Brownie's Marine Group, Inc - Quarter Report: 2009 June (Form 10-Q)

CONSOLIDATED BALANCE SHEETS

	June 30,
	2009			December 31,
	(Unaudited)			2008
ASSETS

Current assets
Cash	$	38,544		$	3,532
Accounts receivable, net of $28,000 and $ 25,000 allowance
for doubtful accounts, respectively		65,266			34,328
Accounts receivable - related parties		30,988			41,059
Inventory		548,411			735,036
Prepaid expenses and other current assets		94,203			94,079
Costs and estimated earnings in excess of billings on uncompleted contract		--			287,861
Deferred tax asset, net - current		85,675			456
Total current assets		863,087			1,196,351

Property, plant and equipment, net		1,184,592			1,199,554

Deferred tax asset, net - non-current		5,634			--
Other assets		6,968			6,968

Total assets	$	2,060,281		$	2,402,873

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued liabilities	$	389,760		$	329,488
Customer deposits		6,885			194,425
Royalties payable - related parties		37,817			42,865
Income taxes payable		9,171			30,649
Other liabilities		4,228			4,232
Other liabilities and accrued interest- related parties		58,571			44,151
Notes payable - current portion		245,783			244,188
Notes payable - related parties - current portion		110,726			86,677
Total current liabilities		862,941			976,675

Long-term liabilities
Deferred tax liability, net - non-current		--			2,411
Notes payable - long-term portion		859,018			882,410
Notes payable - related parties - long-term portion		266,185			314,356

Total liabilities		1,988,144			2,175,852

Commitments and contingencies

Stockholders' equity
Common stock; $0.001 par value; 250,000,000 shares authorized
1,785,538 and 1,785,538 shares issued and outstanding, respectively		1,785			1,785
Additional paid-in capital		1,147,216			1,084,216
Accumulated deficit		(1,076,864	)		(858,980	)
Total stockholders' equity		72,137			227,021

Total liabilities and stockholders' equity	$	2,060,281		$	2,402,873

See Accompanying Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS

See Accompanying Notes to Consolidated Financial Statements

	Three Months Ended June 30,					Six Months Ended June 30,
	2009			2008		2009			2008

Net revenues
Net revenues	$	444,192		$	1,512,712	$	804,972		$	2,449,613
Net revenues - related parties		125,657			216,361		276,181			474,261
Total net revenues		569,849			1,729,073		1,081,153			2,923,874

Cost of net revenues
Cost of net revenues		369,486			880,390		772,132			1,686,422
Royalties - related parties		15,140			53,747		35,403			77,367
Total cost of net revenues		384,626			934,137		807,535			1,763,789

Gross profit		185,223			794,936		273,618			1,160,085

Operating expenses
Research and development costs		17,274			993		27,353			1,122
Selling, general and administrative		217,842			328,375		445,442			561,067
Total operating expenses		235,116			329,368		472,795			562,189

Income (loss) from operations		(49,893	)		465,568		(199,177	)		597,896

Other expense, net
Other expense, net		757			7,466		61,538			4,240
Interest expense		18,183			16,851		38,138			33,600
Interest expense - related parties		6,671			15,759		13,773			31,891
Total other expense, net		25,611			40,076		113,449			69,731

Net (loss) income before provision for income taxes		(75,504	)		425,492		(312,626	)		528,165

Provision for income tax (benefit) expense		(27,214	)		202,254		(94,742	)		207,850

Net (loss) income	$	(48,290	)	$	223,238	$	(217,884	)	$	320,315

Basic (loss) income per common share	$	(0.03	)	$	0.13	$	(0.12	)	$	0.19
Diluted (loss) income per common share	$	(0.03	)	$	0.13	$	(0.12	)	$	0.19

Basic weighted average common
shares outstanding		1,785,538			1,685,538		1,785,538			1,685,538
Diluted weighted average common
shares outstanding		1,785,538			1,685,538		1,785,538			1,685,538

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

					Additional					Total
	Common Stock				Paid-in		Accumulated			Stockholders'
	Shares		Amount		Capital		Deficit			Equity

Balance, December 31, 2008		1,785,538		1,784.54	$	1,084,216	$	(858,980	)	$	227,021

Purchase of issued and pending patents for
stock options granted on March 3, 2009		--		--		63,000		--			63,000

Net loss		--		--		--		(169,594	)		(169,594	)

Balance, March 31, 2009 (Unaudited)		1,785,538		1,785		1,147,216		(1,028,574	)		120,427

