Brownie's Marine Group, Inc - Quarter Report: 2010 September (Form 10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(mark one)

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

For the quarterly period ended September 30, 2010

o 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. 1st Street, Fort Lauderdale, Florida	33311
(Address of Principal Executive Offices)	(Zip Code)

(954) 462-5570
(Issuer’s Telephone Number, Including Area Code)


(Former Name, if Changed Since Last Report)

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

Yes x No o

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

Yes o No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (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 o No x

There were 3,864,186 shares of common stock outstanding as of September 30, 2010.

PART I

Item 1. Financial Statements

Financial Information

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

	September 30,
	2010			December 31,
	(Unaudited)			2009
ASSETS

Current assets
Cash	$	81,173		$	2,713
Accounts receivable, net of $10,000 and $31,000 allowance for doubtful accounts, respectively		26,994			9,704
Accounts receivable - related parties		31,064			14,419
Inventory		524,596			488,694
Income tax refunds receivable		—			121,802
Prepaid expenses and other current assets		76,485			67,078
Deferred tax asset, net - current		379			219
Total current assets		740,691			704,629

Property, plant and equipment, net		1,146,828			1,165,940

Deferred tax asset, net - non-current		177,096			42,685
Other assets		2,895			6,968

Total assets	$	2,067,510		$	1,920,222

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued liabilities	$	509,067		$	391,767
Customer deposits		17,575			11,365
Royalties payable - related parties		84,953			49,611
Other liabilities		2,167			2,921
Other liabilities and accrued interest - related parties		31,743			18,570
Notes payable - current portion		1,054,223			247,424
Notes payable - related parties - current portion		181,198			137,408
Total current liabilities		1,880,926			859,066

Long-term liabilities
Notes payable - long-term portion		—			834,966
Notes payable - related parties - long-term portion		147,998			219,319

Total liabilities		2,028,924			1,913,351

Commitments and contingencies

Stockholders' equity
Preferred stock; $0.001 par value: 10,000,000 shares authorized; No shares issued and outstanding		—			—
Common stock; $0.001 par value; 250,000,000 shares authorized; 3,864,186 and 1,785,538 shares issued and outstanding, respectively		3,862			1,785
Common stock payable; $0.001 par value; 353,250 and 502,140 shares, respectively		353			502
Prepaid equity based compensation		(119,654	)		(43,542	)
Additional paid-in capital		2,169,488			1,358,333
Accumulated deficit		(2,015,463	)		(1,310,207	)
Total stockholders' equity		38,586			6,871

Total liabilities and stockholders' equity	$	2,067,510		$	1,920,222

See Accompanying Notes to Consolidated Financial Statements

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Net revenues
Net revenues	$	390,152		$	493,162		$	1,154,363		$	1,298,405
Net revenues - related parties		171,735			117,722			529,772			393,632
Total net revenues		561,887			610,884			1,684,135			1,692,037

Cost of net revenues
Cost of net revenues		378,790			407,967			1,232,336			1,180,099
Royalties expense - related parties		16,331			16,482			47,293			51,885
Total cost of net revenues		395,121			424,449			1,279,629			1,231,984

Gross profit		166,766			186,435			404,506			460,053

Operating expenses
Selling, general and administrative		363,557			215,211			973,365			660,653
Research and development costs		16,696			17,281			49,342			44,634
Total operating expenses		380,253			232,492			1,022,707			705,287

Loss from operations		(213,487	)		(46,057	)		(618,201	)		(245,234	)

Other (income) expense, net
Other(income) expense, net		(26,143	)		1,305			(31,041	)		62,843
Interest expense		199,930			19,792			239,098			57,930
Interest expense - related parties		(2,957	)		6,284			13,569			20,057
Total other expense, net		170,830			27,381			221,626			140,830

Net loss before provision for income taxes		(384,317	)		(73,438	)		(839,827	)		(386,064	)

Provision for income tax benefit		(38,955	)		(25,856	)		(134,571	)		(120,598	)

Net loss	$	(345,362	)	$	(47,582	)	$	(705,256	)	$	(265,466	)

Basic loss per common share	$	(0.13	)	$	(0.03	)	$	(0.30	)	$	(0.15	)
Diluted loss per common share	$	(0.13	)	$	(0.03	)	$	(0.30	)	$	(0.15	)

Basic weighted average common shares outstanding		2,685,284			1,785,538			2,321,727			1,785,538
Diluted weighted average common shares outstanding		2,685,284			1,785,538			2,321,727			1,785,538

See Accompanying Notes to Consolidated Financial Statements

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) /EQUITY

											Prepaid			Additional					Total
	Common stock				Common stock payable						Equity based			paid-in		Accumulated			stockholders'
	Shares		Amount		Shares			Amount			compensation			capital		deficit			equity (deficit)

Balance, December 31, 2009		1,785,538	$	1,785		502,140		$	502		$	(43,542	)	$	1,358,333	$	(1,310,207	)	$	6,871

Issuance of stock payable from prior reporting periods		52,140		52		(52,140	)		(52	)		—			—		—			—

Stock granted for consulting services		—		—		100,000			100			(99,000	)		98,900		—			—

Legal expense recognized for stock warrants		—		—		—			—			—			6,250		—			6,250

Current period amortization of prepaid equity based compensation		—		—		—			—			21,774			—		—			21,774

Net loss		—		—		—			—			—			—		(160,154	)		(160,154	)

Balance, March 31, 2010 (Unaudited)		1,837,678		1,837		550,000			550			(120,768	)		1,463,483		(1,470,361	)		(125,259	)

