Brownie's Marine Group, Inc - Quarter Report: 2014 June (Form 10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(mark one)

For the quarterly period ended June 30, 2014

For the transition period from _______ to _______.

Commission File No. 333-99393

Brownie’s Marine Group, Inc. 

(Name of Small Business Issuer in Its Charter)

(954) 462-5570

(Issuer’s Telephone Number, Including Area Code)

(Former Name, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                   Yes x No ¨

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

Yes 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 30,344,667 shares of common stock outstanding as of August 14, 2014.

PART I

Item 1. Financial Statements

Financial Information

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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 2013 financial statement amounts to conform to the 2014 financial statement presentation. Effective July 15, 2013 the Company effectuated a reverse stock split (1 -for- 1,350). See Note 18. CHANGE IN CAPITAL STRUCTURE for more information. Accordingly, the transactional number of shares referenced throughout the Notes has been retroactively stated unless otherwise noted.

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 in 2014. We have had a working capital deficit since 2009.

The Company is behind on payments due for payroll taxes and withholding, matured convertible debentures, related parties notes payable, accrued liabilities and interest – related parties, and certain vendor payables. The Company is handling delinquencies 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 7. RELATED PARTIES TRANSACTIONS, Note 9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 10. OTHER LIABILITIES, Note 11. NOTES PAYABLE, and Note 12. CONVERTIBLE DEBENTURES.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Going Concern (continued) – During the fourth quarter of 2011, the Company formed a joint venture with one dive entity, and in the first quarter of 2012, purchased the assets of another, with assumption of their retail location lease. The Company accomplished both transactions predominantly through issuance of restricted common stock in BWMG. The Company believed these transactions would help generate sufficient future working capital. Neither endeavor did or has generated profit or positive cash-flow. Therefore, effective May 31, 2013, the Company closed and ceased operations at its retail facility. The Company is still involved in the joint venture. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT and Note 8. ASSET PURCHASE for further discussion of these transactions. As a result, the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations beyond the third quarter of 2014. This raises substantial doubt about BWMG’s ability to continue as a going concern. The Company will need to raise additional funds and is currently exploring alternative sources of financing. BWMG has issued a number of convertible debentures as an interim measure to finance working capital needs as discussed in Note 12. CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities, and obtaining some short term loans. The Company has paid for legal and consulting services with restricted stock to maximize working capital, and intends to continue this practice when possible. In addition, the Company implemented some cost saving measures and will continue to explore more to reduce operating expenses.

If BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate 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 fair market value. 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.

Furniture, Fixtures, and Equipment – Furniture, Fixtures, and Equipment is 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. 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.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 (credit) expense incurred for the three months ended June 30, 2014 and 2013, was $292 and $5,889, respectively. Advertising and trade show expense incurred for the six months ended June 30, 2014, and 2013, was $620 and $33,161, respectively.

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.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-based compensation (continued) – For the three and six months ended June 30, 2014 and 2013, the Company compensated and/or converted all accrued payroll to stock for one related party employee. In addition, for the three and six months ended June 30, 2014 and 2013, the Company transacted stock-based compensation transactions as follows: amortized prepaid equity based compensation for personal guarantees of Chief Executive Officer on Company’s bank debt; additional compensation expense to the Chief Executive Officer; Board of Directors’ fees and bonuses; certain consulting, legal, and other professional fees; equity based incentive and/or retention bonuses for some employees, and consultants; and operating expense for exclusivity pursuant to strategic alliance agreement payable. These transactions, as applicable, are also further discussed in Note 7. RELATED PARTIES TRANSACTIONS, Note 13. EQUITY BASED COMPENSATION FOR CONSULTING, LEGAL, AND OTHER PROFESSIONAL SERVICES, Note 20. EQUITY BASED INCENTIVE/RETENTION BONUSES, and Note 21. STRATEGIC ALLIANCE AGREEMENT.

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. See Note 12. CONVERTIBLE DEBENTURES for further discussion.

Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair value of financial instruments (continued) – At June 30, 2014, and December 31, 2013, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of the Company’s convertible debentures was the principal balance due at June 30, 2014, and December 31, 2013, or $475,336, and $516,800, respectively, as presented in Note 12. CONVERTIBLE DEBENTURES. The principal balance due approximates fair value because of the short maturity of these instruments. On the face of the balance sheet the convertible debentures are presented net of discount, which is less than fair market value at period end dates when discount is not fully accreted.

