Brownie's Marine Group, Inc - Quarter Report: 2015 September (Form 10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(mark one)

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

For the quarterly period ended September 30, 2015

¨          Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______.

Commission File No. 333-99393

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 84,763,702 shares of common stock outstanding as of November 2, 2015.

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.

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 Pompano Beach, 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 OTC Markets (pink) 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 2014 financial statement amounts and disclosures to conform to the 2015 presentation.

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

Inventory – Inventory is stated at the lower of cost or net realizable 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, Equipment and Leasehold Improvements– Furniture, Fixtures, Equipment and Leasehold Improvement is stated at cost less accumulated depreciation and/or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated useful lives of the assets or the lease, 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.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Although profitable for the year ended December 31, 2014, and the three and nine months ended September 30, 2015, we have otherwise incurred losses since 2009. We have predominantly had a working capital deficit since 2009.

The Company is behind on payments due for matured convertible debentures, 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.

Because the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about BWMG’s ability to continue as a going concern within one year from date the financial statements are issued. Therefore, 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.

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

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

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

Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the three months ended September 30, 2015, and 2014, was $138 and $824 respectively. Advertising and trade show expense incurred for the nine months ended September 30, 2015, and 2014, was $2,842 and $1,444, respectively.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 is determined through use of the quoted stock price. For the three and nine months ended September 30, 2015 and 2014, the Company compensated and/or converted all accrued payroll to stock for one related party employee. For further discussion see Note 7. RELATED PARTIES TRANSACTIONS.

Beneficial conversion features on convertible debentures – The fair value of the stock upon which beneficial conversion feature (BCF) computations, as applicable, was determined through use of the quoted stock price. See Note 12. CONVERTIBLE DEBENTURES for further discussion.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

At September 30, 2015, and December 31, 2014, 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 September 30, 2015, and December 31, 2014, as presented on the face of the balance sheet.

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 and equivalent shares were included in the computation of dilutive earnings per share for the three and nine months ended September 30, 2015 and 2014.

New accounting pronouncements – In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. ASU No. 2015-11 does not apply to inventory measurement using the last-in, last-out (LIFO) or retail methods. ASU No. 2015-11 applies to all other inventory measurement methods, which includes first-in, first-out (FIFO) or average cost. Previously, inventory valuation was at the lower of cost or fair market value. This ASU changes the valuation to lower or cost of net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of the business, less reasonably predictable costs of completion, disposal, and transportation. ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. ASU 2015-11 should be applied prospectively with earlier application permitted.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

New accounting pronouncements (continued) – The Company opted for early adoption of ASU 2015-11 this period with no impact to financial condition, results of operations, or cash flows. The Company updated its consolidated financial statements to reflect inventory valuation at the lower of cost or net realizable value.

The Company believes there was no other new accounting guidance issued, 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 $105,320 at September 30, 2015, consists of $71,497 prepaid inventory, $9,048 prepaid insurance, $7,200 legal settlement receivable (see Note 16 COMMITMENTS AND CONTINGENCIES), $5,991 prepaid rent, $10,000 prepaid legal, $1,000 prepaid accounting, and $584 other current assets and prepaid expenses.

Prepaid expenses and other current assets totaling $30,195 at December 31, 2014, consists of $21,508 prepaid inventory, $8,112 prepaid insurance, and $575 other current assets and prepaid expenses.

Property and equipment consists of the following as of:

Other assets of $6,648 at September 30, 2015, consists of refundable deposits. Other assets of $31,049 at December 31, 2014, consists of $24,740 investment in joint venture, and $6,309 refundable deposits. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further information on investment in joint venture and notice of dissolution received for 2015.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer, and three Company’s owned by the Chief Executive Officer as further discussed in Note 7. RELATED PARTIES TRANSACTIONS. Combined sales to these six entities for the three months ended September 30, 2015 and 2014, represented 25.50% and 27.48%, respectively, of total net revenues. Combined sales to these six entities for the nine months ended September 30, 2015 and 2014, represented 30.49% and 39.55%, respectively, of total net revenues. Sales to one non-related party represented 40.93% and 19.84% of net revenues for the three and nine months ended September 30, 2015, respectively. Sales to no other customers for the three and nine months ended September 30, 2015, and 2014 represented greater than 10% of net revenues.

Notes payable – related parties

Notes payable – related parties consists of the following at September 30, 2015:

As of September 30, 2015, principal payments on the notes payable – related parties are as follows:

Effective April 22, 2015, the Company issued Mr. Carmichael, Chief Executive Officer of the Company, an unsecured promissory note presented in the table above in consideration for a $27,000 advance. For purposes of calculating the interest due monthly on the note, the weighted average price per share during the monthly period from the historical data as quoted on www.quotemedia.com for BWMG shall be used. Interest shall be calculated as the unpaid principal balance times the daily rate for the number of the days in the period times the average weighted price per share for the monthly period. The Company borrowed and is using the proceeds for tooling and inventory of new product it plans to offer during its local summer diving and boating season. For the three and nine months ended September 30, 2015, the Company converted $203 and $489 accrued interest on the note payable – related party to 66,764 and 204,012 shares of restricted stock, respectively.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On October 30, 2013, the Company signed the above 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. During the third quarter ended September 30, 2015, the Company paid off the remaining balance due under the note payable – related party.