Issuance of stock payable from prior reporting periods		450,000		450		(450,000	)		(450	)		—			—		—			—

Stock granted for consulting services		375,000		375		250,000			250			(180,000	)		179,575		—			200

Legal expense recognized for stock warrants		—		—		—			—			—			6,250		—			6,250

Stock issued for consulting services during the period		4,958		5		—			—			—			1,482		—			1,487

Current period amortization of prepaid equity based compensation		—		—		—			—			105,753			—		—			105,753

Net loss		—		—		—			—			—			—		(199,740	)		(199,740	)

Balance, June 30, 2010 (Unaudited)		2,667,636		2,667		350,000			350			(195,015	)		1,650,790		(1,670,101	)		(211,309	)

Stock issued for consulting services during the period		7,118		7		3,250			3			—			3,690		—			3,700

Legal expense recognized for stock warrants		—		—		—			—			—			6,250		—			6,250

Conversion of loan payable to stock and warrants		818,182		818		—			—			—			360,628		—			361,446

Stock issued for purchase of intellectual property		371,250		370		—			—			—			148,130		—			148,500

Current period amortization of of prepaid equity based compensation		—		—		—			—			75,361			—		—			75,361

Net loss		—		—		—			—			—			—		(345,362	)		(345,362	)

Balance, September 30, 2010 (Unaudited)		3,864,186	$	3,862		353,250		$	353		$	(119,654	)	$	2,169,488	$	(2,015,463	)	$	38,586

See Accompanying Notes to Consolidated Financial Statements

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2010			2009

Cash flows from operating activities:
Net loss	$	(705,256	)	$	(265,466	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		25,898			27,385
Amortization		—			1,015
Change in deferred tax asset, net		(134,571	)		(116,709	)
Change in deferred tax liability, net		—			(2,411	)
Loss on issuance of stock for purchase of intellectual property		148,500			—
Stock based compensation		24,137			63,000
Stock and warrant interest expense on loan payable conversion		181,446			—
Amortization of prepaid equity based compensation expense		202,888			—
Changes in operating assets and liabilities:
Change in accounts receivable, net		(17,290	)		9,138
Change in accounts receivable - related parties		(16,645	)		33,350
Change in inventory		(35,902	)		185,635
Change in prepaid expenses and other current assets		(9,407	)		(10,258	)
Change in costs and estimated earnings in excess of billings on uncompleted contract		—			287,861
Change in other assets		4,073			—
Change in accounts payable and accrued liabilities		297,300			(12,105	)
Change in customer deposits		6,210			(75,601	)
Change in income tax refunds receivable		121,802			—
Change in income taxes payable		—			(30,649	)
Change in other liabilities		(754	)		(518	)
Change in other liabilities and accrued interest - related parties		13,173			15,719
Change in royalties payable - related parties		35,342			(837	)
Net cash provided by operating activities		140,944			108,549

Cash flows from investing activities:
Purchase of fixed assets		(6,786	)		(3,600	)
Net cash used in investing activities		(6,786	)		(3,600	)

Cash flows from financing activities:
Proceeds from borrowing on loan payable		—			—
Principal payments on notes payable		(28,167	)		(32,823	)
Principal payments on notes payable - related parties		(27,531	)		(29,836	)
Net cash used in financing activities		(55,698	)		(62,659	)

Net change in cash		78,460			42,290

Cash, beginning of period		2,713			3,532

Cash, end of period	$	81,173		$	45,822

Supplemental disclosures of cash flow information:
Cash paid for interest	$	57,273		$	65,368

Cash paid for income taxes	$	—		$	38,528

Supplemental disclosures of non-cash investing activities and future operating activities:
Stock issued for prepaid equity based compensation	$	279,000		$	—

Stock options and additional paid-in capital for purchase of issued and pending patents on March 3, 2009	$	—		$	63,000

Stock and additional paid-in capital for purchase of intellectual property	$	148,500		$	—

Conversion of loan payable for stock and warrants (excluding interest of $181,446)	$	180,000		$	—

See Accompanying Notes to Consolidated Financial Statements

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Liquidity –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. In the third quarter of 2010, the Company also defaulted on its first mortgage resulting in an automatic default on its second mortgage further discussed in Note. 9. NOTES PAYABLE.

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 current cash flow will be sufficient to fund our presently anticipated operations beyond the first quarter of 2011. This raises substantial doubt about our ability to continue as a going concern.

We will need to raise additional funds and are currently exploring alternative sources of financing. We are in the process of negotiating with our mortgage lender for debt restructure to reduce our payments and cure of our defaults. 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, are not able to renegotiate our bank loans, or do not have sufficient cash flows from sales, it may have a material adverse effect on the Company. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Inventory – Inventory is stated at the lower of cost or market. Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory. Inventory consists of raw materials as well as finished goods held for sale. The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.

Property, Plant, and Equipment – Property, Plant and Equipment are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which 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 three months ended September 30, 2010 and 2009, was $8,194 and $831, respectively. Advertising and trade show expense incurred for the nine months ended September 30, 2010 and 2009, was $9,802 and $17,996, 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.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

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

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

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

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued using the market price of the stock on the date of the related agreement.

For the three and nine months ended September 30, 2010, the Company amortized prepaid stock based compensation associated with stock options granted October 1 and December 1, 2009. See Note 10. EQUITY INCENTIVE PLAN for further discussion. For the three and nine months ended September 30, 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 three and nine months ended September 30, 2010, the company granted stock for consulting services. See Note 13. STOCK ISSUED FOR CONSULTING SERVICES. For the three and nine months ended September 30, 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 nine months ended September 30, 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 three and nine months ended September 30, 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.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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. We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU to 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. The Company does not expect adoption of this ASU to have a material financial impact.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

New accounting pronouncements (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.

