U.S. UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DCWashington, D.C. 20549

FORM 10-Q

(mark one)

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

For the quarterly period endedSeptember 30, 2017Mark One)

[  ] Transition report under Section 13

or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______.

Commission File No. file number333-99393

Brownie’s Marine Group, Inc.

(NameExact name of Small Business Issuerregistrant as specified in Its Charter)its charter)

(954) 462-5570

Registrant’s telephone number, including area code

Not applicable

Former name, former address and former fiscal year, if changed since last report

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 (§ 232.405 of this chapter) 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by checkmarkcheck mark if the registrant has elected not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the Securities Act:Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined byin Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There were 86,710,793238,119,561 shares of common stock outstanding as of November 13, 2017.

at July 1, 2019.

PART I

Item 1. Financial Statements

Financial Information

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See Accompanying Notesaccompanying notes to Unaudited Condensed Consolidated Financial Statements.unaudited condensed consolidated financial statements

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

See Accompanying Notesaccompanying notes to Unaudited Condensed Consolidated Financial Statements.unaudited condensed consolidated financial statements

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(UNAUDITED)

See accompanying notes to unaudited condensed consolidated financial statements

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(UNAUDITED)

See Accompanying Notesaccompanying notes to Unaudited Condensed Consolidated Financial Statements.

unaudited condensed consolidated financial statements

BROWNIE’S MARINE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Supplemental disclosures of cash flow information:

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Description of business –Brownie’s Marine Group, Inc., (hereinafter referred to as the “Company”, “we”“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. and manufactures and sells high pressure air and industrial gas compressor packages through its wholly owned subsidiary Brownie’s High Pressure Compressor Services, 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. Inand Brownie’s High Pressure Compressor Services, Inc. The Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”.

On August 7, 2017, Brownie’s Marine Group, Inc. entered into an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”), a German-based company engaged in the Company organizeddevelopment, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean (the “Territory”). Pursuant to an intercompany assignment, Brownie’s High Pressure Compressor Services, Inc., aour newly-formed wholly-owned subsidiary (“BHP”)., is party to the agreement. Through BHP we expect to establishconduct business and build the brand name “L&W Americas/LWA”, establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. The Company’s common stock is quoted onOur goal will be to build a network of jobbers, dealers, installers and high-pressure compressor distributors throughout the OTC Markets (Pink) under the symbol “BWMG”.Territory by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product OEM integration relationships.

In December 2017, the Company formed a new wholly-owned subsidiary BLU3, Inc. The Company was formed to develop and market an innovation electric shallow dive system that is completely portable to the user. As of March 31, 2019 and December 31, 2018 the company has had limited operations.

Basis of Presentation –

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States for interim information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not include all of America (“GAAP”).the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of a normal and recurring adjustmentsnature considered necessary to givefor a fair presentation of operatinghave been included. Operating results for the periods presented have been included.

The unaudited condensed consolidated financial statements as of September 30, 2017 and for the three and nine month periodsthree-month period ended September 30, 2017 and 2016 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2017, and the results of operations for the three and nine month periods ended September 30, 2017 and 2016, and the statements of cash flows for the nine month periods ended September 30, 2017 and 2016. The condensed consolidated results of operations for the three and nine months ended September 30, 2017 areMarch 31, 2019 may not necessarily be indicative of the results tothat may be expected for the entire year. The consolidated balance sheet as ofyear ending December 31, 2016 has been derived from2019.

For further information, refer to the Company’s auditedconsolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2016. While management of the Company believes that the disclosures presented are adequate to make the information not misleading, these condensed consolidated financial statements should be read in conjunction with our audited financial statements and the footnotes thereto for the fiscal year ended December 31, 2016 as filed with the Securities and Exchange Commission as part of the Company’s Form 10-K which was filed on April 17, 2017.2018.

Definition of fiscal year – The Company’s fiscal year end is December 31.

Principles of Consolidation -The consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor Industries, Inc., Brownie’s High Pressure Compressor Services, Inc. and BLU3, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.

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.

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.