Notes payable – related parties

Notes payable – related parties consists of the following at December 31, 2014:

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 September 30, 2015 and 2014, was $280,786 and $218,874, respectively. Combined net revenues from these entities for nine months ended September 30, 2015 and 2014, was $652,124 and $706,105, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at September 30, 2015, was $28,976, $9,410, and $7,573, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2014, was $42,882, $4,128, and $8,451, respectively.

The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”), 940 Associates, Inc. (“940A), and 3D Buoy, entities wholly owned by the Company’s Chief Executive Officer. Terms of sales may be 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 approximate cost or include a nominal margin if Strategic partner terms are met. Strategic partner terms on a per order basis 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 September 30, 2015, and 2014, were $1,261 and $676, respectively. Combined net revenues from these entities for nine months ended September 30, 2015, and 2014 were $43,649 and $179,367, respectively Accounts receivable from BGL at September 30, 2015, and December 31, 2014 was $3,593 and $2,107, respectively. Accounts receivable from 3D Buoy was $1,948 at September 30, 2015.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Beginning in 2015, the joint venture agreement with Pompano Dive Center “PDC” was in process of dissolution. See Note 17. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further discussion regarding PDC. PDC provided notice of intent to dissolve effective January 1, 2015, and BWMG awaited the return of the stock PDC held in BWMG to fulfil terms of dissolution. PDC returned the stock at the end of the second quarter of 2015 and the Company cancelled it at the beginning of third quarter of 2015. The cancellation is reflected on the face of the statement of stockholders’ equity. Market value of the 3,394 shares of stock PDC held that were returned was $0. The Company had recorded the decline in value of the stock in the second quarter of 2014 by reversing the $24,740 long term asset (purchase option) tied to the stock provided PDC discussed below, with corresponding reduction in additional paid in capital to write the asset down to fair market value.

Therefore, PDC is not being presented or disclosed as a related party in 2014 or 2015, with this presentation prospectively applied. Accordingly, sales to PDC for the three and nine months ended September 30, 2014 of $1,781 and $7,994, respectively, have been reclassified in the financial statements to non-related party revenues. In addition, accounts receivable of $13,757 from Pompano Dive Center at December 31, 2014, has been prospectively reclassified to non-related party accounts receivable.

Royalties expense – related parties – The Company has Non-Exclusive License Agreements with 940A 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 nine months ended September 30, 2015 and 2014, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of September 30, 2015, and December 31, 2014, the Company was approximately thirty and twenty-nine 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 and bonus for Chief Executive Officer – On February 23, 2013, the Company declared a bonus of $129,500 of which the Chief Executive Officer was awarded $67,000 to be paid out in cash or stock based on later determination by the BOD. This amount was 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 BOD of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012, the BODs 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.

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, leaving a $4,534 receivable. During the second quarter of 2015, the Company deemed the receivable fair market value as $1, which is the par value of 8,372 shares pending return from Mr. Pitzner. Accordingly, the Company reduced the value of the receivable, and reduced additional paid in capital, which is the account that would have been adjusted upon return of the shares

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity based compensation to employee –The Company pays the employment compensation of Alexander F. Purdon, an employee and a more than 10% shareholder of the Company, 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 September 30, 2015 and 2014, stock based compensation to Mr. Purdon was $13,500 and $13,500, respectively. For the nine months ended September 30, 2015 and 2014, stock based compensation to Mr. Purdon was $40,500 and $40,500, respectively, or 4,833,157 shares and 2,321,978, 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 BOD, Mr. Purdon is due $17,500 reflected in the table below of Other liabilities and accrued interest– related parties. Lastly, of 61,852 total shares of common stock attributable to incentive retention bonuses declared by the BOD in 2012, which vested as of May 2013, Mr. Purdon is payable 1,852 shares of stock, which were valued at $2,250. 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 December 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 was 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 Intellectual Property (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:

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 IP, the Company issued Mr. Carmichael 234 stock options at a $1,350 exercise price with expiration ten years from the effective date of grant, or March 2, 2019. None of the options have been exercised to-date.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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. On May 31, 2013, the Company closed the dive store and vacated the premises. As of December 31, 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 at September 30, 2015 and December 31, 2014.

Accounts payable and accrued liabilities of $401,480 at September 30, 2015, consists of $116,649 accounts payable trade, $28,130 accrued payroll and fringe benefits, $45,000 accrued year-end bonuses, $39,612 accrued payroll taxes and withholding, and $172,089 accrued interest. Balances due certain vendors are in arrears to varying degrees. The Company is handling all delinquent accounts on a case by case basis.

Accounts payable and accrued liabilities of $462,776 at December 31, 2014, consists of $196,027 accounts payable trade, $31,669 accrued payroll and fringe benefits, $45,000 accrued year-end bonuses, $39,242 accrued payroll taxes and withholding, and $150,838 accrued interest. 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.

Other liabilities of $230,977 at September 30, 2015, consists of $215,782 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement (Note 8. ASSET PURCHASE), and $2,338 on-line training liability. Other liabilities of $232,738 at December 31, 2014, consists of $216,586 short-term loans, $12,857 payable for assets purchased pursuant to Asset Purchase Agreement and $3,295 on-line training liability. The short-term loans are comprised of four 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 some convertible debentures.

On-line training certificates accompany 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.

Notes payable consists of the following as of September 30, 2015:

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2015, principal payments on the notes payable are as follows:

The unsecured note payable presented in the table below, which matured in March 2015, was paid in full in accordance with its terms. The note payable had 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, 2014:

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Convertible debentures consist of the following at September 30, 2015 and December 31, 2014:

Reference numbers in right hand column of table entitled Ref. refer to paragraphs with corresponding numbers that immediately follow this paragraph.

