


36,484



67,078Deferred tax asset, net - current


469



219Total current assets


620,270



704,629Property, plant and equipment, net


1,139,911



1,165,940Deferred tax asset, net - non-current


108,309



42,685Other assets


2,895



6,968Total assets

$
1,871,385


$
1,920,222LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITYCurrent liabilitiesAccounts payable and accrued liabilities

$
510,642


$
391,767Customer deposits


58,390



11,365Royalties payable - related parties


87,048



49,611Other liabilities


13,346



2,921Other liabilities and accrued interest - related parties


31,752



18,570Convertible debentures, net


90,676



--Notes payable - current portion


--



247,424Notes payable - related parties - current portion


205,180



137,408Total current liabilities


997,034



859,066Long-term liabilitiesNotes payable - long-term portion


1,053,993



834,966Notes payable - related parties - long-term portion


124,014



219,319Total liabilities


2,175,041



1,913,351Commitments and contingenciesStockholders' (deficit) equityPreferred stock; $0.001 par value: 10,000,000 shares authorized; No sharesissued and outstanding


--



--Common stock; $0.001 par value; 250,000,000 shares authorized4,051,502 and 1,785,538 shares issued and outstanding, respectively


4,052



1,785Common stock payable; $0.001 par value; 543,240 and 502,140shares, respectively


543



502Prepaid equity based compensation


(41,586
)


(43,542
)Additional paid-in capital


2,233,119



1,358,333Accumulated deficit


(2,499,783
)


(1,310,207
)Total stockholders' (deficit) equity


(303,655
)


6,871Total liabilities and stockholders' (deficit) equity

$
1,871,386


$
1,920,222
  See Accompanying Notes to Consolidated Financial Statements
  F-2
 
  BROWNIE'S MARINE GROUP, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Year Ended December 31,2010


2009Net revenuesNet revenues

$
1,503,391


$
1,840,386Net revenues - related parties


677,682



544,319Total net revenues


2,181,073



2,384,705Cost of net revenuesCost of net revenues


1,591,529



1,644,554Royalties expense - related parties


96,070



69,787Total cost of net revenues


1,687,599



1,714,341Gross profit


493,474



670,364Operating expensesSelling, general and administrative


1,353,000



911,464Research and development costs


135,593



64,508Total operating expenses


1,488,593



975,972Loss from operations


(995,119
)


(305,608
)Other (income) expense,  netOther (income) expense, net


(38,176
)


202,625Interest expense


280,701



75,760Interest expense - related parties


17,806



26,016Total other expense, net


260,331



304,401Net loss before provision for income taxes


(1,255,450
)


(610,009
)Provision for income tax benefit


(65,874
)


(158,782
)Net loss

$
(1,189,576
)

$
(451,227
)Basic loss  per common share

$
(0.32
)

$
(0.25
)Diluted loss per common share

$
(0.32
)

$
(0.25
)Basic weighted average commonshares outstanding


3,767,397



1,785,538Diluted weighted average commonshares outstanding


3,767,397



1,785,538
  See Accompanying Notes to Consolidated Financial Statements
  F-3
 
  BROWNIE'S MARINE GROUP, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
  Prepaid


Additional





TotalCommon stock


Common stock payable


Equity based


paid-in


Accumulated


stockholders'Shares


Amount


Shares


Amount


compensation


capital


deficit


equity (deficit)Balance, December 31, 2008


1,785,538


$
1,785



--


$
-


$
-


$
1,084,216


$
(858,980
)

$
227,021Purchase of issued and pendingpatents for stock options grantedon March 3, 2009


--



--



--



--



--



63,000



--



63,000Prepaid equity based compensationincentive stock options grantedeffective October 1 andDecember 1, 2009


--



--



--



--



(47,500
)


47,500



--



--Purchase of Intellectual Propertyeffective December 31, 2008


--



--



400,000



400



--



99,600



--



100,000Common stock payable effectiveDecember 30, and 31, 2009 forlegal services


--



--



102,140



102



--



64,017



--



64,119Current period amortization ofprepaid equity based compensation


--



--



--



--



3,958



--



--



3,958Net loss


--



--



--



--



--



--



(451,227
)


(451,227
)Balance, December 31, 2009


1,785,538



1,785



502,140



502



(43,542
)


1,358,333



(1,310,207
)