Reclassifications– Certain reclassifications may have been made to the 2016 financial statement amounts and disclosures to conform to the 2017 financial statement presentation.

Going Concern – The accompanying condensed unaudited 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 consolidated financial statements. We incurred net losses for the three months ended years ended March 31, 2019 and 2018 of $246,045 and $217,940, respectively. The Company had an accumulated deficit as of March 31, 2019 of $10,446,823.

AlthoughBecause the Company had net income forbelieves that existing operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, the nine months ended September 30, 2017Company will continue to raise additional funds as needed and the years ended December 31, 2016, 2015is currently exploring alternative sources of financing. The Company has issued a number of common shares and 2014, we have otherwise incurred annual losses since 2009,convertible debentures as an interim measure to finance working capital needs and expect we may have more losses in future periods.continue to raise additional capital through sale of restricted common stock or other securities or obtaining short term loans.

CashIf 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 equivalents – Only highly liquid investments with original maturitiespossibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of 90 days or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.these uncertainties.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accounts receivable – Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for doubtful accounts isare estimated based on historical customer experience and industry knowledge, as of September 30, 2017, the allowanceknowledge. The allowances for bad debts is $22,713.doubtful accounts totaled $9,200 and $9,200 at March 31, 2019 and December 31, 2018, respectively.

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 indicated.

Property and equipment and leasehold improvements – Property and equipment and leasehold improvements areimprovement is stated at cost less accumulated depreciation or amortization. Depreciation and amortization is provided principally on the straight-line method over the estimated useful lives of the assets or term of 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.

Revenue recognition –Recognition

On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive. The new revenue standard was applied using the modified retrospective method. As a result of the adoption of this standard, there was no impact on the prior year financial statements.

We recognize the sale of products under single performance obligations upon shipment of the units as that is when ownership is transferred and our performance is completed. Revenues from product sales arerepair and maintenance activities is recognized when the Company’s productsrepairs are shipped or when service is rendered. Revenues from fixed-price contracts are recognized oncompleted and the percentage-of-completion method, when applicable, 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. As of September 30, 2017, there were no ongoing contracts being accounted for using the percentage of completion method.units have been shipped.

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 they occur. Advertising and trade show expense incurred for the three months ended September 30, 2017March 31, 2019 and 2016,March 31, 2018, totaled $760$1,046 and $313,$ 16,249, respectively.Advertising and trade show expense incurred for the nine months ended September 30, 2017 and 2016, was $12,730and $3,550, respectively.

Research and development costs– The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10,Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. During the three month periods ending September 30, 2017months ended March 31, 2019 and 2016March 31, 2018 the Company incurred $12,730 and $10, respectively, of expenses related to research and development costs. During the nine month periods ending September 30, 2017costs of $29,568 and 2016 the Company incurred $13,935 and $1,425, respectively, of expenses related to research and development costs.$6,432, respectively.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Customer deposits and unearned revenue and returns policy – The Company typically 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. Customer deposits and unearned revenue totaled $307,145 and $245,907 at March 31, 2019 and December 31, 2018, respectively.

Warranty policy – Under the provisions of FASB ASC 460, Guarantor’s Guarantees, the Company accrues a liability for estimated warranty policy costs based on historical information and experience. The Company provides our customers with an industry standard one year warranty on systems sold. Historically,sold and recognizes a warranty reserve based on gross sales multiplied by the historical warranty expense return rate The warranty reserve at March 31, 2019 and December 31, 2018 was charged to cost of ournet revenues and is included in accrued expenses and is deemed sufficient to absorb any material or labor costs that might be incurred on sales recorded during the period. The Company recognized a reserve for warranty policy has been immaterial, and nowork in 2018 of $8,834. During the three months ended March 31, 2019 the Company increased the reserve has been established.by $1,709 to a total of $10,543.

Income taxes – On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Jobs Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a United States corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017.

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 presented.

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.

During the three months ended March 31, 2019 and 2018, the Company recognized share based compensation with a fair value of $92,051 and $25,000, respectively.