Company valued the beneficial conversion feature (BCF) of the convertible debenture at $53,517, its intrinsic value. The Company accreted the discount to the convertible debenture and will recognize interest expense through repayment in full or conversion. Because there was no assurance of success and the invention was still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense during the year ended 2010. Both parties agreed to confidentiality regarding the invention during the pre-prototype stage. In addition, the Company agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services.

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 is purchased/assigned. See Ref. (6) for discussion of new terms on the assigned portions of the debenture.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 the paragraph above. The Company valued the BCF of the convertible debenture at $50,189, and accordingly, discounted the $78,500 debenture by this amount. The Company accreted the discount to the convertible debenture through its maturity and recognized interest expense until full conversion. During the year ended December 31, 2014, the lender converted $73,820 of the convertible debenture to shares of common stock, and during the first quarter of 2015 converted the remaining $4,680 balance to shares of common stock. In addition, the lender converted $6,820 accrued interest on the convertible debenture to stock in the first quarter of 2015 in full satisfaction of the balance due. The stock was issued without restrictive legend pursuant to Rule 144, as the holder acquired convertible note issued by the Company more than nine 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

600,000 warrants at $337.50 and $472.50 per share (after restatement for 1 for -1,350- reverse stock split), respectively. As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $206,832, which was recorded as a discount against the debenture. The Company accreted the discount to the convertible debenture through maturity and will accrue interest expense until paid in full or

converted. Before discount, the Company determined the FMV of the warrants as $45,000 using the Black-Scholes valuation model.

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, 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 September 30, 2015 and December 31, 2014, the lender had assigned an aggregate of $5,500 under the debenture to four separate parties, and $23,500 to another party. See reference (7) and (8), respectively, related to the assignments.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Conversion price under the debenture is $.37125, 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 is limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. During the year ended December 31, 2013, the lender converted $3,211 of the debenture to stock. The stock was issued without restrictive legend pursuant to Rule 144, since the holder acquired convertible note issued by the Company more than nine months prior to the date of conversion and did not pay any additional consideration for the shares.

On March 9, 2011, the Company borrowed $50,000 in exchange for a convertible debenture, which was converted in full with accrued interest in the second quarter of 2012. As further inducement for loaning the Company the funds, the Company granted the lender 50,000 and 100,000 warrants at $337.50 and $472.50 per share, respectively. Before discount, the Company determined and recorded the fair market value of the warrants as $7,500 using the Black-Scholes valuation model. See Note 12. CONVERTIBLE DEBENTURES, reference (4) for similar warrant arrangement made with another lender.

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

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at September 30, 2015:

The effective tax rate used for calculation of the deferred taxes as of September 30, 2015 was 34%. The Company has established a valuation allowance against deferred tax assets of $1,120,843 or 99.8%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve against the net operating carryforward, 100% reserve against the allowance for doubtful accounts, and 97% reserve against the deferred tax assets attributable to the equity based compensation.

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

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2014:

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The effective tax rate used for calculation of the deferred taxes as of December 31, 2014 was 34%. The Company has established a valuation allowance against deferred tax assets of $1,202,911 or 99.8%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve against the net operating carryforward, 100% reserve against the allowance for doubtful accounts, and 97% reserve against the deferred tax assets attributable to the equity based compensation.

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. As of September 30, 2015, and December 31, 2014, the 425,000 shares of preferred stock are owned by the Company’s Chief Executive Officer. The preferred shares have 250 to 1 voting rights over the common stock, and are convertible into 31,481 shares of common stock. The preferred stock votes with the Company’s common stock, except as otherwise required under Nevada law. Accordingly, at September 30, 2015, Mr. Carmichael has approximately 61% of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.

From time to time the Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability insurance, which provided coverage for each claim up to $1,000,000. During the third quarter of 2014, the Company did not renew its product liability insurance since the renewal policy amount was cost prohibitive. The Company is currently seeking a new insurance carrier or alternative means to satisfy this potential liability exposure, as well as to fulfil the sales terms of some of our customers, which require the insurance coverage.

As previously disclosed, we are co-defendants under an action filed by an individual in June 2013 in the Circuit Court of Broward County claiming personal injury resulting from use of a Brownie’s Third Lung. Plaintiff has claimed damages in excess of $1,000,000. The insurance carrier’s legal counsel indicates unfavorable outcome is possible, but not probable. We believe such claim is without merit and intend to continue to aggressively defend such action. In addition, as previously disclosed, we are also co-defendant under an action filed March 2015, in the Circuit Court of Broward County claiming personal injury resulting from the use of a Brownie’s Third Lung product. This claim falls outside the Company’s period of insurance coverage. The Company believes the claim to be a Workers Compensation claim relating exclusively against other defendant and without merit, and has retained counsel to aggressively defend this action.

The Company is co-defendant in an action filed by and individual in the Circuit Court of Broward County in March 2015, claiming personal injury resulting from use of the Brownie’s Third Lung. The claim is also for damages in excess of $1,000,000. The claim falls outside the Company’s insurance coverage period. The Company has retained legal counsel, believes the claim is completely without basis in fact or merit, and intends to aggressively defend.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 14, 2014, the Company entered into a new lease commitment. Terms of the new lease include thirty-seven month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), which is approximately $1,500 per month subject to periodic adjustment.