Net loss		--		--		--		(48,290	)		(48,290	)

Balance, June 30, 2009 (Unaudited)		1,785,538	$	1,785	$	1,147,216	$	(1,076,864	)	$	72,137

See Accompanying Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Accompanying Notes to Consolidated Financial Statements

	Six Months Ended June 30,
	2009			2008

Cash flows from operating activities:
Net (loss) income	$	(217,884	)	$	320,315
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation		17,877			19,686
Amortization		685			--
Change in deferred tax asset, net		(90,853	)		41,255
Change in deferred tax liability, net		(2,411	)		6,279
Issuance of equity based stock options		63,000			--
Changes in operating assets and liabilities:
Change in accounts receivable, net		(30,938	)		(105,389	)
Change in accounts receivable - related parties		10,071			--
Change in inventory		186,625			6,321
Change in prepaid expenses and other current assets		(124	)		(38,348	)
Change in costs and estimated earnings in excess of billings
on uncompleted contract		287,861			--
Change in accounts payable and accrued liabilities		60,272			(134,497	)
Change in customer deposits		(187,540	)		(124,226	)
Change in income taxes payable		(21,478	)		150,401
Change in other liabilities		(4	)		(2,273	)
Change in other liabilities and accrued interest - related parties		14,420			(107,601	)
Change in royalties payable - related parties		(5,048	)		38,450
Net cash provided by operating activities		84,531			70,373

Cash flows from investing activities:
Purchase of fixed assets		(3,600	)		(4,210	)
Net cash used in investing activities		(3,600	)		(4,210	)

Cash flows from financing activities:
Principal payments on notes payable		(21,797	)		(22,822	)
Principal payments on notes payable - related parties		(24,122	)		(37,396	)
Net cash used in financing activities		(45,919	)		(60,218	)

Net change in cash		35,012			5,945

Cash, beginning of period		3,532			142,516

Cash, end of period	$	38,544		$	148,461

Supplemental disclosure of cash flow information:
Cash paid for interest	$	44,397		$	65,383

Cash paid for income taxes	$	20,000		$	5,072

Supplemental disclosure of non-cash investing activities
Stock options and additional paid in capital issued for
purchase of issued and pending patents on March 3, 2009	$	63,000		$	--

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business – Brownie’s Marine Group, Inc. (hereinafter referred to as the “Company” 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.

Prior to August 22, 2007 the Company was known as United Companies Corporation (hereinafter referred to as “UCC”). The Company changed its name to Brownie’s Marine Group, Inc. during the third quarter of 2007, a name the Company believes more closely reflect its line of business, and also has associated tradename recognition.

History –The Company was incorporated under the laws of Nevada on November 26, 2001, with authorized common stock of 250,000,000 shares with a par value of $0.001. On August 22, 2007, the Company effectuated a 1-for-100 reverse stock split of the Common Stock whereby every one hundred shares of Common Stock outstanding was combined and reduced to one share of Common Stock. Fractional shares were rounded up and this resulted in an additional 146 shares issued. All footnotes and financial statement amounts that relate to common share data have been retrospectively adjusted to reflect the reverse stock split.

On March 23, 2004, UCC consummated an agreement to acquire all of the outstanding capital stock of Trebor Industries, Inc., dba Brownies Third Lung, in exchange for 950,000 shares of the Company’s common stock (“the UCC Transaction”). Prior to the UCC Transaction, UCC was a non-operating public shell company with no operations, nominal assets, accrued liabilities totaling $224,323 and 144,837 shares of common stock issued and outstanding; and Trebor Industries, Inc., dba Brownies Third Lung, was a manufacturer and distributor of hookah diving, and yacht based scuba air compressor and Nitrox Generation Systems from its factory in Ft. Lauderdale, Florida. The UCC Transaction is considered to be a capital transaction in substance, rather than a business combination. Inasmuch, the UCC Transaction is equivalent to the issuance of stock by Trebor Industries, Inc., for the net monetary assets of a non-operational public shell company, accompanied by a recapitalization. UCC issued 950,000 shares of its common stock for all of the issued and outstanding common stock of Trebor Industries, Inc. The accounting for the UCC Transaction is identical to that resulting from a reverse acquisition, except goodwill or other intangible assets will not be recorded. Accordingly, these financial statements are the historical financial statements of Trebor Industries, Inc. Trebor Industries, Inc. was incorporated in September 17, 1981. Therefore, these financial statements reflect activities from September 17, 1981 (date of inception for Trebor Industries, Inc.) and forward.