INVENTORY

Inventory consists of the following as of:

	September 30, 2010		December 31, 2009

Raw materials	$	341,667	$	303,230
Work in process		—		—
Finished goods		182,929		185,464
	$	524,596	$	488,694

3.	PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets totaling $76,485 at September 30, 2010, consists of $31,950 credit toward inventory resulting from patent infringement settlements, $20,670 of prepaid inventory, $22,290 of prepaid insurance, and $1,575 of other prepaid expenses and current assets.

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:

	September 30, 2010		December 31, 2009

Building, building improvements, and land	$	1,224,963	$	1,224,963
Furniture, fixtures, vehicles and equipment		122,396		115,610
		1,347,359		1,340,573
Less: accumulated depreciation and amortization		200,531		174,633
	$	1,146,828	$	1,165,940

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5.	CUSTOMER CREDIT CONCENTRATIONS

The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer as further discussed in Note 6 – RELATED PARTIES TRANSACTIONS. Combined sales to these entities for the three months ended September 30, 2010 and 2009 represented 30.55% and 19.03%, respectively, of total net revenues. Combined sales to these entities for the nine months ended September 30, 2010 and 2009 represented 31.45% and 58.03%, respectively, of total net revenues. For the three months ended September 30, 2010, sales to one unrelated customer represented 12.53% of total net revenues. Sales to no other customers represented greater than 10% of net revenues for the three and nine months ended September 30, 2010 and 2009.

6.	RELATED PARTIES TRANSACTIONS

Notes payable – related parties

Notes payable – related parties consists of the following as of September 30, 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.	$	291,936

Promissory 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 $1,127,852 at September 30, 2010, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012.		37,260

		329,196

Less amounts due within one year		181,198

Long-term portion of notes payable – related parties	$	147,998

As of September 30, 2010, principal payments on the notes payable – related parties are as follows:

2010	$	109,961
2011		95,223
2012		82,159
2013		41,853
2014		—
Thereafter		—

	$	329,196

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6.	RELATED PARTY TRANSACTIONS (continued)

Notes payable – related parties (continued)

As of September 30, 2010, the Company was approximately fifteen 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 PAYABLE for further discussion. The Company was three months in arrears on mortgage payments due GKR at September 30, 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.	$	307,412

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 $1,148,425 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.		49,315

		356,727

Less amounts due within one year		137,408

Long-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 three months ended September 30, 2010 and 2009, was $171,682 and $116,259, respectively. Combined net revenues from these entities for nine months ended September 30, 2010 and 2009, was $529,719 and $354,467, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at September 30, 2010, was $9,429, $10,522, and $2,997, respectively. Net revenue from 940 Associates, Inc. (hereinafter referred to as “940AI”), an entity owned by the Company’s Chief Executive Officer, for the nine months ended September 30, 2009 was $38,789. 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.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6.	RELATED PARTY TRANSACTIONS (continued)

Royalties expense – related parties

The Company has Non-Exclusive License Agreements with 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 September 30, 2010 and 2009, was $16,631 and $16,482, respectively. Total royalty expense for the above agreements for the nine months ended September 30, 2010 and 2009, was $47,293 and $51,885, respectively. As of September 30, 2010, the Company was approximately eighteen 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.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 September 30, 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 one year term of the agreement for marketing advisory services. As of September 30, 2010, prepaid equity based compensation totaled $31,263 under the agreement and is reflected as a component of shareholders’ equity for the related consulting services as yet to be provided as of that date. For the three and nine months ended September 30, 2010, the Company recognized combined consulting expense of $35,951 and $85,445, respectively, under these two agreements.

Other liabilities and accrued interest– related parties

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

	September 30, 2010		December 31, 2009

Accrued interest on Notes payable – related parties		23,493	$	18,205
Due to Principals of Carleigh Rae Corp.		8,250		—
Accounts payable – 940 Associates, Inc.		—		365

Other liabilities – related parties	$	31,743	$	18,570

As of September 30, 2010, the Company was approximately fifteen 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.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

7.	ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities of $509,067 at September 30, 2010, consists of $329,526 accounts payable trade, $60,574 balance of legal expense that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $83,461 accrued payroll and related fringe benefits, $18,978 accrued real estate taxes, $12,397 accrued interest, and $4,131 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 $2,167and $2,921, at September 30, 2010, and December 31, 2009, respectively, 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.

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 were redeemed and the related payments were 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 monitor and maintain a reserve for certificate redemption that approximates the historical redemption rate that is 10%.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

9.	NOTES PAYABLE

Notes payable consists of the following as of September 30, 2010:

Term loan secured by a second mortgage on the real property of the Company with a carrying value of $1,127,852 at September 30, 2010, interest rate at 6.50% per annum, due in monthly principal and interest payments of $1,200 with a balloon payment due February 12, 2011.	$	199,239

Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,127,852 at September 30, 2010, interest at 6.99% per annum, due in monthly principal and interest payments of $9,038, maturing on January 22, 2022.		854,984

		1,054,223

Less amounts due within one year		1,054,223

Long-term portion of notes payable	$	—

As of September 30, 2010, principal payments on the notes payable are as follows:

2010	$	1,054,223
2011		—
2012		—
2013		—
2014		—
Thereafter		—

	$	1,054,223

The Company converted its revolving line of credit that matured on December 2, 2009 into the above term loan that matures on February 12, 2011. As part of the conversion, the Company granted the bank a second mortgage on the underlying security. Accordingly, the Company converted GKR Associates, LLC’s secured position from second to third position. As of September 30, 2010, the Company was two months in arrears on payments to its first mortgage lender on the property. On September 15, 2010, the Company received a default letter from the bank demanding both the first and second mortgage (which it also holds), be brought current by October 15, 2010. Under the terms of the default notice, if the Company failed to bring the loans current by October 15, 2010, the Bank would accelerate as due the full principal and accrued interest due under both notes, as well as initiate collection and legal action. Because the Company did not anticipate cure of the defaults without restructure of the debt, the Company reclassified the full balance of the debt to current knowing a restructure by October 15, 2010, was unlikely. See Note 18. SUBSEQUENT EVENTS for further discussion of this matter.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.	$	199,990

Promissory 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.		882,400

		1,082,390

Less amounts due within one year		247,424

Long-term portion of notes payable	$	834,966

10.	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 December 31, 2008, the Company granted to certain key employees, consultants and officers, fully vested incentive stock options to purchase 210,000 shares of common stock under the Plan. The fair value of the options was determined to be $31,650 using the using the Black-Scholes Model. Accordingly, the Company recognized $31,650 as operating expense for the options as of December 31, 2008.

Effective October 1, 2009, the Company granted an option to a related party to purchase 75,000 shares of common stock under the plan. See Note 6. RELATED PARTY TRANSACTIONS – Loan conversion and other equity transactions for further discussion of this.

Effective December 1, 2009, stock options to purchase 115,000 shares of common stock were granted to certain consultants under the Plan. The fair value of the options was determined to be $28,750 using the Black-Scholes valuation model. The options having a term of five years were issued in conjunction with one-year consulting agreements for certain business, marketing and financial advisory services. The stock options are in lieu of payment for these services and as such the Company is recognizing operating expense over the term of the agreements. Accordingly, the Company recognized $7,168 and $21,5638 as operating expense for the options during the three and nine months ended September 30, 2010, respectively. As of September 30, 2010, prepaid equity based compensation totaled $4,792 under the agreements 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.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

11.	STOCK ISSUED FOR LEGAL SERVICES

Effective December 30, 2009, the Company granted 50,000 shares of restricted common stock to an outside attorney for certain 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 $12,500 for the year ended December 31, 2009, as legal expense associated with the stock issue. See Note 12. Stock Warrants 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 ISSUED FOR LEGAL SERVICE

Effective December 30, 2009, the Company issued to an outside attorney warrants to purchase 100,000 shares of restricted common stock for certain legal and advisory services to be performed in 2010, as evidenced by a signed proposal. The warrants are exercisable at fair market value as of the date of grant, and 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 $6,250 and $18,750 as operating expense for the three and nine months ended September 30, 2010, respectively. As of September 30, 2010, the first tranche of warrants were unexercised.

13.	STOCK ISSUED FOR CONSULTING SERVICES

From April 16, through September 30, 2010, the Company granted a combined 640,316 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 $35,923 and $101,267 as operating expense under the agreements for the three and nine months ended September 30, 2010, respectively. As of September 30, 2010, prepaid equity based compensation under these agreements totaled $83,599 and is reflected as a component of shareholders’ equity for the related consulting services as yet to be provided as of that date.

14.	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.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

15.	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 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 for certain 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.

16.	INCOME TAXES

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

	September 30, 2010			September 30, 2009
Current taxes
Federal	$	—		$	—
State		—			—
Current taxes		—			—
Change in deferred taxes		(57,749	)		(25,675	)
Change in valuation allowance		18,794			(181	)

Provision for income tax (benefit) expense	$	(38,955	)	$	(25,856	)

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

	September 30, 2010			September 30, 2009
Current taxes
Federal	$	—		$	3,706
State		—			(5,184	)
Current taxes		—			(1,478	)
Change in deferred taxes		(246,506	)		(133,478	)
Change in valuation allowance		111,935			14,358

Provision for income tax (benefit) expense	$	(134,571	)	$	(120,598	)

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

16.	INCOME TAXES (continued)

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at September 30, 2010:

Deferred tax assets:
Equity based compensation	$	33,362
Allowance for doubtful accounts		3,400
Depreciation and amortization timing differences		11,817
Net operating loss carryforward		312,166
On-line training certificate reserve		758
Total deferred tax assets		361,503
Valuation allowance		(184,028	)

Deferred tax assets net of valuation allowance		177,475

Less deferred tax assets – non-current, net of valuation allowance		177,096

Deferred tax assets – current, net of valuation allowance	$	379

The effective tax rate used for calculation of the deferred taxes as of September 30, 2010 was 34%. The Company has established a valuation allowance against deferred tax assets of $184,028 due to the uncertainty regarding realization, comprised primarily of a 64% reserve against the deferred tax assets attributable to the equity based compensation, a 100% reserve against the allowance for doubtful accounts, and a 50% reserve against the net operating carryforward and depreciation and amortization timing differences.