On September 24, 2015 all claims and counterclaims by and between Undersea Breathing Systems, Inc. (“UBS”) and the Company were settled in full in the Circuit Court of the 15^th Judicial Circuit in and for Palm Beach County, FL, in the third quarter of 2015. The settlement included the Company owing UBS nothing, UBS owing the Company certain tangible property within 14 days, mutual execution of general release, and stipulation for dismissal with prejudice with all parties to bear their own attorneys’ fees and costs. The Company’s legal expenses and fees during the third quarter 2015 related to this action were approximately $60,000, and the fair value estimate of the tangible property (inventory items) receivable was approximately $7,200. The Company recorded these amounts during the third quarter of 2015 as legal expense, and other income, respectively. See Note 22. SUBSEQUENT EVENTS regarding delivery of the aforementioned tangible property.

Prior to the above settlement in full on July 1, 2014, the amended complaint for damages in excess of $15,000 filed by UBS on December 10, 2013 in the Circuit Court of the 15^th Judicial Circuit in and for Palm Beach County, FL was partially dismissed as to Count IV, Default on Promissory Note Against BWMG. The complaint against the Company sought to compel purchase of Medal Model No. 4241 membranes or equivalent pursuant to pricing agreement in 2011. UBS was the holder of the convertible debenture referenced in Note 12. CONVERTIBLE DEBENTURES Ref (2). Under the complaint, UBS asserted the Company was to purchase no less than 24 membranes from the company per year for $2,000 and $1,000, cash and Company stock, respectively, per membrane. The Company took delivery, paid cash, and issued stock for 14 Medal Model No 4241 membranes pursuant to the stated pricing in 2011, plus issued an additional $24,000 stock toward future purchases of 24 membranes. However, the Company had not purchased or taken delivery of additional membranes. At the same time the stock was issued the Company granted UBS a convertible debenture of $76,000 and reduced its balance to $48,000 when the Company paid $28,000 cash and took delivery of the 14 membranes. Therefore, UBS had $24,000 worth of stock and a $48,000 convertible debenture for which the Company took no membrane deliveries. Associated with the dismissal of Count IV, the Company reversed in the third quarter of 2014, related prepaid inventory and convertible debenture resulting in a loss on settlement of $14,850, which was accrued as of June 30, 2014.

In December 2014, the Company received notice from Pompano Dive Center, LLC. (“PDC”) of intent to cancel the Joint Venture Equity Exchange Agreement described below effective January 1, 2015, in accordance with the terms of the agreement. After notice, BWMG awaited the return of the stock PDC held in BWMG to fulfil terms of dissolution. PDC returned the stock at the end of the second quarter of 2015 and the Company cancelled it at the beginning of third quarter of 2015. The cancellation is reflected on the face of the statement of stockholders’ equity. Market value of the 3,394 shares of stock PDC held that were returned was $0. The Company had recorded the decline in value of the stock in the second quarter of 2014 by reversing the $24,740 long term asset (purchase option) tied to the stock provided PDC discussed below, with corresponding reduction in additional paid in capital to write the asset down to fair market value.

On November 7, 2011, the Company entered into a Joint Venture Equity Exchange Agreement (“Agreement”) with 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.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Beginning in 2012, both parties ceased operating under the consignment inventory arrangement. Inventory not

sold was returned, and inventory was purchased for sale. See Note: 7 RELATED PARTIES TRANSACTIONS - Net revenues and accounts receivable – related parties for further information related to pre-2015 related party information. Terms of sale to PDC were no more favorable than those granted other dealers of the Company’s products.

In addition, the Agreement provided 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 provided BWMG with a 33% interest in PDC. As part of the transaction, BWMG issued 3,394 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 purchased PDC, the stock issued by BWMG would have been credited to the purchase price. Further, PDC was 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 were required for distribution under the Agreement, and BWMG was not required to share in losses.

Terms of the above included upon termination of this Agreement by either party and/or a written purchase and sales agreement not consummated by the parties, then the parties’ respective interests in each other’s business would revert back to the original party. Accordingly, when this happened, PDC would relinquish the interest acquired in BWMG through this Agreement and BWMG wouldl do the same. All property at PDC owned by BWMG would be returned to BWMG at that time as well. The Company accounted for the investment in PDC under the Cost basis because the joint venture was cancellable at any time by either party with return of respective interest transferred to each as per the joint venture agreement; the possible acquisition of PDC was in the form of a non-binding letter of intent; each entities assets and liabilities remained their owned; and BWMG was not to share in any of PDC losses or additional expenses unless otherwise approved; and the management and operation of PDC remained with PDC. Since inception of the Agreement and through termination PDC reported pre-tax net losses, there was no profit sharing due the Company in accordance with the Agreement.

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 297 shares, and no more than 75 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 297 options were issued under the plan prior to January 1, 2010, and to-date all remain outstanding.