6,871Issuance of stock payable from priorprior reporting periods


502,140



502



(502,140
)


(502
)


--



--



--



--Stock granted for consulting andlegal services


574,392



575



543,240



543



(279,000
)


320,393



--



42,511Legal expense recognized for stockwarrants


--



--



--



--



--



25,000



--



25,000Conversion of legal  accounts payable toconvertible debenture


--



--



--



--



--



20,635



--



20,635Conversion of loan payable to stockand warrants


818,182



818



--



--



--



360,628



--



361,446Stock issued for purchase ofintellectual property


371,250



371



--



--



--



148,130



--



148,501Amortization of prepaid equitybased compensation


--



--



--



--



280,956



--



--



280,956Net loss


--



--



--



--



--



--



(1,189,576
)


(1,189,576
)Balance, December 31, 2010


4,051,502


$
4,052



543,240


$
543


$
(41,586
)

$
2,233,119


$
(2,499,783
)

$
(303,655
)
  See Accompanying Notes to Consolidated Financial Statements
  F-4


BROWNIE'S MARINE GROUP, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Year ended December 31,2010


2009Cash flows from operating activities:Net loss

$
(1,189,576
)

$
(451,227
)Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation


34,615



36,614Amortization


—



600Change in deferred tax asset, net


(65,874
)


(44,336
)Change in deferred tax liability, net


—



(523
)Issuance of stock for purchase of intellectual property


148,501



163,000Equity based compensation for consulting and legal services


67,511



68,077Stock and warrant  expense on conversion of loan to equity


181,446



—Amortization of prepaid equity based compensation expense


280,956



—Gain on sale of fixed asset


—



(2,000
)Changes in operating assets and liabilities:Change in accounts receivable, net


(19,849
)


24,624Change in accounts receivable - related parties


(9,579
)


26,640Change in inventory


(36,901
)


246,342Change in prepaid expenses and other current assets


30,594



27,001Change in other assets


4,073



—Change in costs and estimated earnings in excess of billings on uncompleted contract


—



287,861Change in accounts payable and accrued liabilities


319,510



22,279Change in customer deposits


47,025



(183,060
)Change in income tax refunds receivable


121,802



(121,802
)Change in income taxes payable


—



(30,649
)Change in other liabilities


10,425



(1,311
)Change in other liabilities and accrued interest - related parties


13,182



14,419Change royalties payable  - related parties


37,437



6,746Net cash (used in) provided by operating activities


(24,702
)


89,295Cash flows from investing activities:Sale of fixed asset


—



2,000Purchase of fixed assets


(8,586
)


(3,600
)Net cash used in investing activities


(8,586
)


(1,600
)Cash flows from financing activities:Proceeds from borrowing on convertible debenture


90,676



—Proceeds from borrowings on notes payable


—



70,000Principal payments on notes payable


(28,397
)


(114,208
)Principal payments on notes payable - related parties


(27,533
)


(44,306
)Net cash provided by (used in) financing activities


34,746



(88,514
)Net change in cash


1,458



(819
)Cash, beginning of period


2,713



3,532Cash, end of period

$
4,171


$
2,713Supplemental disclosures of cash flow information:Cash paid for interest

$
74,645


$
87,669Cash paid for income taxes

$
—


$
38,528
 
 See Accompanying Notes to Consolidated Financial Statements
 
 F-5
  BROWNIE'S MARINE GROUP, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Supplemental disclosures of non-cash investing activities and future operating activities:Prepaid equity based compensation for incentive stock options

$
279,000


$
47,500Conversion of accounts payable into convertible debenture

$
20,635


$
—Stock options and additional paid in capital issued for for purchase of intellectual property

$
—


$
63,000Common stock  payable and additional paid in capital issued for purchase of intellectual property

$
—


$
100,000Common stock and additional paid in capital issued for purchase of intellectual property

$
148,501


$
—Conversion of loan payable for stock and warrants (excluding interest of $181,446)