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 dilutive earnings per share for the six months ended June 30, 2014, and 2013, since their effect was antidilutive.

New accounting pronouncements – The Company believes there was no new accounting guidance adopted but not yet effective that either has not already been disclosed in prior reporting periods or is relevant to the readers of BWMG’s financial statements.

Inventory consists of the following as of:

Prepaid expenses and other current assets totaling $146,211 at June 30, 2014, consists of $114,115 prepaid inventory, $17,741 prepaid insurance, $13,493 prepaid subcontract labor; and $862 other current assets and prepaid expenses.

Prepaid expenses and other current assets totaling $109,523 at December 31, 2013, consists of $94,990 prepaid inventory, $14,141 prepaid insurance, and $392 other current assets.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Furniture, fixtures, and equipment consists of the following as of:

5. OTHER ASSETS

The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer, and two Company’s owned by the Chief Executive Officer as further discussed in Note 7. RELATED PARTIES TRANSACTIONS. Combined sales to these five entities for three months ended June 30, 2014 and 2013, represented 35.94% and 42.22%, respectively, of total net revenues. Combined sales to these five entities for six months ended June 30, 2014 and 2013, represented 45.81% and 35.09%, respectively, of total net revenues. Sales to no other customers represented greater than 10% of net revenues for three and six months ended June 30, 2014, and 2013.

Notes payable – related parties

Notes payable – related parties consists of the following at June 30, 2014:

As of June 30, 2014, principal payments on the notes payable – related parties are as follows:

During the three months ended March 31, 2014, the Company fully satisfied the note payable due the Chief Executive Officer for $49,702, which had matured in September 2013.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2014, the Company was four months in arrears on payments due under the Note payable to the non-employee Board of Director. No notice of default has been received and the Company plans to make payments as able.

Notes payable – related parties consists of the following at December 31, 2013:

As of December 31, 2013, the Company was approximately nine months in arrears on principal payments due under the Note payable to the Chief Executive Officer. On May 13, 2013, the Company granted the Chief Executive Officer 370,371 shares of common stock in satisfaction of $50,000 of note payable – related parties. The shares of stock were issued at the fair market value, or trading price, on the date of the transaction.

On October 30, 2013, the Company signed a secured promissory note, with Mikkel Pitzner, the non-employee Board of Director (BOD) for $85,000. In addition to the terms of the Note Payable disclosed in the table above, the Company was to use its best efforts to settle the Branch Banking and Trust (“BBT”) Judgment and terminate all Uniform Commercial Code filings in favor of Mr. Pitzner within 10 business days of the date of the agreement. As further inducement to make the loan, Mr. Pitzner was granted an option to purchase 1,802,565 shares of the Company’s common stock for $.01 per share. The option is exercisable immediately and will continue for a period ending two years from the agreement date with an option for cashless exercise based on a formula within the agreement. The closing price per share of the Company’s stock closing on the OTCBB on the date of the agreement was $.025 per share. As a result of the option granted, the Company recorded $44,610 stock option expense using the Black-Scholes valuation model on date of the agreement.

Net revenues and accounts receivable – related parties – The Company sells products to 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 June 30, 2014 and 2013, was $265,490 and $250,228, respectively. Combined net revenues from these entities for six months ended June 30, 2014 and 2013, was $487,231 and $414,473, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at June 30, 2014, was $53,414, $4,799, and $17,042, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2013, was $11,926, $6,116, and $3,047, respectively.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net revenues and accounts receivable – related parties (continued) - The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”) And 940 Associates, Inc., fully owned by the Company’s Chief Executive Officer. Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended to Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are consistent with those extended to Brownie’s strategic partners. Strategic partner terms include promotion of BWMG’s technologies and “Brownie’s” brand, offered only on product or services not offered for resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services.. BGL is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and “Brownie’s” brand in the yachting and exploration community word-wide through its operations. Combined net revenues from these entities for three months ended June 30, 2014 and 2013, was $45,447 and $0, respectively. Combined net revenues from these entities for six months ended June 30, 2014 and 2013, was $178,691 and $0, respectively. Accounts receivable from BGL at June 30, 2014, and December 30, 2013 was $607 and $70,823, respectively.