On November 2, 2012, the Board of Directors consented to grant equity based bonuses to certain key employees and consultants as an incentive to retain their services. Stock incentive bonuses were to vest, and be paid out on May 2, 2013, contingent upon continued employment or service. The stock bonus price per share was calculated based on last closing price as reported on per the OTCBB prior to the grant date for a total of $75,100. Shares were set aside and reserved for this transaction. As disclosed in Note 7. RELATED PARTIES TRANSACTIONS, $45,000 and $2,250 of the $75,100 bonuses, or 37,038 and 1,854 shares, were awarded to the Chief Executive Officer and the related party employee, respectively. The Company accrued operating expense ratably from the time of the awards through May 2, 2013, when vested. Of the 61,852 vested, only 5,185 have been issued to-date. The rest are included in shares payable as reflected on the Statement of Stockholders’ Deficit and the Balance Sheet. In addition, at the end of 2012, the BOD declared $129,500 bonuses payable in stock or cash to be determined by the BOD at a later date. Of this amount $67,000 was declared payable to the Chief Executive Officer of the Company and $17,500 declared payable to the related party employee as disclosed in Note 7. RELATED PARTIES. The combined $84,500 payable to the related parties is reflected on the Balance Sheet in Other liabilities and accrued interest – related parties.

BROWNIE’S MARINE GROUP, INC.

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On April 10, 2012, the Company entered into a strategic alliance agreement with Precision Paddleboards, Inc. The agreement provides for 12 month exclusivity granted for $24,000 in one year restricted stock, or 494 shares. Price per share was calculated as the weighted average per share for 30 days preceding the agreement or $.036 per share. The Company recognized the operating expense ratably over the twelve month vesting term with corresponding entry to shares payable. As of September 30, 2015, none of the 494 shares had been paid out and are reflected in shares payable balance on the Statement of Stockholders’ Deficit and the Balance Sheet.

For the three months ended September 30, 2015, non-related parties interest expense of $9,254 is comprised of $9,177 interest on convertible debentures and $77 other interest. For the three months ended September 30, 2014, non-related parties interest expense of $10,312 is comprised of $10,216 interest on convertible debentures and $96 other interest.

For the nine months ended September 30, 2015, non-related parties interest expense of $27,800 is comprised of $27,531 interest on convertible debentures and $269 other interest. For the nine months ended September 30, 2014, non-related parties interest expense of $35,564 is comprised of $34,702 interest on convertible debentures and $862 other interest.

For the three months ended September 30, 2015, $6,494 other income, net is comprised of $7,200 legal settlement receivable and no other individually significant items. For the three months ended September 30, 2014, $26,223 other income, net is comprised primarily of $49,812 sales commissions, partially offset by $20,406 headquarters and manufacturing facility relocation expense, and $3,183 other expense, net of individually insignificant items

For the nine months ended September 30, 2015, $4,264 other income, net is comprised primarily of $7,200 legal settlement (see Note 16. COMMITMENTS AND CONTINGENCIES), $3,471 royalty income on licensed patents, $1,800 sale of fixed assets, $2,930 other income, net of individually insignificant items and is partially offset by $11,137 insurance expense audit adjustments. For the nine months ended September 30, 2014, $23,619 other income, net is comprised primarily of $49,812 sales commissions, $31,463 write off of accrued legal expense from prior years resulting from resolution of overbilling as identified by Company, $5,144 royalty income on licensed patents, and partially offset by $20,406 headquarters and manufacturing facility relocation expense, $27,846 loss on disposal of fixed assets, and $14,850 loss on convertible debenture settlement.

Effective October 31, 2015, the Company issued Mr. Purdon, related party employee, 2,154,569 shares of restricted common stock in lieu of cash for $4,500 employee compensation for the month ended October 31, 2015. The number of shares issued was based on the weighted average share price during the month.

Effective October 22, 2015, the Company reincorporated to the State of Florida from the State of Nevada (the “Reincorporation”) pursuant to a plan of conversion, effective October 22, 2015 (the “Plan of Conversion”). On September 9, 2015, stockholders of the Company holding approximately 71% of the combined voting power of the Company’s outstanding Common Stock and Series A Convertible Preferred Stock, voting as a single class, as of September 9, 2015, approved by written consent in lieu of a special stockholders’ meeting the Reincorporation.  The Reincorporation did not affect any of the Company’s material contracts with any third parties, and the Company’s rights and obligations under such material contractual arrangements continue to be rights and obligations of the Company after the Reincorporation. The Reincorporation did not result in any change in headquarters, business, jobs, management, location of any of the offices or facilities, number of employees, assets, liabilities or net worth (other than as a result of the costs incident to the Reincorporation) of the Company.  The Reincorporation reduces the Company’s corporate costs and expenses and aligns the Company’s domicile with its executive offices. 

Pursuant to the Plan of Conversion, the Reincorporation was effected by the Company filing (i) articles of conversion (the “Nevada Articles of Conversion”) with the Secretary of State of the State of Nevada, (ii) a certificate of conversion (the “Florida Certificate of Conversion”) with the Secretary of State of the State of Florida and (iii) an articles of incorporation (the “Florida Articles of Incorporation”) with the Secretary of State of the State of Florida. Pursuant to the Plan of Conversion, the Company also adopted new bylaws (the “Florida Bylaws”).   As a result of the Reincorporation: (1) the affairs of the Company ceased to be governed by the Nevada Revised Statutes, the Company’s existing Articles of Incorporation and the Company’s existing Bylaws, and the affairs of the Company became subject to the Business Corporation Act of the State of Florida, the Florida Articles of Incorporation and the Florida Bylaws; (2) the Company as a Florida corporation is deemed to be the same entity as the Company was as a Nevada corporation for all purposes under the laws of Florida, with the Company’s existence as a Florida corporation deemed to have commenced when it was initially formed in Nevada; (3) each outstanding share of common stock of the Company as a Nevada corporation automatically converted into an outstanding share of common stock of the Company as a Florida corporation; (4) each outstanding option, warrant or other convertible right to acquire shares of common stock of the Company as a Nevada corporation converted into an equivalent option, warrant or other convertible right to acquire, upon the same terms and conditions (including the vesting schedule and exercise or conversion price per share applicable to each such option, warrant or other convertible right), the same number of shares of common stock of the Company as a Florida corporation; and (5) each director and officer of the Company as a Nevada corporation continues to hold his respective position with the Company as a Florida corporation.  The Reincorporation does not affect the trading of the Company’s shares of common stock on the OTC Markets in any respect. The Company, as a Florida corporation, will continue to file periodic reports and other documents as and when required by the rules and regulations of the SEC.

