Brownie's Marine Group, Inc - Quarter Report: 2012 March (Form 10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(mark one)

For the quarterly period ended March 31, 2012

For the transition period from _______ to _______.

Commission File No. 000-28321

Brownie’s Marine Group, Inc.

(Name of Small Business Issuer in Its Charter)

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

Yes x        No   ¨

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

Yes x       No   ¨

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.

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

Yes ¨     No   x

There were 112,462,475 shares of common stock outstanding as of May 5, 2012.

PART I

Item 1. Financial Statements

Financial Information

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

See Accompanying Unaudited Notes to Consolidated Financial Statements

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See Accompanying Unaudited Notes to Consolidated Financial Statements

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

See Accompanying Unaudited Notes to Consolidated Financial Statements

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See Accompanying Unaudited Notes to Consolidated Financial Statements

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See Accompanying Unaudited Notes to Consolidated Financial Statements

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Basis of Presentation – The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10Q should be read in the conjunction with information included in the 2011 annual report filed on Form 10-K.

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 2011 financial statement amounts to conform to the 2012 financial statement presentation.

Cash and equivalents – Only highly liquid investments with original maturities of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.

Going Concern –The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. We have incurred losses since 2009, and expect to have losses in 2012. We have had a working capital deficit since 2009. Although cured effective the fourth quarter 2010, the Company defaulted on its first mortgage in the third quarter of 2010, which resulted in an automatic default on its second mortgage, and was restructured with a forbearance agreement with a maturity date of May 22, 2012, further discussed in Note 10. NOTES PAYABLE. See also Note. 21. SUBSEQUENT EVENTS for discussion of default notice received under the Forbearance Agreement on or about April 17, 2012.

In addition, the Company is behind on payments due for payroll taxes and withholding, matured convertible debentures, related party notes payable, property taxes accrued liabilities and interest –related parties, a note payable due an unrelated party, and certain vendor payables. While the Company has received no formal notices of default related to these matters (other than Forbearance Agreement default notice) it has not been able to resolve, it is working out these matters on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue. Payment delinquencies are further addressed in Note 6. RELATED PARTIES TRANSACTIONS, Note 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 9. OTHER LIABILITIES, Note 10. NOTES PAYABLE, and Note 11. CONVERTIBLE DEBENTURES. See Note 21. SUBSEQUENT EVENTS for discussion regarding notice of Forbearance Agreement default.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of 2012, purchased of the assets of another, with assumption of their retail location lease. The Company accomplished both transactions predominantly through issuance of the restricted common stock in BWMG. The Company believes these transactions will allow us to generate enough sales to supply us with sufficient working capital in the future. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT and Note 7.ASSET PURCHASE for further discussion of these transactions. However, the Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the second quarter of 2012. This raises substantial doubt about our ability to continue as a going concern. We will need to raise additional funds and are currently exploring alternative sources of financing. We have issued a number of convertible debentures as an interim measure to finance our working capital needs as discussed in Note 11. CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities. We have implemented some cost saving measures and will continue to explore more to reduce operating expenses.

Going Concern (continued) – If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

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

Property, Plant, and Equipment – Property, Plant and Equipment are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 5 years except for the building that is being depreciated over a life of 39 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

Revenue recognition – Revenues from product sales are recognized when the Company’s products are shipped or when service is rendered. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost of each contract. This method is used because management considers the percentage of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts.

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Change in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

Revenue and costs incurred for time and material projects are recognized as the work is performed.

Product development costs – Product development expenditures are charged to expenses as incurred.

Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the three months ended March 31, 2012, and 2011, was $5,014 and $5,415, respectively.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Customer deposits and returns 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.

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 on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value. Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries.

For the three months ended March 31, 2012, the Company amortized prepaid equity based compensation for personal guarantees of related party on debt. See Note 6. RELATED PARTY TRANSACTIONS for further discussion. For the three months ended March 31, 2012, and 2011, the company granted stock for consulting services. See Note 12. STOCK ISSUED FOR CONSULTING SERVICES. In addition, on March 6, 2012, the Company authorized year end 2011 equity based bonuses for some employees, board of directors, and consultants, as well as payment of amounts due the non-employee Board of Directors for service on the Board from April 1 to December 31, 2012. See Note 20. EQUITY BASED YEAR END BONUSES AND CONVERSION OF BOARD OF DIRECTORS’ LIABILITY for further information. Similarly, on March 8, 2012, the Company issued 10,000,000 shares of stock to an employee in satisfaction of $45,000 of accrued payroll from 2011.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Beneficial conversion features on convertible debentures – The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value. Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries.  See Note 11. CONVERTIBLE DEBENTURES for further discussion.

Fair value of financial instruments – The carrying amounts and estimated fair values of the Company’s financial instruments approximate their fair value due to the short-term nature.

Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. All common stock equivalent shares were excluded in the computation for the three months ended March 31, 2012, and 2011, since their effect was antidilutive.

New accounting pronouncements – In December 2011, the Financial Accounting and Standards Board (FASB) issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement with a similar master netting arrangement. ASU 2011-11 is effective for annual and interim reporting periods beginning on or after January 1, 2013. Retrospective disclosure is required for all comparative periods presented. Since this accounting standard requires only enhanced disclosure, the adoption of this standard is not expected to have an impact our financial position or results of operations.

In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). Under ASU 2011-08, companies testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e. step 1 of the goodwill impairment test). If companies determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is evaluating the revised guidance and does not anticipate that adoption will have a material impact on the Company's Consolidated Financial Statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011. Because this ASU impacts presentation only, it will have no effect on our financial condition, results of operations or cash flows.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Inventory consists of the following as of:

Prepaid expenses and other current assets totaling $101,930 at March 31, 2012, consists of $74,800 of prepaid inventory, and $23,890 of prepaid insurance, $3,240 prepaid rent,

Prepaid expenses and other current assets totaling $86,293 at December 31, 2011, consists of $74,800 of prepaid inventory, and $11,493 of prepaid insurance.