Sales to Pompano Dive Center for the three months ended June 30, 2014, and 2013, was $5,133 and $5,061, respectively. Sales to Pompano Dive Center for the six months ended June 30, 2014, and 2013, was $6,212 and $6,198, respectively. Terms of sale are no more favorable than those extended to any of the Company’s other customers. Accounts receivable from Pompano Dive Center at June 30, 2014 and December 31, 2013, was $20,187, and $14,029, respectively. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further discussion regarding Pompano Dive Center. .

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 the three and six months ended June 30, 2014 and 2013, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of June 30, 2014, and December 31, 2013, the Company was approximately twenty-five and twenty-six months in arrears, respectively, on royalty payments due. No default notice has been received and the Company plans to make payments as able.

Equity based compensation for Chief Executive Officer – On November 2, 2012, the Board of Directors (BODs) approved a stock incentive bonus to certain key employees and consultants to vest and pay out on May 2, 2013, contingent upon continued employment or services. The stock bonus price per share was calculated based on last closing price per the OTCBB on the effective date of the transaction. Of the total stock incentive bonuses declared for the key employees and consultants of $75,150 or 61,852 shares of common stock, the Chief Executive was awarded $45,000 or 37,037 shares. The Company recorded compensation expense ratably over the vesting period, and for the three months ended June 30, 2013, compensation expense to the Chief Executive Officer related to this transaction was $22,500. See Note 20. EQUITY BASED INCENTIVE/RETENTION BONUSES for further discussion. In addition, on February 23, 2013, the Company declared a bonus payable for the years ended 2012 for certain employees, service providers, and consultants. As part of this bonus, the Chief Executive Officer was awarded $67,000 to be paid out in cash or stock based on later determination by the BODs. This amount is included in operating expense for the year ended December 31, 2012. See table below for inclusion in other liabilities and accrued interest – related parties. Further, pursuant to a Written Consent of the BODs of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012, the BOD declared an $83,333 bonus due the Chief Executive Officer payable in shares of restricted stock. The shares vested as of January 2, 2013. The grant price per share was based on the closing price of the stock on May 31, 2012. For accounting purposes, the Company recognized $83,333 operating expense ratably over the seven months the shares vested. These shares are included in shares payable on the statement of stockholders’ deficit. These shares are included in shares payable on the statement of stockholders’ deficit.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity based compensation for Chief Executive Officer – (continued) Lastly, the Chief Executive Officer’s monthly salary was increased by $16,667 per month beginning in June 2012, payable in restricted stock calculated based on a monthly weighted average share factor of .70, or a 30% discount (“incremental salary”). The shares were to vest six months after the last day of each month, continued employment was requirement for vesting, and shares would not be issuable until vested. The Company recorded $23,801 operating expense each month related to the incremental salary, which was $16,667 plus $7,144 discount added back to record at full monthly weighted average price per market. On December 23, 2013, the Chief Executive Officer forgave all incremental salary shares payable to him by the Company from 2012 and through November 2013. As a result, the Company recorded $428,578 contribution to Additional Paid in Capital for the year ended December 31, 2013, for the cancellation of the $261,904, and $166,667 stock payable from 2013 and 2012, respectively.

Non-employee Board of Director fees and bonus – Effective December 23, 2013, the Board of Directors cancelled the $2,500 per month non-employee Board of Director fee agreement under which Mikkel. Pitzner was being compensated. In addition, Mr. Pitzner forgave the $27,500 BOD fees due in shares payable and/or paid him monthly through November 2013. Related to the forgiveness of the BOD fees for 2013, the Company cancelled related stock payable to him, recorded $5,917 receivable for the stock due back from him, and recorded the $27,500 as contribution to Additional Paid in Capital. During the three months ended June 30, 2014, Mr. Pitzner returned 14,406 shares, or $1,383 of $5,917.

On February 23, 2013, the Company declared a bonus payable for the years ended 2012 for certain employees, service providers, and consultants. As part of this bonus, Mr. Pitzner was awarded restricted shares of common stock with $73,000 fair market value. The shares were issued to Mr. Pitzner during the three months ended June 30, 2013.