On October 14, 2015, Mr. Robert Carmichael, Chief Executive Officer, was issued 54,055 shares of restricted common stock for $124 accrued interest on notes payable – related party.

On October 14, 2015, the tangible personal property referred to legal settlement in Note 16. COMMITMENTS AND CONTINGENCIES was delivered by UBS to the Company in full satisfaction of the last remaining term under settlement agreement. Accordingly, the Company reversed and received as inventory the $7,200 settlement receivable recorded at September 30, 2015.

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 Pompano Beach, Florida. The Company’s common stock is quoted on the OTC Markets (pink) under the symbol “BWMG”. The Company’s website is www.browniesmarinegroup.com.

Mr. Carmichael has operated Trebor as its President since 1986. Since 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 some patents that are used by Trebor and several other large original equipment manufacturers in the diving industry. Mr. Carmichael is also the holder of trademarks and tradenames used by the Company.

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

Results of Operations for the Three Months Ended September 30, 2015, as Compared to the Three Months Ended September 30, 2014

Net revenues. For the three months ended September 30, 2015, we had net revenues of $1,105,915 as compared to net revenues of $805,472 for the three months ended September 30, 2014, an increase of $300,443, or 37.30%. Sales of tankfill systems and related sales were up approximately $400,000 for the third quarter of 2015 compared to the third quarter of 2014, and this increase was partially offset by an approximately $100,000 decline in hookah systems and related sales during the same period. Discontinuance of the Company’s product liability insurance has had negative impact on hookah sales to some of the Company’s dealers, but the Company believes sales of these products will rebound over time. The increase in tankfill system and related sales was primarily attributable to one very large sale in addition to the other individual, lesser dollar value sales during the period.

Cost of net revenues. For the three months ended September 30, 2015, we had cost of net revenues of $660,614 as compared with cost of net revenues of $539,666 for the three months ended September 30, 2014, an increase of $120,948, or 22.41%. Cost of material, the largest component of cost of net revenues, was constant as a percentage of net revenues for the three months ended September 30, 2015, as compared to the three months ended September 30, 2015. Therefore, the $120,948 increase in cost of net revenues is primarily attributable to the increase in net revenues during the third quarter of 2015 compared to the same period in 2014.

Gross profit. For the three months ended September 30, 2015, we had a gross profit of $445,301 as compared to gross profit of $265,806 for the three months ended September 30, 2014, an increase of $179,495, or 67.53%. The increase in gross profit is primarily attributable to increase in net revenues for the three months ended September 30, 2015, as compared to same period in 2014.

Operating expenses. For the three months ended September 30, 2015, we had operating expenses of $194,539 as compared to operating expenses of $145,846 for the three months ended September 30, 2014, an increase of $48,693, or 33.39%. The increase is primarily attributable to approximate $70,000 increase in legal expense for the three months ended September 30, 2015 compared to the same period in 2014. The majority of the legal increase or, approximately $60,000, was for the settlement and dismissal of the Undersea Breathing Systems, Inc. (“UBS”) legal proceeding discussed below during the third quarter of 2015 including defense and counterclaim settlement. This increase was partially offset by net decrease in individually insignificant increases and decreases in account other balances.

Other (income) expense, net. For the three months ended September 30, 2015, we had other (income) expense, net of $3,264, as compared to other (income) expense, net of $(11,405) for the three months ended September 30, 2014, a change of $14,669 other (income) expense, net, or 72.24%. This account is comprised of other (income) expense, net with $19,729 change during the third quarter of 2015, compared to the third quarter of 2014; and interest expense, which decreased $5,060 during the three months ended September 30, 2015 compared to same period in 2014. Other (income) expense, net is comprised of transactions that are generally of a non-recurring nature. The $19,729 other income, net decrease is primarily due to transactions occurring in the third quarter of 2014 without comparable transactions in the third quarter of 2015 including a $49,812 sales commission partially offset by $20,406 headquarters and manufacturing facility relocation expense. During the third quarter of 2015, the primary activity in this account was for $7,200 other income for legal settlement with no other individually significant activity. The $5,060 decrease in interest expense during the third quarter of 2015, as compared to the third quarter of 2014, is primarily attributable to approximately $1,000 less in convertible debenture interest due lower convertible debenture balance outstanding during the third quarter of 2015, as compared to the same period in 2014; and approximately $4,000 decrease in interest expense related party due to decline in note payable – related parties balance during the three months ended September 30, 2015, as compared to same period in 2014.

Provision for income tax expense. For the three months ended September 30, 2015 as compared to September 30, 2014 we had no change in the $0 provision for income tax expense.

Net income. For the three months ended September 30, 2015, we had net income of $247,498 as compared to net income of $131,365 for the three months ended September 30, 2014, an increase of $116,133, or 88.40%. The $116,133 increase in net income is attributable to $179,495 increase in gross profit, and partially offset by $48,693 increase in operating expenses, and $14,669 decrease in other income, net.