$
180,000


$
—
 
 See Accompanying Notes to Consolidated Financial Statements
  F-6





BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Description of business –Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company” 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 2009 financial statement amounts to conform to the 2010 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 15. PATENT INFRINGEMENT SETTLEMENTS.
 In addition, the Company introduced some of its own new products to market in mid 2010, 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 second 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.  See Note 20. SUBSEQUENT EVENTS for further information on financing activity.  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.
  F-7
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 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 is 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 years ended December 31, 2010 and 2009, was $37,465 and $22,105, 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.
  F-8
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 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 years ended December 31, 2010, and 2009, the Company amortized prepaid stock based compensation associated with stock options granted October 1 and December 1, 2009.  See Note 13. EQUITY INCENTIVE PLAN for further discussion.  For the year ended December 31, 2010, the Company recorded stock based compensation associated with warrants granted on December 31, 2009.  See Note 12. STOCK WARRANTS FOR LEGAL SERVICES for further discussion.  For the year ended December 31, 2010, the company granted stock for legal and consulting services.  See Note 11. STOCK ISSUED FOR LEGAL SERVICES, and Note 14. STOCK ISSUED FOR CONSULTING SERVICES. For the year ended December 31, 2010, the Company issued capital stock to the Carleigh Rae Corp, a related party which the Company’s Chief Executive Officer has a financial interest, upon finalization of a patent purchase agreement.  The Company granted stock options for the year ended December 31, 2009 associated with the purchase of intellectual property from the Company’s Chief Executive Officer.  See Note 6. RELATED PARTY TRANSACTIONS, Patent Purchase Agreements, for further discussion.  During the year ended December 31, 2010, the Company converted a loan payable to capital stock and warrants.  See Note 6. RELATED PARTY TRANSACTIONS, Loan conversion and other equity transactions, for further discussion of the transaction.
  F-9
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Fair value of financial instruments – The carrying amounts and estimated fair values of the Company’s financial instruments approximate their fair value due to the short-term nature.
 
 Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities.  Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period.  Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.  Common stock equivalent shares are excluded from the computation if their effect is antidilutive.  All common stock equivalent shares were excluded in the computation for the three and nine months ended September 30, 2010 and 2009 since their effect was antidilutive.
 
 New accounting pronouncements – In June 2009, FASB established the Accounting Standards Codification (“ASC”) as the single source of authoritative US GAAP to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. The ASC is a new structure which took existing accounting pronouncements and organized them by accounting topic. The ASC did not change current US GAAP, but was intended to simplify user access to all authoritative US GAAP by providing all the relevant literature related to a particular topic in one place. All previously existing accounting standards were superseded and all other accounting literature not included in the ASC is considered non-authoritative. New accounting standards issued since September 30, 2009 are communicated by the FASB through Accounting Standards Updates (“ASU”). The ASC was effective during the period ended September 30, 2009. Adoption of the ASU did not have a financial impact on the Company’s consolidated financial position, results of operations or cash flows.
 
 In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements.  This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers.  Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The  adoption of this ASU did not have a material impact on our consolidated financial statements.
 
 In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events and amendments to certain recognition and disclosure requirements.  Under this ASU, a public company that is a SEC filer, as defined, is not required to disclose the date through which subsequent events have been evaluated.  This ASU is effective upon the issuance of this ASU.  The adoption of this ASU did not have a material impact on our consolidated financial statements.
 
 In March 2010, the FASB issued ASU No. 2010-11 which clarifies the transfer of credit risk that is only in the form of subordination of one financial instrument to another is an embedded derivative feature that should not be subject to potential bifurcation and separate accounting. This ASU will be effective for the first fiscal quarter beginning after June 15, 2010, with early adoption permitted.  Adoption of this ASU did not have a material financial impact.
  F-10
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 New accounting pronouncements (continued) – 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, with early adoption permitted. The Company does not expect adoption of this ASU to have a material financial impact.
 
 There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.
 
 2.
INVENTORY
 
 Inventory consists of the following as of:
  December 31, 2010


December 31, 2009Raw materials

$
333,107


$
303,230Work in process


—



—Finished goods


192,488



185,464$
525,595


$
488,694
 
 3.
PREPAID EXPENSES AND OTHER 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.
 
 Prepaid expenses and other current assets totaling $67,078 at December 31, 2009, consists of $48,645 of prepayments for inventory, $14,116 of prepaid insurance, $1,651 of prepaid software maintenance, $2,248 sales tax refund due, and $418 other prepaid and expenses and current assets.
 