Equity based compensation to employee – During November 2013, Alexander F. Purdon, an employee of the Company, exceeded 10% ownership whereby he was reclassified to related party. The Company pays Mr. Purdon’s employment compensation in restricted shares of stock in lieu of cash. The number of shares paid is based on the weighted average price per share during the months the services were rendered. For the three months ended June 30, 2014 and 2013, stock based compensation to Mr. Purdon was $13,500 and $9,000, respectively. In addition, of the $129,500 employee bonuses declared payable for 2012 year end, which is payable in stock or cash to be determined by the Board of Directors, Mr. Purdon is due $17,500. Lastly, of 61,852 total shares of common stock attributable to incentive retention bonuses declared by the Board of Directors in 2012, which vested as of May 2013, Mr. Purdon received 1,852 shares of stock, which were valued at $2,250. These shares are included in shares payable on the statement of stockholders’ deficit. These shares are included in shares payable on the statement of stockholders’ deficit.

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 nominal shares of the Company’s common stock. In addition, the principals of CRC were 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. See Other liabilities and accrued interest– related parties below for inclusion of $6,017 remaining from the original $8,250 liability due the Principals of CRC. 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.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other liabilities and accrued interest– related parties

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

Restricted common stock issued for personal guarantee – On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 14,815 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 expired 50% on April 20, 2012, and 50% on April 20, 2013, since Mr. Carmichael continued his full time employment with the Company. The company valued the stock at determined fair market value per share on the date of the transaction and has recorded $1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expired. The unearned balance of the compensation was recorded as prepaid compensation as a component of shareholders’ deficit. For the years ended December 31, 2013 and 2012, the Company recognized $137,494 and $500,004, respectively, as amortization of prepaid compensation under this agreement. Prepaid compensation remaining under this agreement as of December 31, 2013, and December 31, 2012, was $0 and $137,494, respectively, and is reflected as a component of Stockholders’ Deficit.

Stock options outstanding from patent purchase

Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued patents. In exchange for the Intellectual Property (“IP), the Company issued Mr. Carmichael 234 stock options (adjusted for 1 –for– 1,350 reverse stock split) at a $1,350 exercise price per share with expiration ten years from the effective date of grant, or March 2, 2019. None of the options have been exercised to-date.

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 was automatically renewable on an annual basis through May 31, 2014, with 90 days written notice assuming the Lessee was in compliance with all terms of the lease. On May 31, 2013, the Company closed the dive store and vacated the premises. The $3,200 lease deposit was returned during the year ended December 31, 2013. As of June 30, 2014, the Company had paid Seller $9,643 toward the $22,500 cash purchase price leaving a balance of $12,857 included in other liabilities.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts payable and accrued liabilities of $507,951 at June 30, 2014, consists of $209,048 accounts payable trade, $42,512 accrued payroll and related fringe benefits, $45,000 accrued year-end bonuses, $43,249 accrued payroll taxes and withholding, $14,850 accrued loss for debenture settlement in July 2014, and $153,292 accrued interest. Accrued payroll taxes and withholding were approximately six months in arrears at June 30, 2014. 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.

Accounts payable and accrued liabilities of $517,058 at December 31, 2013, consists of $245,672 accounts payable trade, $50,910 accrued payroll and related fringe benefits, $45,000 accrued year-end bonuses, $42,093 accrued payroll taxes and withholding, and $133,383 accrued interest. Accrued payroll taxes and withholding were approximately six months in arrears at December 31, 2013. Balances due certain vendors are also due in arrears to varying degrees.

Other liabilities of $250,916 at June 30, 2014, consists of $235,000 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement (Note 8. ASSET PURCHASE), and $3,059 on-line training liability. Other liabilities of $252,009 at December 31, 2013, consists of $235,000 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement, $3,169 on-line training liability, and $983 other liabilities. The $235,000 short-term loans is comprised of three loans due on demand from unrelated parties. The loans have no other stated terms except one for $200,000 indicated it was for settlement of debenture debt. Therefore, the Company used the proceeds from that loan toward settlement of convertible debentures referenced in (13) of Note 12. CONVERTIBLE DEBENTURES.