Results of Operations for the Nine Months Ended September 30, 2015, as Compared to the Nine Months Ended September 30, 2014

Net revenues. For the nine months ended September 30, 2015, we had net revenues of $2,281,636 as compared to net revenues of $2,258,980 for the nine months ended September 30, 2014, an increase of $22,656, or 1%. Sales of tankfill systems and related sales were up approximately $200,000 for the nine months ended September 30, 2015 compared to the same period in 2014, and this increase was partially offset by an approximate $175,000 decline in hookah systems and related sales during the same period. Discontinuance of the Company’s product liability insurance has had negative impact on hookah sales to some of the Company’s dealers, but the Company believes sales of these products will rebound over time. The increase in tankfill system and related sales was primarily attributable to one very large sale in addition to the other individual, lesser dollar value sales during the period.

Cost of net revenues. For the nine months ended September 30, 2015, we had cost of net revenues of $1,494,807 as compared with cost of net revenues of $1,569,621 for the nine months ended September 30, 2014, a decrease of $74,814, or 4.77%. The decrease during the nine months ended September 30, 2015 compared to nine months ended September 30, 2014, is primarily attributable approximately $24,000 decrease in overhead allocation primarily due to discontinuance of product liability insurance in the third quarter of 2014, which was an expense allocable as overhead; approximately $13,000 decrease in direct labor; approximately $18,000 decrease in subcontract labor; approximately $6,000 decrease in non-sales freight; and approximately $15,000 net decrease of primarily individually insignificant decreases in the majority of cost of net revenue accounts due to continuance of cost cutting measures by the Company to maximize working capital without sacrificing quality. In addition, although material costs increased due to quantity increase in sales, the increase was offset by an approximately 1% overall decline in material cost as a percentage of net revenues.

Gross profit. For the nine months ended September 30, 2015, we had a gross profit of $786,829 as compared to gross profit of $689,359 for the nine months ended September 30, 2014, an increase of $97,470, or 14.14%. The increase in gross profit is attributable to increase in net revenues of $22,656 and decrease in cost of net revenues of $74,814 for the nine months ended September 30, 2015, as compared to same period in 2014.

Operating expenses. For the nine months ended September 30, 2015, we had operating expenses of $533,879 as compared to operating expenses of $485,137 for the nine months ended September 30, 2014, an increase of $48,728, or 10.05%. The increase is primarily attributable to increase in legal expense of approximately $118,000, approximately $17,000 increase in rent, and partially offset by approximately $41,000 decrease in insurance expense related to discontinuance of product liability insurance, and decrease in indirect labor of approximately $43,000. There were many other net increases and decreases in account balances not deemed individually insignificant. The majority of the legal expense increase, or approximately $60,000, was for the UBS legal proceeding during the third quarter of 2015 including legal defense and counterclaim settlement. The balance of the increase in legal is primarily a result of a credit to legal expense for overbilled amount during the nine months ended September 30, 2014 without comparable transaction during the nine months ended September 30, 2015. The decrease in direct labor for the nine months ended September 30, 2015 as compared to the same period in 2014 is a result of reduction in head count not replaced when the Company’s factory and headquarters relocated in October 2014.

Other (income) expense, net. For the nine months ended September 30, 2015, we had other (income) expense, net of $24,229, as compared to other (income) expense, net of $25,464 for the nine months ended September 30, 2014, a change in other (income) expense, net of $1,235, or 4.85%. This account is comprised of other (income) expense, net that had $19,355 change during the nine months ended September 30, 2015, compared to same period in 2014; and interest expense that decreased $20,590 during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. Other (income) expense net is comprised of transactions that are generally of a non-recurring nature. The decrease in other income net of $19,235 is primarily due to transactions occurring during the nine months ended September 30, 2014, without comparable transactions during the same period in 2015 with the most significant being $49,812 sales commissions, $31,463 credit to accrued legal expense, and partially offset by $20,406 headquarters and manufacturing facility relocation expense, $27,846 loss on disposal of fixed assets, and $14,850 loss on convertible debenture settlement. During the nine months ended September 30, 2015, the most significant activity in this account included $7,200 other income for legal settlement, approximately $5,000 other net individually insignificant income items, and partially offset by $11,137 insurance expense audit adjustments, and approximately $2,000 less royalty income during this period as compared to the same period in 2014. The $20,590 decrease in interest expense is primarily attributable to approximately $7,000 less in convertible debenture interest due to lower convertible debenture balance outstanding during the nine months ended September 30, 2015, as compared to the same period in 2015; and approximately $13,000 decrease in interest expense related party due to decline in note payable balance during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014.

Provision for income tax expense. For the nine months ended September 30, 2015, we had a provision for income tax expense of $43 as compared to $44 for the nine months ended September 30, 2014, an insignificant decrease of $1, or 2.27%.

Net income. For the nine months ended September 30, 2015, we had net income of $228,678 as compared to net income of $178,714 for the nine months ended September 30, 2014, an increase of $49,964, or 27.96%. The $49,964 increase in net income is primarily attributable to $97,470 increase in gross profit, and partially offset by increase in operating expenses of $48,728.