The significant differences between the statutory tax rate and the effective tax rates for the Company for the nine months ended are as follows:

	September 30, 2010			September 30, 2009
Statutory tax rate benefit		—	%		—	%
Increase (decrease) in rates resulting from:
Net operating loss carryforward or carryback		(29	)%		(29	)%
Equity based compensation and loss		1	%		(6	)%
Book/tax depreciation and amortization differences		(1	)%		—	%
Change in valuation allowance		13	%		4	%
Other		—	%		—	%
Effective tax rate benefit		(16	)%		(31	)%

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

16.	INCOME TAXES (continued)

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	$	33,527
Allowance for doubtful accounts		10,540
Net operating loss carryforward		72,382
On-line training certificate reserve		438
Total deferred tax assets		116,887
Valuation allowance		(72,095	)

Deferred tax assets net of valuation allowance		44,792

Less deferred tax assets – non-current, net of valuation allowance		44,573

Deferred tax assets – current, net of valuation allowance	$	219

Deferred tax liability
Depreciation and amortization timing differences	$	1,888

Less deferred tax liability – non-current		1,888

Deferred 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 it attributable to net operating loss carryback from 2009 to recuperate taxes paid in 2008.

16.	AUTHORIZATION OF PREFERRED STOCK

During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of Chapter 78 of the Nevada Revised Statutes. Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

17.

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. The lawsuit alleges that the deceased suffered fatal injuries while using a Brownie’s product while performing maintenance in a residential swimming pool. The lawsuit further alleges that the Brownie’s product caused the deceased to be electrocuted, thus contributing to the cause of his death. Plaintiff seeks recovery of unspecified amounts to exceed $75,000 from the Company and Trebor. The Company intends to vigorously defend the lawsuit, and although the ultimate outcome of the lawsuit cannot be determined at this time, based on our present knowledge of the facts, the Company believes the lawsuit is without merit. The Company's legal costs of defending against the civil action will be funded by the Company's insurance policies. Management believes coverage is adequate to provide for such lawsuit. In the event the Company is found to be responsible or liable, such costs could be material to the Company.

18.	SUBSEQUENT EVENT

On October 15, 2010, the Company did not cure defaults on its first and second mortgages as per a default notice from the lender. The Company was two months in arrears on payments to its first mortgage lender on the property as of September 30, 2010. On September 15, 2010, the Company received a default letter from the bank demanding both the first and second mortgage (which it also holds), be brought current by October 15, 2010. Under the terms of the default notice, if the Company failed to bring the loans current by October 15, 2010, the bank would accelerate as due the full principal and accrued interest due under both notes, as well as initiate collection and legal actions. Since default, The Company has been negotiating with the bank to cure the defaults through restructure of its debt.

Item 2.

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

Introductory Statements

Information included or incorporated by reference in this filing may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

This filing contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our Company’s growth strategies, (c) our Company’s future financing plans and (d) our Company’s anticipated needs for working capital. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this prospectus generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

Overview

Brownie’s Marine Group, Inc., a Nevada corporation (referred to herein as “BWMG”,“the Company” or “Brownie’s”), does business through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation. The Company designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and nitrox generation systems, and scuba and water safety products. BWMG sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility in Fort Lauderdale, Florida. The Company’s common stock is quoted on the OTCBB under the symbol “BWMG”. The Company’s website is www.browniesmarinegroup.com.

Mr. Carmichael has operated Trebor as its President since 1986. Since April 16, 2004, Mr. Carmichael has served as President, Principal Accounting Officer and Chief Financial Officer of the Company. From March 23, 2004 to April 26, 2004, Mr. Carmichael served as the Company’s Executive Vice-President and Chief Operating Officer. He is the holder or co-holder of numerous patents that are used by Trebor and several other large original equipment manufacturers in the diving industry.

The Company’s diving and marine based products are generally marketed under the Brownie’s Third Lung, Brownie’s Tankfill, and Brownie’s Public Safety trade names.

Results of Operations for the Three Months Ended September 30, 2010, As Compared To the Three Months Ended September 30, 2009

Net revenues. For the three months ended September 30, 2010, we had net revenues of $561,887 as compared to net revenues of $610,884 for the three months ended September 30, 2009, a decrease of $48,997, or 8.02%. The net decrease is attributable to a decrease in tankfill system sales of approximately $90,000, partially offset by an increase in hookah system and related sales of approximately $40,000. The increase in hookah system and related sales is primarily attributable to approximately $52,000 increase in sales of the Company’s new variable speed diving systems, both electric and battery powered. The Company believes the depressed state of the economy continues to negatively impact overall 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 three months ended September 30, 2010, we had cost of net revenues of $395,121 as compared with cost of net revenues of $424,449 for the three months ended September 30, 2009, a decrease of $29,328, or 6.91%. Cost of materials was lower by approximately $18,000 as a result of a decrease in net revenues and remained fairly constant as a percentage of net revenues. The remainder of the net decrease is attributable to various other individually insignificant increases and decreases in other costs of net revenues.

Gross profit. For the three months ended September 30, 2010, we had a gross profit of $166,766 as compared to gross profit of $186,435 for the three months ended September 30, 2009, a decrease of $19,669, or 10.55%. The decrease is primarily attributable to the decrease in net revenues.

Operating expenses. For the three months ended September 30, 2010, we had total operating expenses of $380,253 as compared to total operating expenses of $232,492 for the three months ended September 30, 2009, an increase of $147,761, or 63.56%. The $147,761 increase is due to an increase in selling, general and administrative costs of $148,346 net of $585 decrease in research and development costs as compared to the same period in 2009. The net increase in sales, general and administrative costs for the quarter ended September 30, 2010, as compared to the same period in 2009 is primarily attributable to an increase of approximately $147,000 consulting expense for business, marketing, legal, and financial advisory services, the majority of which was in the form of equity based compensation.