Beneficial conversion features on convertible debentures – A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share value of the underlying stock into which it is convertible. The fair value of the stock upon which to base the beneficial conversion feature (BCF) computations, as applicable, wascomputation has been determined through use of the quoted stock price.

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.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2017,March 31, 2019 and December 31, 2016,2018,, the carrying amount of cash, accounts receivable, accounts receivable – related parties, accounts payable and accrued liabilities, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, notes payable, and accounts payable and accrued liabilitiesconvertible debentures, approximate fair value because of the short maturity of these instruments.

Earnings per common share – Basic earnings per share excludeexcludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share areis 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 dilutive and common stock equivalent shares if any, outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.Potentially At March 31 2019 and March 31, 2018, 68,386,823 and 62,164,296, respectively, potentially dilutive shares are included in dilutive earnings per share totaled 58,156,862 forwere not recognized as their inclusion would be anti-dilutive. These shares reflect shares potentially issuable under convertible note agreements, outstanding warrants, outstanding stock options and the nine months ended September 30, 2017.conversion of preferred stock.

New accounting pronouncements

In June 2018, the Financial Accounting Standards Board issued ASU 2018-7, “Compensation – Stock Compensation” (Topic 718) amending the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments specify that nonemployee share-based payments are measured at grant-date fair value with the grant date being defined when the parties reach a mutual understanding of the key terms and conditions of the share-based award. ASU 2018-07 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU 2018—07 did not have an impact on our operations, cash flows or financial condition.

In April 2016,March 2018, the FASB issued ASU No. 2016-15,“Classification2018-05, “Income Taxes” (Topic 740) amending previous guidance on accounting and disclosures for income taxes addressing changes under the Tax Cuts and Jobs Act (the “Act”). This standard addresses the recognition of Certain Cash Receiptstaxes payable or refundable in the current year and Cash Payments”the recognition of deferred tax liabilities and deferred tax assets following passage of the Act. ASU 2016- provides guidance regarding the classification2018-5 had an enactment date of certain items within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted.22, 2017. We do not believe this ASU will have anhad a material impact on our results of operation, cash flows other than presentation, or financial condition.

In April 2016, the FASB issued ASU 2016–10Revenue from Contract with Customers (Topic 606): identifying Performance Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2016-09 did not have a material effect on our condensed consolidated financial statements.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In February 2016, the FASB issued ASU 2016-02,Leases,, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will beis effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently reviewing the provisions of this ASU to determine if there

This standard will be anynot have a material impact on our resultsconsolidated statement of operations cash flows or financial condition.

In July 2015,however, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11,Inventory (Topic 330),Simplifyingrecognition of right of use assets and real estate operating lease liabilities will have a material impact on our consolidated balance sheet presentation. Adoption of this standard resulted in additional right of use assets and additional liabilities of approximately $635,613 based on 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 orpresent fair market value. This ASU changes the valuation to lower of cost or 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. 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.remaining minimum rental payments under our current real property lease obligations. See Note 12

The Company believes there was no other new accounting guidance adopted, but not yet effective that either has not already been disclosed in prior reporting periods or is relevant to the readers of our consolidated financial statements.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the year ended December 31, 2018, the Company recognized an additional reserve for obsolete or slow moving inventory of approximately $100,000.

InventoryPrepaid expenses and other current assets consisted of the following:

Property, equipment and leasehold improvements consists of the following as of:

Depreciation and amortization expense totaled $2,219$3,563 and $20,060$4,553 for the three months ended March 31, 2019 and nine month periods ending September 30, 2017, and $9,197 and $27,157 for the three and nine month periods ending September 30, 2016,2018, respectively.

Other assets at March 31, 2019 of $24,649 consisted of refundable deposits $6,649 and an unamortized license fee of $18,000. Other assets at September 30, 2017 and December 31, 2016, respectively,2018 of $26,147 consisted solely of refundable deposits.deposits $6,649 and an unamortized license fee of $19,498.