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

The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer as further discussed in Note 6 – RELATED PARTIES TRANSACTIONS. Combined sales to these entities for the three months ended March 31, 2012 and 2011, represented 26.65% and 42.1%, respectively, of total net revenues. Sales to no other customers represented greater than 10% of net revenues for the three months ended March 31, 2012 and 2011.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Notes payable – related parties

Notes payable – related parties – consists of the following as of March 31, 2012:

As of March 31, 2021, principal payments on the notes payable – related parties are as follows:

As of March 31, 2011, the Company was approximately twenty-six 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 in arrears. On April 21, 2011, the Company issued 425,000 shares of preferred stock, designated as Series “A” Convertible Preferred Stock, to Robert Carmichael in consideration for forgiveness of $42,500 due under the Note payable to Chief Executive Officer. The Series “A” Convertible Preferred Stock may be converted to common stock at a rate of $.01 per share, or 42,500,000 shares of common stock. The fair market value per common share upon which the transaction was based was $.05. Accordingly, the Company recognized $2,082,500 as interest expense – related party as part of the transaction.

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 10. NOTES PAYABLE for further discussion. The Company was fifteen months in arrears on mortgage payments due GKR when on March 18, 2011, the Chief Executive Officer disposed of all his financial interest in GKR Associates, LLC (GKR). Accordingly, all transactions of the Company with GKR subsequent to March 18, 2011, are not classified with those of related parties. On September 18, 2011, the Company converted GKR’s note payable to a convertible debenture. See Note 10. CONVERTIBLE DEBENTURES for further discussion.

Notes payable – related parties – consists of the following as of December 31, 2011:

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Net revenues and accounts receivable – related parties – The Company sells products to three entities, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers. Combined net revenues from these entities for three months ended March 31, 2012, and 2011, was $162,066 and $153,394, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at March 31, 2012, was $21,296, $7,083, and $13,817, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2011, was $27,247, $12,348, and $8,457, respectively. Accounts receivable from the Company’s Chief Executive Officer as of March 31, 2012 and December 31, 2011, was $0 and $3,991, respectively.

Royalties expense – related parties – The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns. Under the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing 5% annually. Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for three months ended March 31, 2012, and 2011, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of March 31, 2012, the Company was approximately twenty-five 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 $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.

Other liabilities and accrued interest– related parties

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

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of December 31, 2011, 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. The $6,017 due the Principals of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company.

Restricted common stock issued for personal guarantee – On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 20,000,000 shares of restricted common stock in consideration of personal guarantees he provided to secure restatement and consolidation of the first and second mortgages of the Company. The restrictions on the common stock will expire 50% on April 20, 2012, and 50% on April 20, 2013, if Mr. Carmichael continues his full time employment with the Company. The company valued the stock at $.05 per share and will record $1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expire. The unearned balance of the compensation is recorded as prepaid compensation as a component of shareholders’ deficit. As of the three months ended March 31, 2012, the Company recognized $125,001 as amortization of prepaid compensation under this agreement. Prepaid compensation remaining under this agreement as of March 31, 2012 and December 31, 2011, was $512, 497 and $637,498, respectively, and is reflected as a component of Stockholders’ Deficit.

On March 6, 2012, the Board of Directors authorized an aggregate of $215,000 in bonuses for payment in stock to employees, consultants, and Board of Directors for the year ended December 31, 2011, for service in 2011. Of this amount the Chief Executive Officer and the non-employee Board of Directors were awarded, $36,000 and $53,000, respectively. In addition, an incremental $45,000 due the non-employee Board of Directors for service on the Board from April to December 2011, was converted to stock payable in lieu of cash settlement. See Note 20. EQUITY BASED YEAR END BONUSES AND CONVERSION OF BOARD OF DIRECTORS’ LIABILITY for further discussion.

Non-Employee Board of Director Fees – Beginning in April 2011, the Non-Employee Board of Directors earn $2,500 per month for their services. Accordingly, for the three months ended March 31, 2012, the Company accrued $15,000 for Board of Directors’ Fees.

On February 3, 2012, the Company entered into an asset purchase agreement with Florida Dive Industries, Inc. (“Seller”). On March 5, 2012, the same parties executed an amendment (“Amendment”) to the agreement (collectively, the“Agreement”). Under the terms of the Agreement, the Company acquired certain diving and related inventory, and Seller provided a three year non-compete agreement within a 10-mile wide radius. In addition, the Company assumed a commercial lease obligation for a retail dive store in Boca Raton, Florida beginning in April 1, 2012. The lease is automatically renewable on an annual basis through May 31, 2014, with 90 days written notice assuming the Leasee is in compliance with all terms of the lease. The lease amount is base rental plus an allocated amount of common areas maintenance (‘CAM”). Base rental increases annually by the greater of 5% or the annual consumer price index. The current monthly rental including CAM at the time of assignment is approximately $3,200. During the three month ended months ended March 31, 2012 the Company paid $9,719 for the first month, last month and security deposit.