Other expense, net. For the three months ended September 30, 2010, we had other expense, net of $170,830 as compared to other expense, net of $27,381 for the three months ended September 30, 2009, an increase of $143,443, or 523.90%. This account is comprised of other (income) expense, net, and interest expense. Interest expense for the period increased $170,897 and other income, net increased $27,448. Other (income) expense, net, is comprised of transactions that are generally of a non recurring nature. The increase in interest expense of $170,897 was primarily attributable to approximately $181,000 incremental common stock and warrants granted upon conversion of $180,000 loan payable, and was partially offset by interest reduction due to amortizing principal balances, and adjustment between interest and principal on related party note. The increase in other income, net, of $27,448 is primarily comprised of gain on patent infringement settlement of approximately $207,000 offset by approximately $182,000 of loss and other expenses associated with purchase of patents underlying the settlement.

Provision for income tax benefit. For the three months ended September 30, 2010, we had a provision for income tax benefit of $38,955, as compared to $25,856 for the three months ended September 30, 2009, an increase in provision for income tax benefit of $13,099, or 50.66%. The increase is primarily a result of the increase in deferred tax asset associated with the increase in net loss carryforward for the period.

Net loss. For the three months ended September 30, 2010, we had net loss of $345,362 as compared to net loss of $47,582 for the three months ended September 30, 2009, an increase of $297,780, or 625.82%. The increase in net loss is attributable to $19,669 decrease in gross profit, $147,761 increase in operating expenses, $143,449 increase in other expenses, net, and $13,099 increase in provision for income tax benefit.

Results of Operations for the Nine Months Ended September 30, 2010, As Compared To the Nine months Ended September 30, 2009

Net revenues. For the nine months ended September 30, 2010, we had net revenues of $1,684,135 as compared to net revenues of $1,692,037, for the nine months ended September 30, 2009, a decrease of $7,902, or less than 1%. While net revenue during the current period is fairly consistent with prior period, the sales composition is different. Tankfill system sales declined approximately $87,000 for the nine months ended September 30, 2010 as compared to the same period in 2009. Hookah system and related sales increased approximately $89,000 for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. The increase in hookah system and related sales is primarily attributable to approximately $70,000 increase in sales of the Company’s new variable speed diving systems, both electric and battery powered. 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 nine months ended September 30, 2010, we had cost of net revenues of $1,279,629 as compared with cost of net revenues of $1,231,984 for the nine months ended September 30, 2009, an increase of $47,645, or 3.87%. The increase in cost of net revenues during the nine months ended September 30, 2010, is primarily attributable to approximately $50,000 or, 3% increase in cost of materials as a percentage of net revenues over the same period in 2009.

Gross profit. For the nine months ended September 30, 2010, we had a gross profit of $404,506 as compared to gross profit of $460,053 for the nine months ended September 30, 2009, a decrease of $55,547 or 12.07%. This decrease is primarily attributable to increase in material costs as a percentage of net revenues for the nine months ended September 30, 2010, as compared to the same period in 2009.

Operating expenses. For the nine months ended September 30, 2010, we had total operating expenses of $1,022,707 as compared to total operating expenses of $705,287 for the nine months ended September 30, 2009, an increase of $317,420, or 45.01%. The $317,420 increase is due to an increase in selling, general and administrative costs of $312,712, and an increase in research and development expenses of $4,708 for the nine months ended September 30, 2010, as compared to the same period in 2009. The increase in research and development was primarily for allocation of salaries for additional time spent on research and development activities during the period. The net increase in sales, general and administrative costs for the nine months ended September 30, 2010 as compared to the same period in 2009 is primarily attributable to an increase of approximately $272,000 consulting expense for business, marketing, legal, and financial advisory services, the majority of which was in the form of equity based compensation. The equity based compensation resulted from consulting agreements entered into beginning in the fourth quarter of 2009 through the second quarter of 2010. The remainder of the net increase is attributable to various other individually insignificant increases and decreases in other selling, general and administrative expenses.

Other expense, net. For the nine months ended September 30, 2010, we had other expense, net of $221,626 as compared to other expense, net of $140,830 for the nine months ended September 30, 2009, a decrease of $80,796, or 57.37%. This account is comprised of other (income) expense, net, and interest expense. Interest expense for the period increased $174,680 and other income, net increased $93,884. Other (income) expense, net, is comprised of transactions that are generally of a non recurring nature. The increase in interest expense of $174,680 was primarily attributable to approximately $181,000 incremental common stock and warrants granted upon conversion of $180,000 loan payable, and was partially offset by interest reduction due to amortizing principal balances, and adjustment between interest and principal on related party note. The increase in other income, net, of $93,884 is primarily comprised of gain on patent infringement settlement of approximately $207,000 offset by approximately $182,000 of loss and other expenses associated with purchase of patents underlying the settlement during the nine months ended September, 30, 2010, and without a comparable $63,000 loss on purchase of patents as occurred during the nine months ended September 30, 2009.

Provision for income tax benefit. For the nine months ended September 30, 2010, we had a provision for income tax benefit of $134,571 as compared to $120,598 for the nine months ended September 30, 2009, an increase in provision for income tax benefit of $13,973, or 11.59%. The increase is primarily a result of the increase in deferred tax asset associated with the increase in net loss carryforward for the period.

Net loss. For the nine months ended September 30, 2010, we had net loss of $705,256 as compared to net loss of $265,466 for the nine months ended September 30, 2009, an increase of $439,790, or 165.67%. The increase in net loss is attributable to $55,547 decrease in gross profit, $317,420 increase in operating expenses, $80,796 increase in other expenses, net, and $13,973 increase in provision for income tax benefit.