The Company sells to three (3) entities owned by the brother of Robert Carmichael, the Company’s Chief Executive Officer, and three (3) companies owned or controlled by the Chief Executive Officer as further discussed in Note 7.7 - RELATED PARTIES TRANSACTIONS. Combined sales to these six (6) entities for the three monthsmonth periods ended September 30, 2017March 31, 2019 and 2016,2018, represented 27.76%26.59% and 28.64% respectively, of total net revenues. Combined sales to these six (6) entities for the nine months ended September 30, 2017 and 2016, represented 33.76% and 30.65%30.67% respectively, of total net revenues.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSIn excess of 90% of our total net revenues are made up of product sales to customers within the state of Florida.

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 with similar sales volume.volumes. Combined net revenues from these entities for the three months ended September 30, 2017March 31, 2019 and 2016, was $220,3632018, totaled $138,664 and $234,368, respectively. Combined net revenues from these entities for nine months ended September 30, 2017 and 2016, was $582,683 and $567,196$157,832, respectively. Accounts receivable from Brownie’s SouthportSouthPort Diver’s, Inc., Brownie’s Palm Beach Divers and Brownie’s Yacht Toys, totaled $51,700l at September 30, 2017March 31, 2019, was $24,403, $4,611and $16,553, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and $58,420,Brownie’s Yacht Toys at December 31, 2016, 2018, was $49,443, $7,731, and $8,646, respectively.

The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”), 3D Buoy and 940 Associates, Inc., affiliated with fully owned by the Company’s Chief Executive Officer.Officer directly. Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended to Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are consistent with those extended to Brownie’s strategic partners. Strategic partner terms on a per order basis include promotion of BWMG’s technologies and “Brownie’s” brand, offered only on productproducts 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 world-wide through its operations. Combined net revenues from these three entities for three months ended September 30, 2017,March 31, 2019 and 2016,2018, were $223$810 and $5,734, respectively. Combined net revenues from these entities for nine months ended September 30, 2017, and 2016, were $3,289 and $7,666, respectively. Accounts receivable from these three entities at September 30, 2016 was $2,146. Accounts receivable from BGL, 3D Buoy and 940 Associates, Inc. at September 30, 2017 was $3,289,$0, respectively. Accounts receivable from BGL, 3D Buoy and 940 Associates, Inc. and the Chief Executive Officer totaled $14,766 and $12,603 at March 31, 2019 and December 31, 20162018, respectively.

Accounts payable – related parties – The Company had accounts payable to related parties of $142,212 and $125,243 at March 31, 2019 and December 31, 2018, respectively. The balance payable at March 31, 2019 and December 31, 2018 was $9,819.due to Brownie’s Global Logistics, LLC, and 940 associates two companies affiliated with the Company’s Chief Executive Officer and directly to the CEO.

Royalties expense – related parties –The Company has an Exclusive License AgreementAgreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. This license agreement calls forrequires the Company to pay 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three months ended March 31, 2019 and ended September 30, 2017 and 2016, is2018 as disclosed on the face of the Company’s Condensed Consolidated Statements of Operations totaled $12,761$10,223 and $20,714, respectively,$9,927, respectively.

On August 1, 2017, Mr. Mikkel Pitzner was appointed by the Company’s board of directors to serve on the Company’s board of directors, filling a vacancy on the board. Mr. Pitzner shall serve on the board of directors and forshall hold office until the nine monthsnext election of directors by stockholders and ended September 30, 2017until his successor is elected and 2016 totaled $42,247qualified or until his earlier resignation or removal. The Company has agreed to pay Mr. Pitzner an annual fee of $6,000 and $46,332, respectively. In November 2016, the Company entered into a conversion agreement under which the Companyhas issued 10,000,000Mr. Pitzner 2,000,000 shares of restricted common stock valued at $25,000 and an additional 1,666,667 with a fair value of $20,883 under a two month consulting agreement expiring in satisfactionJanuary 2019. In December 2018, Mr. Pitzner was issued 708,287 common shares in payment of $88,850 past due and payable to 940A. As ofaccrued director fees through December 31, 2018. The shares were valued at $0.0195 per share, totaling $13,812, the fair value on the date of grant. During the conversion agreement,three months ended March 31, 2019 the Company was more than 31 months in arrears on its royalty payments totaling approximately $151,000. In addition, 940A agreedrecorded $31,250 of stock compensation pursuant to forebear on any default under the License Agreement due to the Company’s remaining past due amount for a period of three months from the effective date of the conversionthis agreement. The shares issued were valued at $0.008885 per share, the closing price of the stock on the effective date of the conversion agreement. No default notice had been received prior to the conversion agreement.