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 eighteen-month redemption from the time customer purchases the unit before expiration. The Company owes the on-line training vendor an agreed upon negotiated rate for on-line certificates redeemed prior to expiration, and payment is due upon redemption. 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.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notes payable consists of the following as of June 30, 2014:

As of June 30, 2014, principal payments on the notes payable are as follows:

The unsecured note payable in the table above and as reflected table below in the December 31, 2013, note payable balance resulted from conversion of a vendor payable dating back to February 2011. The note payable was restructured once in June 2012 to reduce the monthly payments and to extend the maturity.

Notes payable consists of the following as of December 31, 2013:

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Convertible debentures consist of the following at June 30, 2014:

Reference numbers in right hand column of table entitled Ref. refer to paragraphs with corresponding number that immediately follow the next paragraph. The referenced paragraphs also support the December 31, 2013 table, which appears at the end of this Note. Therefore, it is appropriate that some of the number references do not appear in the table above (i.e. Ref. 1).

During the first quarter of 2013, the Company determined based on closing market price of $.0005 (pre-reverse stock split), and based on terms of convertible debt, its convertible and/or committed shares were in excess of its authorized common stock of 5,000,000,000. Most of the Company’s convertible debentures have conversion rates at substantial discount to market price; therefore, a decline in market price impacts the number of shares convertible. As a result, the Company recorded a derivative liability of $565,689, which represented the amount of shares convertible or committed in excess of the shares authorized at $.0005 per share, the closing market price at March 30, 2013, and as valued according to the Black-Scholes valuation model. On July 15, 2013, the Company effectuated a reverse stock split (1 -for- 1,350), which was applied retroactively. See Note 19. CHANGE IN CAPITAL STRUCTURE. Accordingly, this transaction resulted in significant shares authorized in excess of those committed, and the full derivative liability of $565,689 was reversed.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 was to 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, occurred 90 days after the first closing for $11,750 paid/assigned. All subsequent Closings were to be for $11,750 and occur in 30 day increments after the second Closing. This was to 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.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On July 2, 2012, the Company borrowed $78,500 from this same lender in exchange for a convertible debenture maturing on April 5, 2013. Beginning 180 days after the date of the debenture, lender could convert the note to common shares at a 39% 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 granted a lower price for common stock purchase or conversion to anyone else during the term of the agreement, the lender’s conversion price would be adjusted downward to the same. The lender could not convert an amount greater than 4.99% of the outstanding common stock at any one time. The Company could have prepaid 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 was a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company was 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 valued the BCF of the convertible debenture at $35,268. Accordingly, the $78,500 debenture was discounted by the amount of the BCF and accreted to the convertible debenture through its maturity, and interest was recognized until converted. By December 31, 2013, the lender had converted $78,500 principal plus accrued interest on the convertible debenture in full satisfaction of the debt. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

On August 8, 2012, the Company borrowed $42,500 from this same lender in exchange for a convertible debenture maturing on May 10, 2013. Beginning 180 days after the date of the debenture, lender could have converted the note to common shares at a 39% discount pursuant to the same terms and conditions discussed in preceding paragraph. The Company valued the BCF of the convertible debenture at $27,172. Accordingly, the $42,500 debenture was discounted by the amount of the BCF. The Company accreted the discount to the convertible debenture through its maturity and will recognize interest expense until paid in full or converted. During the year ended December 31, 2013, the lender converted $34,055 principal on the convertible debenture. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

On October 31, 2012, the Company borrowed $78,500 from this same lender in exchange for a convertible debenture maturing on August 2, 2013. Beginning 180 days after the date of the debenture, lender could have converted the note to common shares at a 39% discount pursuant to the same terms and conditions discussed in two paragraphs preceding this one. The Company valued the BCF of the convertible debenture at $50,189. Accordingly, the $78,500 debenture was discounted by the amount of the BCF. The Company is accreting the discount to the convertible debenture through its maturity and will recognize interest expense until paid in full or converted. During the three and six months ended June 30, 2014, the lender converted $28,975 and $30,640, respectively, of the convertible debenture to shares of common stock. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 10, 2012, the new holder (lender) purchased $7,500 of the original $125,000 principal balance, and based on this transaction, the Company recorded a $4,286 loss on extinguishment. On May 18, 2012, the lender purchased another $11,750, and the Company recorded a $6,714 loss on extinguishment related to this transaction. On July 17, 2012, the lender purchased another $11,750, and the Company recorded a $6,714 loss on extinguishment related to this transaction. On November 8, 2012, the lender purchased another $11,750, and the Company recorded a $6,714 loss on the extinguishment related to this transaction. Since that date the lender has not purchased or converted any shares pursuant to the sale/assignment agreement.