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 2008 financial statement amounts to conform to the 2009 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.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fixed assets – Fixed assets 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 recognizes advertising expenses in accordance with Statement of Position 93-7 “Reporting on Advertising Costs.” Accordingly, the Company expenses the costs of producing advertisements at the time production occurs, and expenses the costs of communicating advertisements in the period in which the advertising space or airtime is used. Advertising and trade show expense incurred for the three months ended June 30, 2009 and 2008, was $5,160 and $9,235, respectively. Advertising and trade show expense incurred for the six months ended June 30, 2009 and 2008, was $6,448 and $17,758 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes – The Company accounts for its income taxes in accordance with the Financial Accounting Standards Board Statement (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 109, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company accounts for uncertainty in tax positions in accordance with FASB Interpretation 48 (“FIN 48”). FIN 48 requires the recognition of a tax position when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position.

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 stock based compensation in accordance with Statement of Financial Accounting Standards No. 123 revised that requires that the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period the employee is required to provide service in exchange for the award.

For the three and six months ended June 30, 2009 and 2008, the Company did not grant any incentive stock options to employees, consultants or officers.

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 six months ended June 30, 2009 since their effect was antidilutive. There were no common stock equivalents for the three and six months ended June 30, 2008.

Subsequent events – We have evaluated all subsequent events through August 12, 2009, the date the financial statements were available to be issued.

New accounting pronouncements – In June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of SFAS No. 162”. SFAS No. 168 establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. According to SFAS No. 168, rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. .This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect any significant financial impact upon adoption of SFAS No. 168.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

New accounting pronouncements (continued) – In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”. SFAS No. 167 addresses the effect on FASB Interpretation 46(R), “Consolidation of Variable Interest Entities” of the elimination of the qualifying special-purpose entity concept of SFAS No. 166, “Accounting for Transfers of Financial Assets”. SFAS No. 167 also amends the accounting and disclosure requirements of FASB Interpretation 46(R) to enhance the timeliness and usefulness of information about an enterprise’s involvement in a variable interest entity. This Statement shall be effective as of the Company’s first interim reporting period that begins after November 15, 2009. Earlier application is prohibited. The Company does not anticipate any significant financial impact from adoption of SFAS No. 167.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140”. SFAS No. 166 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” by eliminating the concept of special-purpose entity, requiring the reporting entity to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk to the assets, changes the requirements for the de-recognition of financial assets, and provides for the sellers of the assets to make additional disclosures. This Statement shall be effective as of the Company’s first interim reporting period that begins after November 15, 2009. Earlier application is prohibited. The Company does not anticipate any significant financial impact from adoption of SFAS No. 166.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. This Statement addresses accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS No. 165 requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, the date issued or date available to be issued. The Company adopted this Statement in the second quarter of 2009. As a result the date through which the Company has evaluated subsequent events and the basis for that date have been disclosed in Note 1, Subsequent Events.

In April 2009, the FASB issued Staff Position (“FSP”) SFAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The Statement clarifies the methodology to be used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. FSP SFAS No. 157-4 also reaffirms the objective of fair value measurement, as stated in SFAS No. 157, which is to reflect how much an asset would be sold in and orderly transaction, and the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. The Company adopted this Statement in the second quarter of 2009 without significant financial impact.

In April 2009, the FASB issued FSP SFAS 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than Temporary Impairments”. FSP SFAS 115-2 and SFAS No. 124-2 modifies the other-than-temporary guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to credit and noncredit components impaired debt securities that are not expected to be sold. Also, the Statement increases disclosures for both debt and equity securities regarding expected cash flows, securities with unrealized losses, and credit losses. The Company adopted this Statement in the second quarter of 2009 without significant impact to our financial statements.

In April 2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, “Interim Disclosures about the Fair Value of Financial Instruments” (“FSP 107-1/APB 28”). FSP 107-1/APB 28 enhances consistency in financial reporting by increasing the frequency of fair value disclosures of those assets and liabilities falling within the scope of SFAS No. 107. The Company adopted this Statement in the second quarter of 2009 without significant impact to the financial statements.