As a purchase price, the Company shall pay Seller, on a monthly basis, beginning April 1, 2012, and thereafter until May 13, 2012, in equal payments, the total cash purchase price of $22,500. In addition, the Company shall issue Seller 2,200,000 shares of restricted stock as part of the purchase price as provided for in the Amendment. The fair market value of the Company’s 2,200,000 shares of restricted stock on March 5, 2012, was $59,400, or $.027 per share. Both the restricted stock and the monthly payments due Seller shall be maintained in an escrow account for six months as a purchase price holdback for contingent liabilities not otherwise settled by Seller. If such items including rent and any building or zoning code violations have not been paid by Seller during this period, Buyer will settle said liabilities with the purchase price holdback.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Accounts payable and accrued liabilities of $511,568 at March 31, 2012, consists of $218,876 accounts payable trade, $65,896 accrued payroll and related fringe benefits, $117,789 accrued payroll taxes and withholding, $39,527 accrued real estate taxes, $53,083 accrued interest, $15,000 accrued non-employee Board of Director Fees, and $1,397 other accrued liabilities. Accrued payroll taxes and withholding were approximately nine months in arrears at March 31, 2012. Balances due certain vendors are also due in arrears to varying degrees. The Company is handling all delinquent accounts on a case by case basis. ee Note 21. SUBSEQUENT EVENTS for discussion regarding notice of Forbearance Agreement default.

Accounts payable and accrued liabilities of $635,378 at December 31, 2011, consists of $252,820 accounts payable trade, $60,574 balance of legal expense that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $96,643 accrued payroll and related fringe benefits, $132,698 accrued payroll taxes and withholding, $35,417 accrued real estate taxes, $49,992 accrued interest, and $7,234 other accrued liabilities. Accrued payroll taxes and withholding were approximately nine months in arrears at December 31, 2011. Balances due certain vendors are also due in arrears to varying degrees.

Other liabilities of $55,419 at March 31, 2012, consists of $30,000 loans payable, $22,500 assets pursuant to Asset Purchase Agreement (Note 7. ASSET PURCHASE), and $2,919 on-line training liability. The $30,000 loans payable is comprised of $20,000 short-term, unsecured loan, due on demand from one of the Board of Directors, and the other $10,000 short-term, due on demand is from the same lender disclosed in Note 11. CONVERTIBLE DEBENTURE, ref (7). Because documentation surrounding classification of the $10,000 as convertible debenture is unavailable, the Company classified this amount as other liability pending resolution.

Other liabilities of $13,320 at December 31, 2011, consists of $10,000 loan payable, and $3,320 on-line training liability. The $10,000 short-term loan, unsecured loan is from one of the Board of Directors and is without stated terms.

Effective July 1, 2005, the Company began including on-line training certificates with all hookah units sold. The training certificates entitle the holder to an on-line interactive course at no additional charge to the holder. The number of on-line training certificates issued per unit is the same as the number of divers the unit as sold is designed to accommodate (i.e., a three diver unit configuration comes with three on-line training certificates). The certificates have an eighteen-month redemption life after which time they expire. The eighteen-month life of the certificates begins at the time the customer purchases the unit. The Company owes the on-line training vendor the agreed upon negotiated rate for all on-line certificates redeemed payable at the time of redemption. For certificates that expire without redemption, no amount is due the on-line training vendor.

The Company estimates the on-line training liability based on the historical redemption rate of approximately 10%. The Company continues to monitor and maintain a reserve for certificate redemption that approximates the historical redemption rate.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Notes payable consists of the following as of March 31, 2012:

As of December 31, 2011, principal payments on the notes payable are as follows:

On March 18, 2011, the Chief Executive Officer transferred all financial interest in GKR. Accordingly, all transactions of the Company with GKR subsequent to March 18, 2011, are not classified with those of related parties, and the note payable due them was converted to a convertible debenture as of September 8, 2011. Accordingly the balance due under that obligation is classified with the convertible debenture balance as of March 31, 2012 and December 31, 2011. See Note 11. CONVERTIBLE DEBENTURES for further discussion.

On February 18, 2011, the Company’s wholly owned subsidiary, Trebor Industries, Inc., entered into a Forbearance Agreement with Branch Banking and Trust Company (“BBT”) for the promissory note in the principal amount of $1,000,000 in favor of BBT (the “Term Loan”) and the promissory note in the principal amount of $199,991 in favor of BBT (the “Second Note”). The Term Loan and Second Note are collectively referred to as the “Secured Notes”.  The Secured Notes are secured by the Company's Fort Lauderdale facilities and personally guaranteed by the Company’s chief executive officer. As previously disclosed, the Company failed to bring the Secured Notes current and in January 2011 BBT accelerated the full principal and accrued interest due under the Secured Notes, as well as initiated collection and legal action.  The Forbearance Agreement effectively extends the maturity date of the Secured Notes to May 22, 2012.  The Secured Notes were consolidated under a Consolidated and Restated Promissory Note in the principal amount of $1,053,993, effective November 22, 2010, (the “Consolidated Note”).  The maturity date of the Consolidated Note is May 22, 2012, and may be prepaid at any time.  The interest rate on the Consolidated Note is 7.5% per annum. Pursuant to the Forbearance Agreement the Company paid $33,000 to BBT at closing.  In addition to the monthly interest only payments required under the Consolidated Note, Trebor was required to pay BBT $6,028 by February 28, 2011, and monthly payments of approximately $3,555 on March 10, 2011, April 10, 2011, and May 10, 2011, to satisfy disbursements, costs and expenses associated with the Forbearance Agreement. See Note 21. SUBSEQUENT EVENTS for discussion of Default Notice on the Forbearance Agreement and Foreclosure on the real estate and assets securing the mortgage

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In February 2011, the Company converted a vendor payable into an unsecured promissory note as reflected above in table summarizing notes payable as of March 31, 2012 and in table below summarizing notes payable as of December 31, 2011. Principal and interest payments of $2,000 per month were to begin on February 28, 2011, and continue through August 31, 2012, maturity. As of March 31, 2012, the Company was in arrears on making payments by approximately seven months. No default notice has been received and the Company plans to make payments as soon as it is able.