 4.
PROPERTY, PLANT AND EQUIPMENT
 
 Property, plant and equipment consists of the following as of:
 
 December 31, 2010


December 31, 2009Building, building improvements, and land

$
1,224,962


$
1,224,963Furniture, fixtures, vehicles and equipment


171,080



115,6101,396,042



1,340,573Less:  accumulated depreciation and amortization


(256,131
)


(174,633
)$
1,139,911


$
1,165,940
  F-11
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 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 years ended December 31, 2010 and 2009 represented 31.06% and 21.18%, respectively, of total net revenues.  For the year ended December 31, 2009, sales to one unrelated customer represented 20.49% of total net revenues.  Sales to no other customers represented greater than 10% of net revenues for the years ended December 31, 2010 and 2009.
 
 6.
RELATED PARTIES TRANSACTIONS
 
 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 principal  and interest payments of $7,050, maturing on August 1, 2013.

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


37,260329,194Less amounts due within one year


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

$
124,014
 
 As of December 31, 2010, principal payments on the notes payable – related parties are as follows:
 
 2011

$
205,1802012


82,1592013


41,8552014


—2015


—Thereafter


—$
329,194
  F-12
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 6.
RELATED PARTY TRANSACTIONS (continued)
 
 Notes payable – related parties (continued)
 
 As of December 31, 2010, the Company was approximately eighteen 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 six months in arrears on mortgage payments due GKR at December 31, 2010.  No default notice has been received and the Company plans to make payments as able.
 
 Notes payable – related parties consists of the following as of December 31, 2009:
 
 Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013.

$
307,412Promissory note payable due an entity in which the Company’s Chief Executive Officer has a financial interest, GKR Associates, LLC., secured by second mortgage on real property, having a carrying value of $1,148,425 at December 31, 2009, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012.


49,315356,727Less amounts due within one year


137,408Long-term portion of notes payable – related parties

$
219,319
 
 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 years ended December 31, 2010 and 2009, was $677,380 and $505,154, 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. Combined net revenues from Robert Carmichael, the Company’s Chief Executive Officer,  940 Associates, Inc, an entity owned by the Company’s Chief Executive Officer, for the years ended December 31, 2010 and 2009, was $303 and $39,165, respectively.  Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2009, was $1,178, $1,726, and $4,688, respectively.
  F-13
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 6.
RELATED PARTY TRANSACTIONS (continued)
 
 Royalties expense – related parties
 
 The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940AI”), 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 940AI $2.00 per licensed product sold, rates increasing 5% annually.  Also with 940AI, 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 940AI, 2.5% of gross revenues per quarter.
 
 Total royalty expense for the above agreements for years ended December 31, 2010 and 2009, was $59,787 and $69,787, respectively.  As of December 31, 2010, the Company was approximately nineteen months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.
 
 Patent purchase agreements – In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the Company of patents previously subject to Non-Exclusive License Agreements.  Effective September 24, 2010, the Company finalized and executed terms of the purchase from CRC for payment of $25,500 and 371,250 shares of the Company’s common stock.   In addition, the CRC is entitled to a percentage of future sales amounting to $8,250 of products the Company is to receive in conjunction with two patent infringement lawsuits settled in the third quarter of 2010.  For financial reporting purposes the Company valued the group of patents at $0 which is the lower of CRC’s historical cost as compared to the fair market value of the stock.  Accordingly, the Company realized a $182,250 loss on the transaction comprised of $148,500 fair market value of the stock on the September, 30, 2010 grant date less the $0 historical cost, plus the $25,500 cash, plus the $8,250 liability.  See Other liabilities and accrued interest– related parties below for inclusion of the $8,250. By acquiring the IP the Company (i) has an opportunity to further develop the IP, (ii) has the ability to incorporate the IP into current and future products, and (iii) has the opportunity to license the IP to third parties. In addition, see Note 15. PATENT INFRINGEMENT SETTLEMENT for further discussion on income earned in the third quarter of 2010, from the Company’s successful settlement of several lawsuits for infringement of one of these patents.
 
 Effective December 31, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company.  In exchange for the Intellectual Property (“IP), the Company granted Mr. Carmichael 400,000 shares of common stock.  For financial reporting purposes the Company valued the group of patents at $0 which is the lower of Mr. Carmichael’s historical cost as compared to the fair market value of the stock.  Accordingly, the Company realized a $100,000 loss on the transaction, the fair market value of the stock on the December 31, 2009, grant date less the $0 historical cost.  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.
 
 Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company.  The Company purchased several patents it had previously been paying royalties on and several related unissued patents.  In exchange for the Intellectual Property (“IP), the Company issued Mr. Carmichael 315,000 stock options at a $1.00 exercise price.  For financial reporting purposes the Company has valued the group of patents at $0 which is the lower of Mr. Carmichael’s historical cost as compared to the fair market value of the stock options on the date of the transaction as determined using the Black-Scholes valuation model.  Accordingly, the Company realized a $63,000 loss on the transaction, the fair market value of the options on the March 3, 2009 grant date using the Black-Scholes valuation model less the $0 historical cost.  By acquiring the IP the Company (i) eliminated an estimated $41,000 net discounted cash flows it would otherwise have had to pay related to the IP through 2018, (ii) has an opportunity to further develop the IP, (iii) has the ability to incorporate the IP into current and future products, and (iv) has the opportunity to license the IP to third parties.
  F-14
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 6.
RELATED PARTY TRANSACTIONS (continued)
 
 Loan conversion and other equity transactions– On September 30, 2010, the Company converted an $180,000 loan from Mikkel Pitzner, a consultant, to 818,182 shares of common stock.  Mr. Pitzner was also granted a warrant to purchase 147, 727 shares of common stock at $.22 per shares exercisable through November 15, 2010 as part of the conversion.  The Company recognized $181,446 as interest expense on conversion: the fair market value of the Company’s stock on the date of conversion plus the fair market value of the warrant determined using the Black-Scholes valuation model, less the $180,000 value of the loan.  This transaction resulted in classification of Mr. Pitzner as a related party of the Company owning greater than 5% of the outstanding shares of common stock.
 
 Effective October 1, 2009, the Company granted Mr. Pitzner an option to purchase 75,000 shares of common stock for $.25 per share pursuant to an Equity Incentive Plan.  The option expires five years from the date of grant. The option was valued at $18,750 using the Black-Scholes valuation model.  This amount was recognized as prepaid equity compensation and is being amortized over the one year term of the agreement for business advisory services. As of December 31, 2010, prepaid equity based compensation under this agreement totaled $0 since all services pursuant to the agreement had been provided. In addition, Mr. Pitzner was granted 100,000 shares of the Company’s common stock on March 3, 2010 pursuant to another consulting agreement.  The fair market value of the stock was $99,000 on the effective date of the agreement.  This amount was recognized as prepaid equity compensation and is being amortized over the approximate nine-month term of the agreement for marketing advisory services. As of December 31, 2010, prepaid equity based compensation totaled $0 under the agreement since all services pursuant to the agreement had been provided.  For the years ended December 31, 2010 and 2009, the Company recognized consulting expense of $116,188 and $1,562, respectively, under these two combined agreements.
 
 Other liabilities and accrued interest– related parties
 
 Other liabilities and accrued interest– related parties consists of the following at:
 
 December 31, 2010


December 31, 2009Accrued interest on Notes payable – related parties

$
23,530


$
18,205Due to Principals of Carleigh Rae Corp.


8,222



—Accounts payable – 940 Associates, Inc.


—



365Other liabilities and accrued interest – related parties

$
31,752


$
18,570
 
 As of December 31, 2010, the Company was approximately eighteen months in arrears on accrued interest due under the Note payable to the Chief Executive Officer.  No default notice has been received and the Company plans to make payments as able.  The $8,222 due the Principals of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company and further discussed in Note 15. PATENT INFRINGEMENT SETTLEMENTS.
  F-15
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 7.
ACCOUNTS PAYABLE AND 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.
 
 Accounts payable and accrued liabilities of $391,767 at December 31, 2009 consists of $232,065 accounts payable trade, $60,574 balance of legal expenses that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $69,981 accrued payroll and related fringe benefits, $24,000 accrued real estate taxes, $1,542 accrued interest, and $3,605 other accrued liabilities.
 
 8.
OTHER LIABILITIES
 
 Other liabilities of $13,346 at December 31, 2010 consists of $2,681 or 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.
 
 Other liabilities of $2,921, at December 31, 2009, consists of on-line training liability.
 