New accounting pronouncements (continued) – In April 2009, the FASB issued FSP SFAS No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” that clarifies and amends FASB SFAS No. 141(revised 2007), as it applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies. FSP SFAS No. 141(R)-1 addresses initial recognition and measurement issues, subsequent measurement and accounting, and disclosures regarding these assets and liabilities arising from contingencies in a business combination. The Company adopted this Statement in the second quarter of 2009 without significant impact to the financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In January 2009, the FASB issued FSP Emerging Issues Task Force (“EITF”) 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20”. FSP EITF 99-20-1 amends the impairments guidance in EITF Issue 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other than-temporary impairment assessment and the related disclosure requirements in FASB

Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other related guidance. The adoption of this Statement in the second quarter of 2009 did not have a significant impact on the Company’s financial statements.

In November 2008, EITF issued Issue No. 08-07, “Accounting for Defensive Intangible Assets”. The Statement applies to all acquired intangible assets in which the acquirer does not intend to actively use the asset but intends to hold (lock up) the asset to prevent its competitors from obtaining or using the asset (a defensive asset). EITF Issue No. 08-07 was adopted by the Company in January 2009 without impact to the financial statements.

In May 2008, the FASB issued STAFF POSITION (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion Including Partial Cash Settlement”. This FSP applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. FSP No. 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost recognized in subsequent periods. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not currently have any debt instruments for which this FSP would apply. This FSP was adopted in January 2009 without significant financial impact.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” This statement is intended to enhance the current disclosure framework in SFAS No. 133. Under SFAS No. 161, entities will have to provide disclosures about (a) how and why and entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c), how derivative instruments and related hedged items effect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for all financial statements issued for fiscal and interim periods beginning after November 15, 2008. The Company does not currently have any derivative instruments, nor does it engage in hedging activities, therefore, the Company’s adoption of this SFAS in the first quarter of 2009 was without significant financial impact.

New accounting pronouncements (continued) –In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for the Company with respect to business combinations for which the acquisition date is on or after January 1, 2009. The Company adopted this SFAS in the first quarter of 2009 without significant financial impact.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of noncontrolling owners. SFAS 160 is effective for the Company as of January 1, 2009. The Company adopted this SFAS in January 2009 without significant impact on the consolidated financial position, results of operations, and disclosures.

INVENTORY

Inventory consists of the following as of:

	June 30, 2009		December 31, 2008
	(Unaudited)
Raw materials	$	319,652	$	485,367
Work in process		--		--
Finished goods		228,759		249,669
	$	548,411	$	735,036

3.	PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets totaling $94,203 at June 30, 2009, consists of $70,000 of prepayments for inventory, $14,851 of prepaid insurance, $3,302 of prepaid software maintenance, $5,400 prepaid advertising, and $650 of employee advances.

Prepaid expenses and other current assets totaling $94,079 at December 31, 2008, consists of $70,000 of prepaid inventory, $20,267 of prepaid insurance, $1,040 of prepaid software maintenance, $2,550 of employee advances, and $222 of other prepaid expenses and current assets.

Property, plant and equipment consists of the following as of:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

4.	PROPERTY, PLANT AND EQUIPMENT

	June 30, 2009		December 31, 2008
	(Unaudited)
Building, leasehold improvements, and land	$	1,224,962	$	1,221,362
Furniture, fixtures, vehicles and equipment		240,787		248,787
		1,465,749		1,470,149
Less: accumulated depreciation and amortization		281,157		270,595
	$	1,184,592	$	1,199,554

5.	CUSTOMER CREDIT CONCENTRATIONS

Sales to Brownie’s Southport Diver’s, Inc. for the three months ended June 30, 2009 and 2008 represented 11.95% and 8.53%, respectively, of total net revenues. Sales to Privacy LTD. for the three and six months ended June 30, 2009 represented 12.13% and 41.53%, respectively, of total net revenues. Sales to Al Masaood Marine and Engineering Division and to Shadow Marine for the three months ended June 30, 2008 represented 20.50% and 16.36%, respectively, of total net revenues. Sales to Brownie’s Southport Diver’s, Inc. for the six months ended June 30, 2009 and 2008 represented 13.67% and 11.69%, respectively, of total net revenues. Sales to Al Masaood Marine and Engineering Division and to Shadow Marine for the six months ended June 30, 2008 represented 16.92% and 18.00%, respectively, of total net revenues. Sales to no other customers represented greater than 10% of net revenues for the three or six months ended June 30, 2009 and 2008.

The brother of Robert Carmichael, the Company’s Chief Executive Officer, as further discussed in Note 6 - RELATED PARTY TRANSACTIONS, owns Brownie’s Southport Diver’s, Inc.