Notes payable consists of the following as of December 31, 2011:

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company has outstanding convertible debentures as follows:

Convertible debentures as of March 31, 2012, are as follows:

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On February 10, 2012, the holder of this debenture entered into an agreement with a third party to sell/assign the $125,000 principal balance, plus accrued interest. The purchase will be in installments with transfer/assignment of the debenture upon payment, referred to as “Closings”. The First Closing was on or about February 15, 2012 for $7,500, with that amount assigned/transferred. The Second Closing, will occur 90 days after the first closing for $11,500 paid/assigned. All subsequent closing’s will be for $11,500 and occur in 30 day increments after the Second Closing. This will continue until the full principal balance of $125,000, plus accrued interest has been purchased/assigned. See Ref. (9) for discussion of new terms on the assigned portions of the debenture.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

From the same lender, the Company borrowed $37,500 twice in exchange for two other convertible debentures under the same general terms and conditions as the previous debenture. The second convertible debenture although dated December 19, 2011, with a maturity date of September 21, 2012, was not funded until February 2012. However, the executed documents were not ratably adjusted to conform to funding date.

On February 7, 2012, the lender sold/assigned all rights and interest on the first debenture having net book value of $11,000 plus accrued interest of $3,328. On March 9, 2012, the lender sold/assigned all rights and interest on the second debenture having a net book value of $24,500, plus $1,448 of accrued interest. See reference (11) which discusses the terms and conditions surrounding the new debentures issued upon extinguishment of the two originals as well as accounting treatment of the transactions.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On February 10, 2012, the lender sold/assigned all rights and interest on the debenture having a net book value of $39,724, plus $1,552 of accrued interest. See reference (11) which discusses the terms and conditions surrounding the new debenture issued upon extinguishment of the original as well as accounting treatment of the transaction.

The stated interest rate of the $7,500 debenture is 10% and the Company may prepay the debenture at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debenture is $.000275 per share and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term. As of March 31, 2012, the lender had assigned $5,500 under the debenture to four separate parties, and had converted $850 of the debenture to stock. See reference (10).

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The new debentures were issued with the following terms and conditions: The stated interest rate of the debentures is 10% and the Company may prepay at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debentures is $.000275 per share and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time.

Convertible debentures as of December 31, 2011, are as follows:

Reference numbers in right hand column of table entitled Ref. refer to paragraphs above the table.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Pursuant to a consulting agreement for business advisory services, the Company issued or declared payable 2,247,298 restricted shares to a consultant or his designees for $14,600 of services for the three months ended March 31, 2012. The stock conversions price under the agreement is calculated as a weighted average for the month the services were granted at a 30% discount. To the same consultant or designees, the Company issued or declared payable 59,105 restricted shares for $11,489 of services.

For the three months ended March 31, 2012 the Company declared 441,405 restricted shares payable to a consultant for $9,400 in engineering services. The Company declared 1,389,077 to another consultant for $9,250 in business advisory services for the three months ended March 31, 2012. The number of shares was calculated based on the weighted average of shares outstanding for the period during the first quarter the services were rendered at a 30% discount.

On February 2, 2012, the Company entered into a consulting agreement for financial and public relations services. The term of the agreement is for twelve (12) months and either party may cancel the agreement with 30 days written notice. Payment shall be monthly beginning in March 2012, in the form of $10,000 cash, or $20,000 worth of common stock based on the weighted average of the Company’s stock for the month at a 30% discount. Payment in cash or stock is at the option of the Company. In addition, upon signing of the agreement, the Company was to issue 2,500,000 shares for services previously provided during the first quarter of 2012. The Company recognized $29,750 operating expense under this agreement for the first quarter of 2012 and 5,277,778 shares payable. Due to the guarantee stock value clause in the Agreement, the Company compared the value at the time the stock was granted with the value at the end of the quarter, and determined no need for accrual of additional shares payable to achieve the $20,000 market value to guarantee.

The Company converted $16,200 in design services payable for the three months ended March 31, 2012, into 600,000 restricted common stock based on the market value of the stock on the date of conversion.

From April 16, 2010, through December 31, 2010, the Company granted a combined 674,932 shares of restricted common stock to eight consultants pursuant to individual consulting agreements. The consulting services provided for include predominantly management advisory services in the areas of sales, marketing, public relations, financing, and business development. Grant of the stock was in lieu of payment for these services. The length of consulting services under the agreements ranges from completed during the second quarter of 2010 through one year from effective transaction date, or July 1, 2011. The majority of the agreements expired 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 recognized operating expense over the term of the agreements. Accordingly, for the three months ended March 31, 2011, the Company recognized $22,250 as operating expense under the agreements.

During the first quarter ended March 31, 2012, the Company converted $45,000 of accrued payroll from 2011 to 10,000,000 shares of restricted common stock at $.0045 per share. At the end of December 2011, the employee provided the Company the option to pay the amount due in cash or in stock if additional shares became authorized in the first quarter of 2012. The $.0045 conversion price was based on the market price on the effective date of agreement.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at March 31, 2012:

The effective tax rate used for calculation of the deferred taxes as of March 31, 2012 was 34%. The Company has established a valuation allowance against deferred tax assets of $1,710,619 due to the uncertainty regarding realization, comprised primarily of a 98% reserve against the deferred tax assets attributable to the equity based compensation, a 100% reserve against the allowance for doubtful accounts, a 97% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.

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

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2011:

The effective tax rate used for calculation of the deferred taxes as of December 31, 2011 was 34%. The Company has established a valuation allowance against deferred tax assets of $1,603,805 due to the uncertainty regarding realization, comprised primarily of a 98% reserve against the deferred tax assets attributable to the equity based compensation, a 100% reserve against the allowance for doubtful accounts, a 97% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.