 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.
  F-16
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 9.
NOTES PAYABLE
 
 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
 
 As of December 31, 2010, principal payments on the notes payable are as follows:
 
 2011

$
—2012


1,053,9932013


—2014


—2015


—Thereafter


—$
1,053,993
 
 The promissory note reflected above is consolidated and restated, executed on February 15, 2011 with an effective date of  November 22, 2010.  The Company defaulted on its original first mortgage through non-payment of its August 22, 2010 monthly payment, whereby resulting in automatic default under the second mortgage.  The amount of the consolidated restated amount is the balance that was due under both notes at the time of default.  Original terms and conditions on the two notes is described next to the balances due on the respective notes at December 31, 2009, below.  As a condition of consolidation and restatement executed on February 15, 2011, the Company signed a forbearance agreement; Mr. Robert Carmichael, the Chief Executive Officer, provided a personal guarantee; and the Company committed to pay all legal fees and costs, title fees, recording fees, and all accrued interest through February 15, 2011.  The Company accrued $10,665 of legal fees and costs as of December 31, 2010 which is reflected in Other liabilities.  The Company accrued interest through December 31, 2010, and is reflected in Accounts payable and accrued liabilities.
  F-17
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 9.
NOTES PAYABLE (continued)
 
 Notes payable consists of the following as of December 31, 2009:
 
 Revolving Line of Credit secured by a third mortgage on the real property of the Company with a carrying value of $1,148,425 at December 31, 2009, bearing interest at the lender’s base rate plus 1.00% per annum.  Interest payments are due monthly on the outstanding principal balance and the Line of Credit matures on December 2, 2009.

$
199,990Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,148,425 at December 31, 2009, interest at 6.99% per annum, due in monthly principal and interest payments of $9,038, maturing on January 22, 2022.


882,4001,082,390Less amounts due within one year


247,424Long-term portion of notes payable

$
834,966
 
 10.
CONVERTIBLE DEBENTURES
 
 The Company entered into two convertible debentures during the year ended December 31, 2010.  The first was on October 4, 2010, and the second was on November 27, 2010 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.  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 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.
  F-18
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 10.
CONVERTIBLE DEBENTURES (continued)
 
 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.
 
 The Company valued the beneficial conversion feature (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 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.
 
 11.
STOCK ISSUED FOR LEGAL SERVICES
 
 Effective December 31, 2010, the Company issued 343,230 shares of stock to an outside attorney in settlement of a $34,323 legal expense debt.  The per share fair market value at December 31, 2010, was $.10.  Accordingly, the Company recognized no gain or loss on the transaction.
 
 Effective December 30, 2009, the Company granted 50,000 shares of restricted common stock to an outside attorney legal and advisory services provided in 2009. The stock was valued at the fair market price on the effective date of grant, or $12,500.  The agreement underlying the stock as granted did not assign a stated value to the services rendered.  Accordingly, the Company recognized $12,500for the year ended December 31, 2009, as legal expense associated with the stock issue.  See Note 12. STOCK WARRANTS FOR LEGAL SERVICE
 for a discussion of the warrants granted.
 
 Pursuant to an Agreement and Release dated February 9, 2010, the Company granted 52,140 shares of restricted common stock to an outside attorney for legal and advisory services valued at $13,035 provided through December 31, 2009.  The effective date of the Agreement was December 31, 2009.  Accordingly, the stock granted was valued at the fair market price on the date of the Agreement, or $51,619.  As of December 31, 2009, $13,035 was recognized as legal expense, and $38,584 was recognized as a loss on the transaction.
 
 12.
STOCK WARRANTS FOR LEGAL SERVICE
 
 Effective December 30, 2009, the Company issued to an outside attorney warrants to purchase 100,000 shares of restricted common stock for certain legal and advisory services to be performed in 2010, as evidenced by a signed proposal.  The warrants are exercisable at fair market value as of the date of grant, and will vest 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 will recognize operating expense over the term of the agreement.  Accordingly, the Company recognized $25,000 as operating expense for the year ended December 31, 2010.  As of December 31, 2010, the two tranches of warrants were unexercised.
  F-19
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 13.
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 one year were issued in conjunction with consulting agreements for certain 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 $3,958 as operating expense for the options in the year ended December 31, 2009. As of December 31, 2009, prepaid equity based compensation totaled $43,542 and is reflected as a component of shareholders’ equity for the related consulting services as yet to be provided as of that date.
 
 As of December 31, 2009 all Stock Options authorized under Plan had been granted.
 