On March 1, 2017, the Company and 940A entered into a second conversion agreement. Under the agreementIn January 2018, the Company issued 940A 4,587,1902,000,000 shares of restricted common stock in satisfactionto Mr. Dana Allan for his services for serving on our board of $63,303, which represented all past duedirectors. The grant date fair value of the shares issued was $50,200 and payable amountswere expensed during the year ended December 31, 2018. Mr. Allan also received 552,742 shares for his services on our board of directors with a grant date fair value of $10,778 and were expensed during the year ended December 31, 2018. Mr. Allen resigned as a director effective March 31, 2019.

In December 2018, the Company issued 20,000,000 shares of common stock to 940A underour CEO as an incentive bonus. As the Exclusive License Agreementshares are subject to continued employment by the CEO through January 2, 2020, the Company has treated the shares as issued but not as yet outstanding. Expense for the issuance is being recognized over the full vesting period, and accordingly, the Company recognized stock compensation expense of $10,576 as of December 31, 2018. During the three months ended March 31, 2019 the Company recognized additional stock compensation expense of $45,876. The Total amount of expense recorded as of March 1, 2017. As of the date of the agreement the Company was more than 3 months in arrears on royalty payments due under the Exclusive License Agreement. The shares were issued at a price per share of $0.0138, which exceeded the closing price of the Company’s common stock as reported on the OTC Markets on the date immediately preceding the closing.31, 2019 is $56,452.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock options outstanding from patent purchase – Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued patents. In exchange for the Intellectual Property, (“IP), the Company issued Mr. Carmichael 234 stock options at a $1,350 exercise price expiring ten years from the effective date of grant, orgrant. The options expired on March 2, 2019. None2019 without being exercised.

Commencing in February, 2019, the Company began paying Mr. Pitzner $9,300 per month, inclusive of the options have been exercised to-date.a $1,300 auto allowance, for consulting services. These payments are not covered by a written agreement.

Accounts payable and accrued liabilities consists of the following as of:

Balances due certain vendors are in arrears to varying degrees. The Company is handling all delinquent accounts on a case-by-case basis.

Other liabilities consist of the following as of:of:

(*) Initial balance of $200,000 non-convertible note dated July 7, 2013. The note carries a 0% interest rate and is due on demand.

Notes payable consists of the following as of September 30, 2017 and December 31, 2016:

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2017, principal payments on the notes payable are as follows:

Convertible debentures consist of the following at September 30, 2017 and December 31, 2016:2018:

Reference numbers in right hand columnConvertible debentures consist of table entitled Ref. refer to paragraphs with corresponding numbers that immediately follow this paragraph.the following at March 31, 2019:

(1) On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 300,000 and 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 the 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 the discount, the Company determined the FMV of the warrants as $45,000 using the Black-Scholes valuation model.

(2) The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the BCFbeneficial conversion feature of the convertible debenture at $4,286, which was accreted to interest expense.expense over the period of the note. The discount has been fully amortized as of December 31, 2018.

(3)(2) The Company entered into three new debenture agreements upon sale or assignmenta 6% Secured Convertible Promissory Note, due December 1, 2018, subject to extension. The Note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the original lender. BecauseCompany’s wholly-owned subsidiaries, Trebor Industries, Inc. and Brownie’s High Pressor Compressor Services, Inc. and the stated termspersonal guarantee of Robert M. Carmichael, the new debenture agreement and principal amounts were significantly different from the original debenture, including analysis of the value of the beneficial conversion feature at the assignment or purchase date, the transactions are treated as extinguishment of the old debentures and recorded as new for accounting purposes. As of September 30, 2017, the principle amount was $2,743.