During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of Chapter 78 of the Nevada Revised Statutes. Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock. The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets.  The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock. See Note 6. RELATED PARTY TRANSACTIONS – Notes Payable for discussion regarding issuance of 425,000 shares of preferred stock for forgiveness of $42,500 Note payable to Chief Executive Officer of the Company.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On June 23, 2011, a claim was filed in the U.S. District Court of Dallas County, Texas by the Estate of Christopher Logan. Amount of damages sought were not provided in the claim. The claim lists eight defendants of which the Company is one. The claim asserts Mr. Logan died breathing carbon monoxide while diving with a T80G medium duty compressor (“T80G”). The claim’s cites belief by the plaintiff that the T80G was sold by Brownie’s based on representations made by Keene Engineering, Inc. also a manufacturer of dive compressors and also listed as a defendant. The Company believes the representation is erroneous because Brownie’s does not sell the make/model cited in the claim, and Brownie’s compressors have the brand name forged into the die-casting on the head of each cylinder. Therefore, Brownie’s believes this claim is without merit, and anticipates being dismissed from the lawsuit. See Note 21. SUBSEQUENT EVENTS for update.

On November 7, 2011, the Company entered into a Joint Venture Equity Exchange Agreement (“Agreement”) with Pompano Dive Center, LLC. (“PDC”). PDC owns a retail store, several dive boats, and has a classroom for training divers. Under the terms of the Agreement, the Company will provide PDC with an assortment of Brownie’s Third Lung products on consignment, and PDC will act as a training and demonstration site for Brownie’s Third Lung products.

In addition, the transaction provides for a non-binding letter of intent for the possible acquisition of PDC in exchange for BWMG’s stock for the yet to be agreed upon value of PDC. In anticipation of a possible purchase, the Agreement provides BWMG with a 33% interest in PDC. As part of the transaction, BWMG issued 4,581,505 restricted shares of its common stock with fair market value on the date of the transaction of $24,740 to PDC, reflected in other assets in the long-term portion of the Company’s balance sheet.

If BWMG purchases PDC, the stock issued by BWMG will be credited to the purchase price. Further, PDC is required to remit no later than 45 days from the end of each quarter, a 33% share in pre-tax net profits. At least 50% of the total pre-tax profits are required for distribution under the Agreement, and BWMG is not required to share in losses. If PDC decides to sell any inventory provided by the Company, the purchase price will be the same as that offered to other Dealers of the Company’s products.

If this Agreement is terminated by either party and/or a written purchase and sales agreement is not entered into by the parties, then the parties’ respective interests in each other’s business will revert back to the original party. Accordingly, if this should happen, PDC will relinquish the interest acquired in BWMG through this Agreement and BWMG will do the same. All property at PDC owned by BWMG would be returned to BWMG at that time as well. Because the joint venture is cancellable at any time by either party with return of respective interest transferred to each as per the joint venture agreement, possible acquisition of PDC is in the form of a non-binding letter of intent, each entities assets and liabilities remain their own, BWMG will not share in any of PDC losses or additional expenses unless otherwise approved, and the management and operation of PDC remains with PDC, the Company accounted for the investment in PDC under the Cost basis.

As of the three months ended March 31, 2012, PDC reported no pre-tax net profits. Therefore, there was no profit sharing applicable under the agreement for the period.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On February 2, 2012, The Company Filed a Definitive Schedule 14C on February 2, 2012. The Information Statement advises shareholders of record as of January, 31, 2012, that the Company’s Board of Directors of the Company and a majority of stockholders’ of the Company approved (i) an increase in the number of authorized shares of common stock from 250,000,000 to 5,000,000,000, and (ii) a decrease in the par value per share of Common Stock from $.001 to $.0001. The effective date of these actions is set forth on or about February 22, 2012. In accordance with Securities and Exchange Commissions’ Staff Accounting Bulletin Topic 4 C. when a change in capital structure occurs after the period reporting date, but before release of the financial statements the Company must apply retroactive treatment to the financial statements to reflect the change. Accordingly, the Company restated the financial statements as of and for the year ended December 31, 2011, to reflect the change in par value and shares authorized. In addition, the par value change has been restated in the detail of the transactions in the Company’s Consolidated Statements of Stockholders’ Deficit.

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. All 400,000 options were issued under the plan prior to January 1, 2010, and to-date all remain outstanding.

On March 6, 2012, the Board of Directors authorized an aggregate of $215,000 in bonuses for payment in stock to employees, consultants, and Board of Directors for the year ended December 31, 2011, for service in 2011. Of this amount the Chief Executive Officer and the non-employee Board of Directors were awarded, $36,000 and $53,000, respectively. In addition, an incremental $45,000 due the non-employee Board of Directors for service on the Board from April to December 2011, was converted to stock payable in lieu of cash settlement. The combined amount of stock issuable under these transactions is 9,629,630 and is based on the closing price of the Company’s stock on March 5, 2012 of $.027 per share. Since the transactions are for 2011 services, the Company applied retroactive statement to the consolidated financial statements as of and for the years ended December 31, 2011 and 2010.

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On or about May 3, 2012, the Company received notice of filing of an action in the Fifteen Judicial Circuit Court in West Palm Beach, Florida for breach of contract, conspiracy to commit securities fraud and injunctive relief against the Company and the note holder in Note 11. CONVERTIBLE DEBENTURES Ref (1). The Plaintiff is the second party referenced in Note 11. CONVERTIBLE DEBENTURES, Ref (1) who purchased the original debenture from the note holder. The principal amount outstanding excluding interest, on the debenture as of March 31, 2012 was approximately $12,700. The plaintiff is seeking damages in excess of $15,000, plus other fees. The Company believes this action is without merit, and intends to vigorously defend the action.

On or about April 27, 2012, the Company received default notice under its Mortgage Forbearance Agreement with an action to foreclose on the real property and assets of the Company underlying the mortgage. The lender has declared immediately due the full principal balance of $1,053,993, accrued interest in the amount of $5,018 through April 11, 2012, appraisal and late fees of $7,282, and $35,677 the lender advanced to satisfy delinquent property taxes not made by the Company. The Company is currently in negotiations with the lender to extend the Forbearance Agreement pursuant to terms and conditions forthcoming from the lender.