6.	RELATED PARTY TRANSACTIONS

Notes payable – related parties

Notes payable – related parties consists of the following as of June 30, 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.	$	319,279

Promissory 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 $1,162,261 at June 30, 2009, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012.		57,632

		376,911

Less amounts due within one year		110,726

Long-term portion of notes payable – related parties	$	266,185

Notes payable – related parties (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6.	RELATED PARTY TRANSACTIONS (continued)

As of June 30, 2009, principal payments on the notes payable – related parties are as follows:

2009	$	67,316
2010		88,324
2011		95,066
2012		81,988
2013		44,217
Thereafter		--

	$	376,911

Notes payable – related parties consists of the following as of December 31, 2008:

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.	$	333,737

Promissory 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 $1,172,227 at December 31, 2008, bearing 6.99% interest per annum, due in monthly principaland interest payments of $1,980, maturing on February 22, 2012.		67,296

		401,033

Less amounts due within one year		86,677

Long-term portion of notes payable – related parties	$	314,356

Net revenues and accounts receivable – related parties – The Company sells products to three entities owned by the brother of the Company’s Chief Executive Officer, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys. 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 the three months ended June 30, 2009 and 2008, was $125,657 and $216,361, respectively. Combined net revenues from these same three entities for the six months ended June 30, 2009 and 2008 was $238,208 and $474,261. Net revenue from Robert Carmichael and 940 Associates, Inc., an entity owned by Robert Carmichael, the Chief Executive officer, was $37,973 for the six months ended June 30, 2009. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at June 30, 2009, was $12,042, $9,144, and $10,390, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2008, was $11,875, $8,903, and $3,982, respectively. Accounts receivable from Robert Carmichael and 940 Associates, Inc. at June 30, 2009 was $144 and $(731), respectively. Accounts receivable from Robert Carmichael and 940 Associates, Inc. was $2,207 and $13,679, respectively, at December 31, 2008.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6.	RELATED PARTY TRANSACTIONS (continued)

Royalties expense – related parties – The Company has Non-Exclusive License Agreements with the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the Company’s Chief Executive Officer has an ownership interest, to license product patents it owns. Based on the license agreements with CRC, the Company pays royalties ranging from $1.00 to $50.00 per licensed products sold, with rates increasing 5% annually. Also with CRC, the Company has a Non-Exclusive License Agreement to license a trademark of products owned by CRC. Based on the agreement, the Company will pay the entity $0.25 per licensed product sold, with rates increasing $0.05 annually.

The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (herein 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 the three months ended June 30, 2009 and 2008, was $15,140 and $53,747, respectively. Total royalty expense for the above agreements for the six months ended June 30, 2009 and 2008, was $35,403 and $77,367, respectively.

Consulting expense – Jeff Morris, an approximately 5% beneficial owner of common stock of the Company, provides management and strategic consulting services for BWMG. For these services, Mr. Morris earned $18,500, and $30,000, from the Company for the three months ended June 30, 2009, and 2008, respectively. For the six months ended June 30, 2009 and 2008 Mr. Morris earned $38,500 and $60,000, respectively, for these services. As of June 30, 2009, the Company was $47,000 in arrears on payments due Mr. Morris for management and strategic consulting services.

Patent Purchase Agreement – 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.

Other liabilities and accrued interest– related parties

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6.	RELATED PARTY TRANSACTIONS (continued)

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

	June 30, 2009		December 31, 2008
	(Unaudited)
Accrued interest on Notes payable – related parties	$	11,517	$	4,151

Management and strategic consulting services due Jeff Morris		47,000		40,000

Other liabilities – related parties	$	58,571	$	44,151

7.	ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities of $389,759 at June 30, 2009 consists of $227,620 accounts payable trade, $60,574 balance of legal expenses that were a Company expense prior to the reverse merger with Trebor Industries, Inc., $84,491 of accrued payroll and related fringe benefits, $12,000 accrued real estate taxes, $1,635 of accrued interest, and $3,439 of other liabilities and accruals.

Accounts payable and accrued liabilities of $329,488 at December 31, 2008 consists of $186,774 accounts payable trade, $60,574 balance of legal expenses that were a Company expense prior to the reverse merger with Trebor Industries, Inc., $79,072 of accrued payroll and related fringe benefits, $1,487 of accrued interest, and $1,581 of other liabilities and accruals.

8.	OTHER LIABILITIES

Other liabilities of $4,228 at June 30, 2009 consist of on-line training liability. Other liabilities of $4,232 at December 31, 2008 consists of $4,193 on-line training liability and $39 of deferred tooling expense.