Company’s Chief Executive Officer. The conversion price under the debentures is $0.37125 andNote range from $0.02 per share if converted in the first year to $0.125 if converted in year five. 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%9.99% of the outstanding Common Stock of the Company at any one time. The Note was extended subsequent to year end for one additional year with a reduction in the conversion price to $0.01 per share. The Company recorded a debt discount initially of $12,500 which was fully amortized as of December 31, 2018.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(3) The Company entered into a 6% Secured Convertible Promissory Note, due December 4, 2018, subject to extension. The Note is secured with such assets of the Company equal to the principal and accrued interest, and is guaranteed by the Company’s wholly-owned subsidiaries, Trebor Industries, Inc. and Brownie’s High Pressure Compressor Services, Inc. and the personal guarantee of Robert M. Carmichael, the Company’s Chief Executive Officer. The conversion price under the Note range from $0.02 per share if converted in the first year to $0.125 if converted in year five. 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 9.99% of the outstanding Common Stock of the Company at any one time. The Note was extended subsequent to year end for one additional year with a reduction in the conversion price to $0.01 per share. The Company recorded a debt discount initially of $12,500 which was fully amortized as of December 31, 2018.

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. As of August 15, 2017, the Company has obtained Product Liability Insurance, although prior claims are not covered under the new policy. The initial term of the policy was through August 14, 2018 and was renewed through August 14, 2019.

In addition, as previously disclosed, the Company, Trebor and other third parties, are each named as a co-defendants under actions initially filed in March 2015 in the Circuit Court of Broward County under Case No. CACE-15-03238 and CACE -16-0000242 by the Estate of Ernesto Rodriguez, claiming wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung product. This claim falls outside the Company’s period of insurance coverage. Plaintiff has claims damages exceeding $1,000,000. A default judgment was entered against Trebor in 2015 due to its failure to timely respond to the complaint. On November 2, 2016, the court granted plaintiff’s motion for sanctions against our company for frivolous litigation relating to our attempt to have the matter dismissed and granted the plaintiff’s motion to strike our motion for summary judgment due to our initial default. The Company believes the claim to be a Workers Compensation claim relating exclusively against other non-affiliated defendants and without merit, and will aggressively defend this action and to appeal the default judgment. In the event Trebor is unable to overturn the default judgment and the defendants are determined to be at fault, we would seek to allocate damages among all of the other parties, including the plaintiff. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated due to the undetermined validity of any claim or claims made by plaintiff and the mitigating factors among the parties. Therefore, the Company has not recorded reserves and contingent liabilities related to this matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or reserve for these matters.

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 $2,000 per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term.

On November 11, 2018, the Company entered a new lease agreement for approximately 8,025 square feet adjoining its existing facility in Pompano Beach, Florida. Terms of the new lease include a sixty-nine month term commencing on January 1, 2019, or the date the Company takes possession of the premises, if earlier; a $6,527 security deposit; initial base rent of approximately $4,848 per month escalating at 3% per year during the term of the lease plus Florida state sales tax and payment of 10.11% of the buildings annual operating expenses (i.e. common area maintenance) which is approximately $1,679 per month subject to adjustment as provided in the lease.

We believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.

Base rent expense, attributable to the Company’s headquarters facility totaled approximately $30,938 and $19,878 for the three months ended March 31, 2019 and 2018, respectively.