On April 18, 2012, the Company filed a Motion for Leave to Designate Responsible Third Parties on the Legal case discussed in Note 16. LEGAL. The Company motioned to have the Court designate the responsible third parties named by the Company in the Motion. Legal counsel advised the Company the court shall grant such a motion unless an objecting party establishes that the moving Defendants failed to plead sufficient facts to meet the pleading requirement of the Texas Rules of Civil Procedure. The Company believes the case is without merit and this latest motion will result in dismissal.

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. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

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

Overview

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

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

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

Results of Operations for the Three Months Ended March 31, 2012, As Compared To the Three Months Ended March 31, 2011

Net revenues. For the three months ended March 31, 2012, we had net revenues of $608,126 as compared to net revenues of $362,900 for the three months ended March 31, 2011, an increase of $245,226, or 67.57%. For the three months ended March 31, 2012, as compared to the same period in 2011, tankfill system and related sales increased approximately $180,000, hookah system and related sales increased approximately $66,000, and other product sales decreased approximately $500 as compared to the three months ended March 31, 2011. The Company attributes the increase in net revenues to sales and marketing efforts, and to consumers’ increased spending due to improving economic conditions.

Cost of net revenues. For the three months ended March 31, 2012, we had cost of net revenues of $472,546 as compared with cost of net revenues of $339,582 for the three months ended March 31, 2011, an increase of $132,964 or 39.16%. The increase in cost of net revenues during the first quarter of 2012, as compared to the first quarter of 2011, is primarily attributable to increase in net revenues. Other than an approximate 5% increase in material costs as a percentage of net revenues, all other costs of net revenues remained fairly constant. The 5% increase in material costs as a percentage of net revenues is primarily attributable to sales mix during the first quarter of 2012, as compared to the first quarter of 2011, with the material cost percentage higher on tankfill systems as compared to hookah systems.

Gross profit. For the three months ended March 31, 2012, we had a gross profit of $135,580 as compared to gross profit of $23,318 for the three months ended March 31, 2011, an increase of $112,262, or 481.44%. The increase in gross profit is primarily attributable to increase in net revenues.

Operating expenses. For the three months ended March 31, 2012, we had operating expenses of $439,948 as compared to operating expenses of $229,630 for the three months ended March 31, 2011, an increase of $210,318, or 91.59%. The $210,318 increase is comprised of an increase in selling, general, and administrative expenses of $229,019, net a $18,701 decrease in research and development expenses as compared to the same period in 2011. The increase in selling, general, and administrative expenses of $229,919 in the first quarter of 2012, is primarily due to $15,000 increase in non-employee Board of Directors’ fees, $125,001 amortization of equity based compensation (non-cash), and approximately $80,000 consulting and legal expense (non-cash), which there was only approximately $10,000 comparable expenses in first quarter of 2011. The decrease in research and development expenses is attributable to less payroll hours spent in this area in the first quarter ended 2012, as compared to the first quarter 2011.

Other expense, net. For the three months ended March 31, 2012, we had other expense, net of $123,717 as compared to other expense, net of $87,016 for the three months ended March 31, 2011, an increase of $36,701, or 42.18%. This account is comprised of other (income) expense, net, and interest expense. Other (income) expense, net, increased by $7,936 expense. Other (income) expense, net, is comprised of transactions that are generally of a non-recurring nature. Interest expense for the three months ended March 31, 2012, increased $28,765 over the three months ended March 31, 2011. The increase in interest expense of $28,765 is primarily attributable to an increase in the number of interest bearing convertible debentures and related accretion of discount in the first quarter of 2012, as compared to the same period in 2011.

Provision for income tax expense (benefit). For the three months ended March 31, 2012, we had a provision for income tax expense (benefit) of $13,116, as compared to a provision for income tax expense (benefit) of ($19,924) for the three months ended March 31, 2011, an increase in the provision for income tax expense of $33,040, or 165.83%. The increase in provision for income tax expense is primarily a result of the increase in valuation allowance against the deferred tax asset attributable to realization of the net operating loss carryforward.

Net loss. For the three months ended March 31, 2012, we had net loss of $441,201 as compared to net loss of $273,404 for the three months ended March 31, 2011, an increase of $167,797, or 61.37%. The increase in net loss is attributable to a $210,318 increase in operating expenses, $36,701 increase in other expense, net, and $33,040 increase in provision for income tax expense, which was partially offset by a $112,262 increase in gross profit.

Liquidity and Capital Resources

As of March 31, 2012, the Company had cash and current assets (primarily consisting of inventory) of $724,087 and current liabilities of $2,679,000 or a current ratio of .27 to 1. This represents a working capital deficit of $1,954,913. As of December 31, 2011, the Company had cash and current assets of $796,051 and current liabilities of $2,698,631 or a current ratio of .30 to 1. As of December 31, 2010, the Company had cash and current assets of $620,270 and current liabilities of $997,034, or a current ratio of .62 to 1.

The accompanying consolidated financial statements included herein have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. However, we have incurred losses since 2009, and expect to have losses through 2012. We have had a working capital deficit since 2009. Although cured effective the fourth quarter 2010, the Company defaulted on its first mortgage in the third quarter of 2010, which resulted in an automatic default on its second mortgage, and was restructured with a forbearance agreement with a maturity date of May 22, 2012, further discussed in Note 10. NOTES PAYABLE. See also Note. 21. SUBSEQUENT EVENTS for discussion of default notice received under the Forbearance Agreement on or about April 17, 2012.