Liquidity and Capital Resources

As of September 30, 2010, the Company had cash and current assets of $740,691 and current liabilities of $1,880,926 or a current ratio of .39. This represents a working capital deficit of $1,140,235. 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.

The accompanying consolidated financial statements contained herein assume 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. In the third quarter of 2010, the Company also defaulted on its first mortgage resulting in an automatic default on its second mortgage further discussed in Note 9. NOTES PAYABLE of the Company’s notes to line consolidated financial statements contained herein.

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 for certain 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 of the Company’s notes to the consolidated financial statements contained herein. 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 current cash flow will be sufficient to fund our presently anticipated operations beyond the first quarter of 2011. This raises substantial doubt about our ability to continue as a going concern.

We will need to raise additional funds and are currently exploring alternative sources of financing. We are in the process of negotiating with our mortgage lender for debt restructure to reduce our payments and cure of our defaults. The Company believes it will cure this default in the fourth quarter of 2010; however, there can be no assurances. 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, are not able to renegotiate our bank loans, or do not have sufficient cash flows from sales, it may have a material adverse effect on the Company. The accompanying consolidated financial statements included herein do not include any adjustments that may result from the outcome of this uncertainty.

The Company does not anticipate any significant purchases of equipment during fiscal year 2010. The number and level of employees at September 30, 2010 is deemed adequate to maintain the Company's operations for at least the next 12 months.

Certain Business Risks

The Company is subject to various risks, which may materially harm its business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase the Company’s common stock. These are not the only risks and uncertainties that the Company faces. If any of these risks or uncertainties actually occurs, the Company’s business, financial condition or operating results could be materially harmed. In that case, the trading price of the Company’s common stock could decline and you could lose all or part of your investment.

Our Common Stock May Be Affected By Limited Trading Volume and May Fluctuate Significantly

Our common stock is traded on the Over-the-Counter Bulletin Board. There is a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’ ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.

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

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

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

We Depend On the Services of Our Chief Executive Officer

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

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

Our continued growth depends on our ability to attract and retain a Chief Financial Officer, a Chief Operations Officer, and additional skilled associates. We are currently utilizing the services of two professional consultants in the absence of a Chief Financial Officer and Chief Operations Officer. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or Chief Operations Officer may have a material adverse effect upon us. Also, there can be no assurance that we will be able to retain our existing personnel or attract additional qualified associates in the future.

Our Failure to Obtain Intellectual Property and Enforce Protection Would Have a Material Adverse Effect on Our Business

Our success depends in part on our ability, and the ability of our patent and trademark licensors, entities owned and controlled by Robert M. Carmichael, our President and Chief Executive Officer, to obtain and defend our intellectual property, including patent protection for our products and processes, preserve our trade secrets, defend and enforce our rights against infringement and operate without infringing the proprietary rights of third parties, both in the United States and in other countries. Despite our efforts to protect our intellectual proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection.

Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. Although we are not aware of any intellectual property claims against us, we may be a party to litigation in the future.

We May Be Unable To Manage Growth

Successful implementation of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management and financial resources. If we fail to manage our growth effectively, our business, financial condition or operating results could be materially harmed, and our stock price may decline.

Reliance on Vendors and Manufacturers

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

Dependence on Consumer Spending

The success of the our business depends largely upon a number of factors related to consumer spending, including current and future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products. Any significant deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect our financial results. The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher fuel prices; declines in the value of investments and residential real estate; and increases in federal and state taxation can all negatively affect our results. There can be no assurance that in this type of environment consumer spending will not decline beyond current levels, thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely affected by continuing or future downturns in the economy, boating industry, or dive industry. If declines in consumer spending on recreational marine accessories and dive gear are other than temporary, we could be forced to curtail operations.

Government Regulations May Impact Us

The SCUBA industry is self-regulating; therefore, Brownie’s is not subject to government industry specific regulation. Nevertheless, Brownie’s strives to be a leader in promoting safe diving practices within the industry and is at the forefront of self-regulation through responsible diving practices. Brownie’s is subject to all regulations applicable to “for profit” companies as well as all trade and general commerce governmental regulation. All required federal and state permits, licenses, and bonds to operate its facility have been obtained. There can be no assurance that our operations will not be subject to more restrictive regulations in the future, which could force us to curtail or cease operations.

Bad Weather Conditions Could Have an Adverse Effect on Operating Results

Our business is significantly impacted by weather patterns. Unseasonably cool weather, extraordinary amounts of rainfall, or unseasonably rough surf, may decrease boat use and diving, thereby decreasing sales. Accordingly, our results of operations for any prior period may not be indicative of results of any future period.

Investors Should Not Rely On an Investment in Our Stock for the Payment of Cash Dividends

We have not paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the future. Investors should not make an investment in our common stock if they require dividend income. Any return on an investment in our common stock will be as a result of any appreciation, if any, in our stock price.