Supplemental balance sheet information related to leases was as follows:

Lease term and discount rate were as follows:

The component of lease costs were as follows:

Supplemental disclosures of cash flow information related to leases were as follows:

Maturities of lease liabilities were as follows as of March 31, 2019:

On August 7, 2017 the Company entered into an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”), a German-based company engaged in the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean (the “Territory”). Pursuant to an intercompany assignment, Brownie’s High Pressure Compressor Services, Inc., our newly-formed wholly-owned subsidiary (“BHP”), is party to the agreement. Through BHP we expect to conduct business and build the brand name “L&W Americas/LWA”, establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. Under the terms of the agreement, we were granted a non-exclusive, non-transferrable and irrevocable right to use certain of L&W’s trademarks in connection with the marketing, use, sale and service of the products in the Territory. The agreement is for an initial term of five years, and will automatically renew for one additional five year term unless terminated by either party upon one year written notice prior to the expiration of the then current term. Either party may terminate the agreement without cause upon one year prior written notice to the other party. In addition, L&W may terminate the agreement for cause upon 120 days prior notice to us, subject to certain cure periods.

In May 2018 the Company entered into an agreement with an employee to pay him $28 an hour in cash and $10 per hour in common stock not to exceed 40 hours a week. The stock price is determined at the end of each month using the 10-day weighted average of the stock price. As of March 31, 2019 the Company has not issued all of the common stock to the employee and has recorded a liability of $6,206.

Common Stock

The Company had 218,119,561 and 161,086,228 common shares outstanding at March 31, 2019 and December 31, 2018, respectively.

In December 2018, the Company issued 20,000,000 shares of common stock to our CEO as an incentive bonus. As the shares are subject to continued employment by the CEO through January 2, 2020, the Company has treated the shares as issued but not as yet outstanding. Expense for the issuance is being recognized over the full vesting period, and accordingly, the Company recognized stock compensation expense of $10,576 as of December 31, 2018. During the three months ended March 31, 2019 the Company recognized additional stock compensation expense of $45,876. The Total amount of expense recorded as of March 31, 2019 is $56,452.

On August 1, 2017, Mr. Mikkel Pitzner was appointed by the Company’s board of directors to serve on the Company’s board of directors, filling a vacancy on the board. Mr. Pitzner shall serve on the board of directors and shall hold office until the next election of directors by stockholders and until his successor is elected and qualified or until his earlier resignation or removal. The Company has agreed to pay Mr. Pitzner an annual fee of $6,000 and has issued Mr. Pitzner 3,333,333 shares of restricted common stock valued at $31,250 under a consulting agreement expiring in January 2019. In December 2018, Mr. Pitzner was issued 708,287 common shares in payment of accrued director fees through December 31, 2018. The shares were valued at $0.0195 per share, totaling $13,812, the fair value on the date of grant. During the three months ended March 31, 2019 the Company recorded $31,275 of stock compensation pursuant to this agreement.

In January 2019, the Company entered into an investment banking and corporate advisory agreement. The term of the agreement is for one year and provided for compensation of 2,700,000 common shares with a fair value of $29,700 plus related expenses. The shares were issued in February and March 2019. For the three months ended March 31, 2019 the Company expenses $7,400 in stock compensation.

In January 2019, the Company issued 1,000,000 common shares with a fair value of $12,500 to a consultant for general administrative advisory services, of which $7,500 was expensed during the three months ended March 31, 2019.

In March, 2019 we issued an accredited investor, a unit of the securities of the Company, with the unit consisting of 50,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 eighteen month common stock purchase warrants exercisable at $0.01 per share in consideration of $500,000. The Company intends to use the proceeds from the sale for product research and development and working capital purposes. The Company did not pay any fees or commissions in connection with the sale of the unit.

Preferred Stock

During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock. The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of the Florida Business Corporation Act. 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, 2017,March 31, 2019 and December 31, 2016,2018, 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 Florida law. Accordingly, Mr. Carmichael will have approximately 55% 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 fulfill the sales terms of some of our customers, which require the insurance coverage. As of August 15, 2017, the Company has obtained Product Liability Insurance, although prior claims are not covered under the new policy. The policy is already prepaid and will remain in effect until its renewal date of August 14, 2018.