Liquidity and Capital Resources

As of September 30, 2015, the Company had cash and current assets (primarily consisting of inventory) of $1,021,878 and current liabilities of $1,319,019 or a current ratio of .77 to 1. This represents a working capital deficit of $297,141. As of December 31, 2014, the Company had cash and current assets of $774,291 and current liabilities of $1,356,642, or a current ratio of .57 to 1. As of December 31, 2013, the Company had cash and current assets of $950,643 and current liabilities of $1,760,058, or a current ratio of .54 to 1.

The 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. Although we had net income for the year ended December 31, 2014, and had net income for the nine months ended September 30, 2015, we have otherwise incurred annual losses since 2009, and expect we may have more in future periods. We have had a working capital deficit since 2009.

The Company is behind on payments due matured convertible debentures; 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.

The Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations. This raises substantial doubt about the Company’s ability to continue as a going concern during the twelve- month period following the date of the financial statements included herein. The Company will need to raise additional funds and is currently exploring alternative sources of financing. We have issued a number of convertible debentures as an interim measure to finance our working capital needs. We have historically paid for many legal and consulting services with restricted stock to maximize working capital. We intend to continue this practice in the future when possible. 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.

Although we incurred net income of approximately $94,000 and $229,000 for the year ended December 31, 2014, and the nine months ended September 30, 2015, respectively, we had a net loss of approximately $896,000, for the year ended December 31, 2013. We anticipate some 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 matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, and certain vendor payables. The Company 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 during the twelve- month period following the date of the financial statements included herein, 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 September 30, 2015, the outstanding principal balance of these debentures was $371,965. The debentures convert under various conversion formulas, all of which are at a significant discount to market price of our 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.

Our common stock may be affected by limited trading volume and may fluctuate significantly.

Our common stock is traded on the OTC Markets (pinks). 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 company is a voluntary filer with the Securities and Exchange Commission and in the event that we cease reporting under the Exchange Act, investors would have limited information available to them about the company.

While we are subject to Section 15(d) of the Exchange Act, we do not have a class of securities registered under Section 12(g) of the Exchange Act. To the extent that our duty to file Exchange Act reports has automatically suspended under Section 15(d) of the Exchange Act, as a voluntary filer, we may elect to cease reporting under the Exchange Act at such time which would limit the information available to investors and shareholders about the company.

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. Note: Services of one of the aforementioned consultants will in essence 2015 cease after the filing of the third quarter Form 10-Q. A suitable replacement has been retained and the Company expects a smooth transition with the assistance of the exiting consultant as needed.

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.

We rely on vendors and manufacturers without long-term contracts.

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.

We depend on consumer spending on discretionary items.

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 affect 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 negatively impact us.

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

Bad weather conditions could have an adverse effect on operating results.

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

The manufacture and distribution of recreational diving equipment could result in product liability claims and we currently lack product liability insurance.

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. We currently do not have any product liability insurance. 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.

Not Applicable to Smaller Reporting Company.

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 of September 30, 2015, as described in more detail below. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.

The specific weakness identified by our management was a lack of personnel with an appropriate level of SEC reporting and accounting experience and training in the application of U.S. Generally Accepted Accounting Principles (“GAAP”) commensurate with our financial reporting requirements and business environment. The weakness is principally due to lack of working capital to retain qualified employees, which are integral to the Company’s process for timely disclosure and financial reporting. Furthermore, our chief executive officer and chief financial officer, Mr. Robert Carmichael, lacks experience in U.S. GAAP and financial accounting. We rely extensively on outside service providers to comply with our financial reporting requirements. Since our inception we have relied on an outside consultant with experience in this area to assist us prepare our financial statements and disclosures in accordance with U.S. GAAP. Until such time as we have a chief executive officer and/or chief financial officer with the requisite expertise in U.S. GAAP, there are no assurances that the significant deficiency in our internal control over financial reporting will not result in errors in our financial statements which could lead to a restatement of those financial statements. This deficiency resulted in the failure of the Company to timely file Form 8-K current reports relating to conversions of related party employee compensation payable to restricted stock, and payment in restricted stock of accrued interest on notes payable during the period covered by this report. These transactions are 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 Form 10-Q Quarterly 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 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

On September 24, 2015, all claims and counterclaims by and between Undersea Breathing Systems, Inc. (“UBS”) and the Company were settled in full. The settlement included the Company owing UBS nothing and UBS owing the Company certain tangible property within 14 days, mutual execution of general release, and stipulation for dismissal with prejudice with all parties to bear their own attorneys’ fees and costs. The Company’s legal expenses and fees during the third quarter 2015 related to this action were approximately $60,000, and the fair value estimate of the tangible property (inventory items) receivable was approximately $7,200. The Company recorded the $60,000 during the third quarter of 2015 as legal expense, and $7,200 as other income. On July 1, 2014, the amended complaint for damages in excess of $15,000 filed by UBS on December 10, 2013 in the Circuit Court of the 15^th Judicial Circuit in and for Palm Beach County, FL was partially dismissed as to Count IV, Default on Promissory Note Against BWMG.

Not Applicable to Smaller Reporting Company.

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(a)(2) as described below or as otherwise previously disclosed on Form 8-K.

During the three months ended September 30, 2015, $13,500 compensation payable to a related party was converted to 6,092,572 shares of restricted stock, which were issued the employee and affiliate of the Company.

During the three months ended September 30, 2015, $489 accrued interest on note-payable – related parties was converted to 204,012 shares of restricted common stock, which were issued to the Company’s Chief Executive Officer.

None

None

None

* 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 September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders’ Deficit (iv) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text.

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.