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.

Until the Company accumulated historical data related to the certificate redemption ratio, it assumed that 100% of certificates issued with unit sales would be redeemed. Accordingly, at the time a unit was sold, the related on-line training liability was recorded. The same liability was reduced as certificates are redeemed and the related payments are made to the on-line training vendor. In July 2007, the Company had accumulated 24 months of historical data regarding redemption rates so the liability estimate was adjusted accordingly to reflect the actual redemption history. The Company continues to maintain a reserve for certificate redemption of 10% that approximates the historical redemption rate.

Notes payable consists of the following as of June 30, 2009:

9.	NOTES PAYABLE

Revolving Line of Credit secured by a third mortgage on the real property of the Company with a carrying value of $1,162, 261 at June 30, 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.	$	200,000

Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,162,261 at June 30, 2009, interest at 6.99% per annum, due in monthly principal and interest payments of $9,038, maturing on January 22, 2022.		904,801

		1,104,801

Less amounts due within one year		245,783

Long-term portion of notes payable	$	859,018

As of June 30, 2009, principal payments on the notes payable are as follows:

2009	$	222,400
2010		47,434
2011		50,907
2012		54,475
2013		58,623
Thereafter		670,962

	$	1,104,801

Notes payable consists of the following as of December 31, 2008:

Revolving Line of Credit secured by a third mortgage on the real property of the Company with a carrying value of $1,172,227 at December 31, 2008, 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.	$	200,000

Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,172,227 at December 31, 2008, interest at 6.99% per annum, due in monthly principal and interest payments of $9,038, maturing on January 22, 2022.		926,598

		1,126,598

Less amounts due within one year		244,188

Long-term portion of notes payable	$	882,410

On December 2, 2008 the balance available under the line of credit was increased from $100,000 to $200,000 subject to the same terms and conditions with the exception that the maturity date was extended to December 2, 2009.

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.

10.	EQUITY INCENTIVE PLAN

From inception to-date, 211,000 stock options have been issued under the Plan. For the three and six months ended June 30, 2009, no options were granted under the Plan.

11.	INCOME TAXES

The components of the provision for income tax benefit are as follows for the three months ended:

	June 30, 2009			June 30, 2008
Current taxes
Federal	$	3,706		$	133,306
State		(5,184	)		27,010
Current taxes		(1,478	)		155,244
Change in deferred taxes		(29,812	)		51,678
Change in valuation allowance		4,076			(4,668	)

Provision for income tax (benefit) expense	$	(27,214	)	$	202,254

The components of the provision for income tax benefit are as follows for the six months ended:

	June 30, 2009			June 30, 2008
Current taxes
Federal	$	3,706		$	133,307
State		(5,184	)		27,010
Current taxes		(1,478	)		160,316
Change in deferred taxes		(107,803	)		52,376
Change in valuation allowance		14,539			(4842	)

Provision for income tax (benefit) expense	$	(94,742	)	$	207,850

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at June 30, 2009:

11.	INCOME TAXES (continued)

Deferred tax assets:
Stock options	$	32,181
Allowance for doubtful accounts		9,520
Tax loss carryback		85,358
On-line training certificate reserve		634
Total deferred tax assets		127,693
Valuation allowance		(33,973	)

Deferred tax assets net of valuation allowance		93,720

Less deferred tax assets – non-current, net of valuation allowance		8,045

Deferred tax assets – current, net of valuation allowance	$	85,675

Deferred tax liability
Depreciation and amortization timing differences	$	2,411

Less deferred tax liability – non-current		2,411

Deferred tax liability – current	$	--

The effective tax rate used for calculation of the deferred taxes as of June 30, 2009 was 34%. The Company has established a valuation allowance against deferred tax assets of $33,973 comprised predominantly of a 75% reserve against the deferred tax assets attributable to the stock options and a 100% reserve against the allowance for doubtful accounts due to the uncertainty regarding realization.

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2008:

Deferred tax assets:
Stock options	$	10,761
Allowance for doubtful accounts		8,500
On-line training certificate reserve		629
Total deferred tax assets		19,890
Valuation allowance		(19,434	)

Deferred tax assets net of valuation allowance		456

Less deferred tax assets – non-current		--

Deferred tax assets – current	$	456

Deferred tax liability
Depreciation and amortization timing differences	$	2,411

Less deferred tax liability – non-current		2,411

Deferred tax liability – current	$	--