In addition, the Company is behind on payments due for payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, a note payable due an unrelated party, and certain vendor payables. While the Company has received no formal notices of default related to these matters it has not been able to resolve, it is working out these matters on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue. Payment delinquencies are further addressed in Note 6. RELATED PARTIES TRANSACTIONS, Note 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 9. OTHER LIABILITIES, Note 10. NOTES PAYABLE, and Note 11. CONVERTIBLE DEBENTURES.

During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of 2012, purchased of the assets of another, with assumption of their retail location lease. The Company accomplished both transactions predominantly through issuance of the restricted common stock in BWMG. The Company believes these transactions will allow us to generate enough sales to supply us with sufficient working capital in the future. See Note 17. JOINT VENTURE EQUITY TRANSACTION and Note 7. ASSET PURCHASE for further discussion of these transactions. However, the Company does not expect that existing cash flow will be

sufficient to fund presently anticipated operations beyond the second quarter of 2012. This raises substantial doubt about our ability to continue as a going concern. We will need to raise additional funds and are currently exploring alternative sources of financing. We have issued a number of convertible debentures as an interim measure to finance our working capital needs as discussed in Note 11. CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities. We have implemented some cost saving measures and will continue to explore more to reduce operating expenses.

If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Certain Business Risks

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

Our ability to continue as a going concern is in substantial doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.

We incurred a net loss of approximately $440 thousand in the first quarter of 2012. We incurred net losses of approximately $3.87 million in 2011, and $1.19 million in 2010. We anticipate these losses will continue for the foreseeable future. Additionally, the Company has negative cash flows from operations, negative working capital, is behind on payments due for payroll taxes and withholding, matured convertible debentures, property taxes, related party notes payable, accrued liabilities and interest –related parties, a note payable due an unrelated party, and certain vendor payables. In April 2012, the Company received a default notice under its Forbearance Agreement on the mortgage underlying the Company’s real estate. Other than the Forbearance Agreement default notice, the Company had no other notices of default to address, and is working out all matters of delinquency on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue. This raises a substantial doubt about our ability to continue as a going concern. Our continued existence is dependent upon generating working capital and obtaining adequate new debt or equity financing. Because of our continuing losses, we may not have working capital to permit us to remain in business through the end of the year, without improvements in our cash flow from operations or new financing. Working capital limitations continue to impinge on our day-to-day operations, thus contributing to continued operating losses. 

The optional conversion features of a series of convertible debentures issued by the Company could require the Company to issue a substantial number of shares of common stock, which will cause dilution to the Company’s stockholders and a potentially negative effect on our stock price.

Since October 4, 2010 the Company has issued convertible debentures to several lenders and other third parties. At March 31, 2012 the outstanding principal balance of these debentures was approximately $640,000. The debentures convert under various conversion formulas, all of which are at a significant discount to market price of our common stock. As of May 1, 2012, the debentures are convertible into approximately 1,100,000,000 shares of Common Stock. The conversion of any of the debentures will result in the issuance of a significant number of shares of our common stock which will cause dilution to our existing shareholders. Furthermore, the conversion at a significant discount to the market price of our common stock may have a negative effect on our stock price. See Note 11. Convertible Debentures to our consolidated financial statements included herein.

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.

Not Applicable to Smaller Reporting Company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

The specific weakness identified by our management was a lack of a timely review by corporate management. The weakness is principally due to lack of working capital to retain the legal, accounting and external audit services, which are integral to the Company’s process for timely disclosure and financial reporting. This deficiency resulted in failure to timely file Form 8-Ks relating to convertible debenture agreements executed in the first quarter of 2012, as well as issuance of 10,000,000 shares of restricted stock in satisfaction of $45,000 accrued payroll from 2011. The convertible debenture and conversion of accrued payroll transactions are 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.

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

Changes in Internal Controls Over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On or about May 3, 2012, the Company received notice of filing of an action in the Fifteen Judicial Circuit Court in West Palm Beach, Florida for breach of contract, conspiracy to commit securities fraud and injunctive relief against the Company and the note holder in Note 11. CONVERTIBLE DEBENTURES Ref (1) of the Unaudited Notes to the Company’s Consolidated Financial Statements as of and for the three months ended March 31, 2012, included herein. The Plaintiff is the second party referenced in Note 11. CONVERTIBLE DEBENTURES, Ref (1) who purchased the original debenture from the note holder. The principal amount outstanding, excluding interest, on the debenture as of March 31, 201,2 was approximately $12,700. The Plaintiff is seeking damages in excess of $15,000, plus other fees. The Company believes this action is without merit, and intends to vigorously defend the action.

On April 18, 2012, the Company filed a Motion for Leave to Designate Responsible Third Parties on the Legal case discussed in Note 16. LEGAL of the Unaudited Notes to the Company’s Consolidated Financial Statements as of and for the three months ended March 31, 2012, included herein. The Company motioned to have the Court designate the responsible third parties named by the Company in the Motion. Legal counsel advised the Company the court shall grant such a motion unless an objecting party establishes that the moving Defendants failed to plead sufficient facts to meet the pleading requirement of the Texas Rules of Civil Procedure. The Company continues to believe the case against the Company is without merit and this latest motion will result in dismissal.

Item 1a. Risk Factors

Not Applicable to Smaller Reporting Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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

Pursuant to a consulting agreement for business advisory services, the Company issued or declared payable 2,247,298 restricted shares to a consultant or his designees for $14,600 of services for the three months ended March 31, 2012. The stock conversion price under the agreement is calculated as a weighted average for the month the services were granted at a 30% discount. To the same consultant or designees, the Company issued or declared payable 59,105 restricted shares for $11,489 of services.

For the three months ended March 31, 2012 the Company declared 441,405 restricted common shares payable to a consultant for $9,400 in engineering services. The number of shares was calculated based on the weighted average of shares outstanding for the period during the first quarter the services were rendered at a 30% discount.