The Company may prepay at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debenture is $.37125 (adjusted for 1-for-1,350 reverse stock split), 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 June 30, 2014 and December 31, 2013, the lender had assigned a cumulative $5,500 under the debenture to four separate parties, and $23,500 to another party. See reference (10) and (12), respectively, related to the assignments.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the years ended December 31, 2012, the lender accepted assignment of $23,500, of a convertible debenture from the lender discussed in (9) above. See reference (2) for terms surrounding the original convertible debenture. In addition, the Company converted $2,125 of the assignments to stock during the year ended December 31, 2013, plus $202 of accrued interest in full satisfaction of the amount due this lender under the assignments. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired the convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

The Company borrowed $84,500, the third debenture referred to above with this lender. The interest rate on the debenture was 10% per annum, and the conversion price was 59% of the lowest closing bid price per share in the ten trading days prior to the conversion notice. Per terms of the debenture agreement, the lender was not to convert an amount that would cause it or any of its affiliates to beneficially own in excess of 4.99% of the Company. The Company could prepay the debenture within 90 days after the effective date at 140% multiplied by outstanding principal and accrued interest. The Company was 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 valued the BCF of the convertible debenture at $58,720, its intrinsic value. Accordingly, the $84,500 debenture was discounted by the amount of the BCF. The Company accreted discount to the convertible debenture and interest expense through its settlement on August 12, 2013 as discussed below. Further, the debenture agreement provided for post-closing expenses, which the lender noted was $1,000 per conversion and approximately $700 in other fees per each debenture. The Company accrued these fees on each debenture and per conversion.

The $95,000 and $30,500 debentures contained the same terms and conditions as the $84,500 debenture except there were no prepayment clause, and the conversion price was 44% of the lowest closing bid price per share in the ten trading days prior to the conversion notice. During the years ended December 31, 2013, the Company converted $30,500 plus $191 of accrued interest in full satisfaction of the $30,500 debenture, and $22,500 toward the $95,000 debenture. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than six months prior to the date of conversion and did not pay any additional consideration for the shares.

On August 12, 2013, the Company fully settled the two debentures outstanding with $157,446 principal and $8,794 accrued interest totaling $166,240 with this lender for $170,000. All pre-payment penalties were waived and the Company recognized the difference between the $166,240 and $170,000, or $3,760, as other expense for the year ended December 31, 2013.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Convertible debentures consist of the following at December 31, 2013:

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

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity based compensation is presented on the face of the Statement of Stockholders’ Deficit for the three and six months ended June 30, 2014. More information on the significant components of the amounts presented for the three and six months ended June 30, 2014 and 2013 follows:

For the three and six months ended June 30, 2014 and 2013, the Company converted $13,500, and $27,000, respectively, employee compensation payable. This amounted to 2,920,849 and 88,243 shares of restricted common stock for the six months ended June 30, 2014 and 2013, respectively. For additional information see Note 7. RELATED PARTIES - Equity based compensation to employee

Pursuant to a consulting agreement for business advisory services for the three and six months ended June 30, 2013, the Company issued 35,236 and 68,032 shares of restricted stock, respectively, for $7,200 and $68,032 services, respectively. The stock conversion price under the agreement was calculated as a weighted average for the month the services were granted at a 30% discount. Operating expense was recorded based on full weighted average share price of the market for the period in which the services were rendered.

On March 27, 2013, the Company entered into a consulting agreement for financial strategic advice for a term of twelve months from the date of the agreement and may be terminated by either party within 30 days written notice and any monies owed are due upon termination. As initial fee, the Company paid the consultant $25,000 in restricted stock during the three months ended March 30, 2013. Further, upon obtaining $5,000,000 new capital into the Company, the consultant will be due $500,000, upon successfully obtaining a second $500,000 commitment of new capital, $50,000 will be due to the consultant, upon successfully obtaining a third $500,000 commitment of new capital, and the same arrangement through eleven additional commitment of new capital. Amounts due shall be paid in cash and any brokerage commissions, private placement fees or other fees in connection with obtaining the new capital shall be reduced from the fees due the consultant on a dollar per dollar basis.

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