The Manufacture and Distribution of Recreational Diving Equipment Could Result In Product Liability Claims

We, like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or side effects, if any. We do not anticipate obtaining contractual indemnification from parties-supplying raw materials, manufacturing our products or marketing our products. In any event, any such indemnification if obtained will be limited by our terms and, as a practical matter, to the creditworthiness of the indemnifying party. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our operations and financial conditions, which could force us to curtail or cease our business operations.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4T.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Principal Executive Officer/Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company’s disclosure control objectives. Based on the evaluation, the Company determined it failed to timely file an 8K with regard to an Asset Purchase Agreement with the Carleigh Rae Corporation (“CRC”), a related party. The CRC transaction is discussed below in Item 2. Unregistered Sales of Equity Securities and Use of Proceeds, and is disclosed in the notes to the Company’s Financial Statements for the period covered by this report included herein. The Company is currently in the process of drafting these documents and will institute additional internal control procedures to remedy this noted internal control deficiency. Other than this noted deficiency, the Company’s Principal Executive Officer/Principal Accounting Officer has concluded that the Company’s disclosure controls and procedures are, in fact, effective at this reasonable assurance level as of the end of period covered by this report.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting 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.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1a.

Risk Factors

Not Applicable to Smaller Reporting Company.

Item 2.

Unregistered Sales of Equity Securities

During the three months ended September 30, 2010, the Company issued 7,118 shares of restricted common stock to a consultant pursuant to a consulting agreement for financial services provided. The securities were issued without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(2). The securities were issued with a legend restricting their transferability absent registration of applicable exemption.

Effective September 24, 2010, the Company entered into an Asset Purchase Agreement with Carleigh Rae Corp., a Florida corporation (“CRC”), pursuant to which the Company acquired seven granted U.S. Patents and three pending U.S. Parents, relating to water safety and survival products, including, but not limited to, devices incorporated into life jackets, personal flotation devices, scuba tanks and BCs (the “Intellectual Property”). In consideration of the Intellectual Property, the Company issued the shareholders of CRC an aggregate of 371,250 shares of common stock of the Company and made a cash payment of an aggregate of $25,500 to the shareholders. Robert Carmichael, the Company’s chief executive officer and director, also serves as an officer and director of CRC and is a shareholder of CRC. As such, Mr. Carmichael received 185,625 shares of common stock and $8,500 in connection with the Agreement. In addition, . In addition, 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. 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. The shares issued to the CRC shareholders were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933. The shares contain a legend restricting their transferability absent registration or applicable exemption.

On September 30, 2010 the Company issued 818,182 shares of restricted common stock pursuant to the conversion of an $180,000 loan to an individual. Also, as part of the same transaction, the Company granted this same individual a warrant to purchase 147,727 shares of restricted common stock for $.22 per share by November 15, 2010. The transaction resulted in classification of this individual as a related party of the Company owning greater than 5% of the outstanding shares of common stock. The securities were issued without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(2). The securities were issued with a legend restricting their transferability absent registration of applicable exemption.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

(Removed and Reserved)

Item 5.

Other Information

None.

Item 6.

Exhibits

Exhibit No.	Description	Location

2.2	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, 2010

3.4	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, 2004

10.2	Non-Exclusive License Agreement – BC Keel Trademark	Incorporated by reference to Exhibit 10.18 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.

10.3	Exclusive License Agreement - Brownie's Third Lung, Brownie's Public Safety, Tankfill, and Related Trademarks and Copyrights	Incorporated by reference to Exhibit 10.20 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.

10.4	Non-Exclusive License Agreement - Garment Integrated or Garment Attachable Flotation Aid and/or PFD	Incorporated by reference to Exhibit 10.22 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.

10.5	Non-Exclusive License Agreement - SHERPA Trademark and Inflatable Flotation Aid/Signal Device Technology	Incorporated by reference to Exhibit 10.24 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.

10.6	Non-Exclusive License Agreement - Tank-Mounted Weight, BC or PFD-Mounted Trim Weight or Trim Weight Holding System	Incorporated by reference to Exhibit 10.25 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.

10.7	Exclusive License Agreement – Brownie’s Third Lung and Related Trademarks and Copyright	Incorporated by reference to Exhibit 10.26 to Form 10KSB for the year ended December 31, 2006 filed April 4, 2007.

10.8	Agreement for Purchase and Sale of Property Between Trebor Industries, Inc. and GKR Associates, Inc. dated February 21, 2007	Incorporated by reference to Exhibit 10.28 to Form 10KSB for the year ended December 31, 2006 filed April 4, 2007.

10.9	First Mortgage dated February 22, 2007 between Trebor Industries, Inc. and Colonial Bank	Incorporated by reference to Exhibit 10.29 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.

10.10	Note dated February 22, 2007 payable to GKR Associates, Inc.	Incorporated by reference to Exhibit 10.30 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.

10.11	Second Mortgage dated February 22, 2007 between Trebor Industries, Inc. and GKR Associates, LLC.	Incorporated by reference to Exhibit 10.31 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.

10.12	Promissory Note dated January 1, 2007 payable to Robert M. Carmichael.	Incorporated by reference to Exhibit 10.32 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.

10.13	Asset Purchase Agreement between Trebor Industries, Inc. and Robert Carmichael.	Incorporated by reference to Form 8K filed on August 1, 2008.

10.14	Asset Purchase Agreement between Trebor Industries, Inc. and Robert Carmichael.	Incorporated by reference to Form 8K filed on March 5, 2009.

10.15	Asset Purchase Agreement between Trebor Industries, 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 Trebor Industries, Inc. and the Carleigh Rae Corporation	To be filed.

31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a)	Provided herewith.

31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a)	Provided herewith.

32.1	Certification Pursuant to Section 1350	Provided herewith.

32.2	Certification Pursuant to Section 1350	Provided herewith

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 22, 2010	Brownie’s Marine Group, Inc.

	By:	/s/ Robert M. Carmichael
		Robert M. Carmichael
		President, Chief Executive Officer, Chief Financial Officer/Principal Accounting Officer