 14.
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 $179,337 as operating expense under the agreements for the year ended December 31, 2010.  As of December 31, 2010, prepaid equity based compensation under these agreements totaled $41,586 and is reflected as a component of shareholders’ equity for the related consulting services as yet to be provided as of that date.
 
 15.
OFFERING AGREEMENT AND INDEPENDENT CONSULTANT AND ADVISORY AGREEMENT
 
 Effective December 31, 2009, the Company signed an independent consulting and advisory agreement with a registered broker dealer.  Effective as of the end of the first quarter of 2010, these agreements were terminated without liability or associated cost to the Company.
  F-20
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 16.
PATENT INFRINGEMENT SETTLEMENTS
 
 In August 2010, the Company settled several lawsuits for infringement of one of the Company’s patents.  The Company recorded $206,950 as other income that was settled in cash and inventory credits.  The Company granted a 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.
 
 17.
INCOME TAXES
 
 The components of the provision for income tax benefit are as follows for the years ended:
 
 December 31, 2010


December 31, 2009Current taxesFederal

$
—


$
(108,739
)State


—



(5,184
)Current taxes


—



(113,923
)Change in deferred taxes


(356,291
)


(97,519
)Change in valuation allowance


290,417



52,600Provision for income tax benefit

$
(65,874
)

$
(158,782
)
 
 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.
  F-21
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 17.
INCOME TAXES (continued)
 
 The significant differences between the statutory tax rate and the effective tax rates for the Company for the three months ended are as follows:
 
 December 31, 2010


December 31, 2009Statutory tax rate benefit


—
%


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


(30
)%


(32
)%Equity based compensation and loss


1
%


—
%Book/tax depreciation and amortization differences


—
%


—
%Change in valuation allowance


23
%


8
%Other


1
%


(2
)%Effective tax rate benefit


(5
)%


(26
)%
 
 The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2009:
 
 Deferred tax assets:Stock options

$
33,527Allowance for doubtful accounts


10,540Net operating loss carryforward


72,382On-line training certificate reserve


438Total deferred tax assets


116,887Valuation allowance


(72,095
)Deferred tax assets net of valuation allowance


44,792Less deferred tax assets – non-current, net of valuation allowance


44,573Deferred tax assets – current, net of valuation allowance

$
219
 
 Deferred tax liabilityDepreciation and amortization timing differences

$
1,888Less deferred tax liability – non-current


1,888Deferred tax liability – current

$
—
 
 The effective tax rate used for calculation of the deferred taxes as of December 31, 2009, was 34%.  The Company established a valuation allowance against deferred tax assets of $72,095 due to the uncertainty regarding realization, comprised primarily of a 75% reserve against the deferred tax assets attributable to the stock options, a 100% reserve against the allowance for doubtful accounts, and a 50% reserve against part of the net operating loss that must be carried forward.
 
 At December 31, 2009, the Company had income tax refunds receivable of $121,802 comprised of tax refunds due from the state and federal government of $9,357 and $112,445, respectively.  The state income tax refund receivable is attributable to a 2008 state income tax overpayment carried forward into 2009 and not utilized as a result of the Company’s net operating loss in 2009.  The federal income tax refund receivable is attributable to net operating loss carryback from 2009 to recuperate taxes paid in 2008.
  F-22
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 18.
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.
 
 19.
LEGAL
 
 On April 28, 2010, Melissa Metz, individually and as personal representative of the Estate of Lester M. Metz, deceased (the “Plaintiff”), filed a wrongful death complaint against Trebor Industries, Inc. and the Company in United States District Court for the Eastern District of Pennsylvania.  See Note 20. SUBSEQUENT EVENTS for settlement of this lawsuit.  Legal fees for the Company’s defense of this case for the year ended December 31, 2010 were $7,500.
 
 20.
SUBSEQUENT EVENTS
 
 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.
 
 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 as full time employment with the Company.
 
 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.
  F-23
  BROWNIE’S MARINE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 20.
SUBSEQUENT EVENTS (continued)
 
 On March 18, 2011, a legal settlement was reached between the Estate of Lester Metz and Brownie’s Marine Group, Inc.  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.
 
 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.
 
 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 10, 2011.  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.  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.
 
 Effective January 7, 2011, the Company ratified a technology and license agreement with commitment for purchase of inventory related to 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) days highest closing bid prices over the preceding five (5) trading days.
  F-24