The Company declared 1,389,077 shares of restricted common stock payable to a consultant for $9,250 in business advisory services for the three months ended March 31, 2012. The number of shares was calculated based on the weighted average of shares outstanding for the period during the first quarter the services were rendered at a 30% discount.

On March 20, 2012, the Company issued 2,787,156 shares of restricted common stock in full satisfaction of the $50,000 principal balance outstanding under a $50,000 convertible debenture. The conversion price per the terms of the debenture was 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion.

On March 19, 2012, the Company issued 9,629,629 restricted shares of common stock to employees, consultants, and non-employee Board of Directors for $215,000 of bonuses and $45,000 of non-employee Board of Directors’ fees. The bonuses for 2011 services, and conversion to stock of the 2011 Board of Directors’ fees were declared on March 6, 2012. The restricted common stock was issued at $.027, the closing price of the stock on March 5, 2012.

On March 12, 2012, the Company issued 2,200,000 shares of restricted common stock for $59,400 pursuant to Asset Purchase Agreement entered into on February 3, 2012. The stock issuance price was based on the market value of the stock on the date of the Agreement.

On March 8, 2012, the Company converted $45,000 accrued payroll from 2011 to 10,000,000 shares of restricted common stock. The conversion price was $.00045, the price of the stock in late December when the Board of Directors and the employee agreed the Company could at its option either pay the liability in cash or satisfy in stock if during the first quarter of 2012, shares became available for conversion.

On February 10, 2012, the lender of a $125,000 convertible debenture to the Company entered into an agreement with a third party to sell/assign the $125,000 principal balance, plus accrued interest. The purchase will be in installments with transfer/assignment of the debenture upon payment, referred to as “Closings”. The First

Closing was on or about February 15, 2012, for $7,500, with that amount assigned/transferred. The Second Closing will occur 90 days after the first closing for $11,500 paid/assigned. All subsequent closing’s will be for $11,500 and occur in 30 day increments after the Second Closing. This will continue until the full principal balance of $125,000, plus accrued interest has been purchased/assigned. The stated interest rate of the $7,500 debenture is 10% and the Company may prepay the debenture at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debenture is $.000275 per share and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding common stock of the Company at any one time. The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term. Through March 31, 2011, the Company had issued and reserved 1,000,000,000 shares of restricted common stock related to this debenture. As of March 31, 2012, the lender had assigned $5,500 under the debenture to four separate parties. This lender plus the four other parties converted a combined $4,250 of the convertible debenture to 15,454,545 shares unrestricted common stock. A legal opinion regarding issuance of the shares without restrictive legend accompanied the presentment of the notice of conversion to the Company’s transfer agent. Accordingly, the shares were issued without restrictive legends.

On February 7, 2012, and March 9, 2012, the lender referred to in the following paragraph sold/assigned all rights and interests in other two other convertible debentures of the Company they held. The first debenture had outstanding principal balance of $11,000 plus accrued interest of $3,328, and the second debenture had outstanding principal balance of $37,500, plus $1,448 of accrued interest. The principal balances under the new restated convertible debentures is $16,000 on the first and $56,250 on the second. The stated interest rate of the debentures is 10% and the Company may prepay at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debentures is $.000275 per share and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. Through March 31, 2011, the Company had issued and reserved 1,000,000,000 shares of restricted common stock related to these debentures. The new lender converted $600 of the first debenture to 2,181,818 shares of unrestricted common stock. A legal opinion regarding issuance of the shares without restrictive legend accompanied the presentment of the notice of conversion to the Company’s transfer agent. Accordingly, the shares were issued without restrictive legends.

On February 10, 2012, the lender of a $39,724 convertible debenture to the Company entered into an agreement with a third party to sell/assign the $39,724 principal balance, plus $1,522 accrued interest. The party which purchased the debenture is the same party referred to in the preceding paragraph, which purchased two other debentures. The principal balance under the new restated convertible debenture is $39,724. The stated interest rate of the debentures is 10% and the Company may prepay at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debentures is $.000275 per share and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time.

On February 2, 2012, the Company entered into a consulting agreement for financial and public relations services. The term of the agreement is for twelve (12) months and either party may cancel the agreement with 30 days written notice. Payment shall be monthly beginning in March 2012, in the form of $10,000 cash, or $20,000 worth of restricted common stock based on the weighted average of the Company’s stock for the month at a 30% discount. Payment in cash or stock is at the option of the Company. In addition, upon signing of the agreement, the Company was to issue 2,500,000 shares for services previously provided during the first quarter of 2012. The Company recognized $29,750 operating expense under this agreement for the first quarter of 2012 and 5,277,778 shares of common stock payable.

On or around February 1, 2012, the Company borrowed $37,500 in exchange for a convertible debenture. The debenture is dated December 19, 2011 on the executed documents, but the transaction and funding did not occur until February 2012. The debenture bears 8% interest per annum and matures on June 14, 2012. The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due. Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same. Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time. The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest. There is a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture. The Company has issued and reserved 185,000,000 shares through March 31, 2012, related to this debenture.

Item 3. Defaults Upon Senior Securities

None.

Item 4. MINE SAFETY DISCLOSURE

None.

Item 5. Other Information

On or about April 27, 2012, the Company received default notice under its Mortgage forbearance agreement with an action to foreclose on the real property and assets of the Company underlying the mortgage. The lender has declared immediately due the full principal balance of $1,053,993, accrued interest in the amount of $5,018 through April 11, 2012, appraisal and late fees of $7,282, and $35,677 the lender advanced to satisfy delinquent property taxes not made by the Company. The Company is currently in negotiations with the lender to extend the forbearance agreement pursuant to terms and conditions forthcoming from the lender.

Item 6. Exhibits

** Attached as Exhibit 101 to this report are the following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed "filed" or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

SIGNATURES

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