As previously disclosed, the Company and Trebor were co-defendants under an action filed by an individual in September 2013 in the Circuit Court of Broward County claiming personal injury resulting from use of a Brownie’s Third Lung. Plaintiff claimed damages in excess of $1,000,000. This matter was settled during the three months ended September 30, 2016 by the Company’s insurance carrier at no additional cost to the Company.Equity Incentive Plan

In addition, as previously disclosed, the Company, Trebor and other third parties, are each named as co-defendants under an action filed in March 2015 in the Circuit Court of Broward County under Case No. CACE15-03238 by the Estate of Ernesto Rodriguez, claiming wrongful death and products liability resulting in the decedent’s drowning death while using a Brownie’s Third Lung product. This claim falls outside the Company’s period of insurance coverage. Plaintiff has claimed damages exceeding $1,000,000. A default judgment was entered against Trebor in 2015 due to its failure to timely respond to the complaint. The Company has obtained different legal representation in this matter and attempted to have the default set aside. On November 2, 2016, the court granted plaintiff’s motion for sanctions against our company for frivolous litigation relating to our attempt to have the matter dismissed and granted the plaintiff’s motion to strike our motion for summary judgment due to our initial default. The Company believes the claim to be a Workers Compensation claim relating exclusively against other non-affiliated defendants and without merit, and will aggressively defend this action and to appeal the default judgment. In the event Trebor is unable to overturn the default judgment and the defendants are determined to be at fault, we would seek to allocate damages among all of the other parties, including the plaintiff. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated due to the undetermined validity of any claim or claims made by plaintiff and the mitigating factors among the parties. Therefore, the Company has not recorded reserves and contingent liabilities related to this matter. However, in the future, as the case progress, the Company may be required to record a contingent liability or reserve for these matters.

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 $2,000 per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term. We believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Base rent expense attributable to the Company’s headquarters facility totaled approximately $30,000 and $12,000 for the three-month periods ending September 30, 2017 and 2016 and $54,000 and $36,000 for the nine-month periods ending September 30, 2017 and 2016, respectively.

The following is an estimate of future minimum rental payments required under our lease agreement on August 14, 2014 and as amended December 1, 2016 :

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 Non-statutory 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 maximum number of shares that may be issued under the Plan was 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 was ten years. The Plan expired on August 22, 2017. All 297 options issued under the Plan remain outstanding.had expired as of March 31, 2019.

Equity Compensation Plan Information as of December 31, 2018.

Equity Compensation Plan Information as of March 31, 2019.

On November 2, 2012,In April, 2019, the Board of Directors consentedCompany reached a settlement agreement with a customer regarding returned merchandise agreeing 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.refund $65,000. The Company accrued operating expense ratably fromdetermined the timereturned merchandise had little or no value and the adjustment was charged to Cost of the awards through May 2, 2013, when vested. Of the 61,852 vested shares, only 5,185 were issued. On April 29, 2016, the Board of Directors determined it was not in the best interest of eitherRevenues at December 31, 2018. In addition, the Company or the recipients to pay bonuses based on the current and foreseeable share price and cancelled the bonuses payable.

On August 1, 2017, Mikkel Pitzner, was appointed by the Company’s board of directors to serve on the Company’s board of directors, filling a vacancy on the board. Mr. Pitzner shall serve on the board of directors and shall hold office until the next election of directors by stockholders and until his successor is elected and qualified or until his earlier resignation or removal. The Company has agreed to pay Mr. Pitzner an annual fee of $6,000 and has issued Mr. Pitzner 2,000,000 shares of restricted common stock valued at $25,000. 

On August 1, 2017 the Company entered into six month advisory agreement with Wesley P. Siebenthal to provide certain advisory services to the Company and serve as its Chief Technology Advisor. As compensation for the services, the Company issued him 2,000,000 shares of its common stock valued at $25,000.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On August 1, 2017, the Company entered into a six month employment agreement with Blake Carmichael, the son of the Company’s chief executive officer and an electrical engineer, to serve as the Company’s products development manager, electrical engineer and marketing team member. Under the terms of the employment agreement,recognized $1,500 in addition to a monthly salary of $3,600, the Company issued Mr. Carmichael 2,000,000 shares of common stock valued at $25,000. Mr. Carmichael is also entitled to performance bonuses at the discretion of the board of directors.

Effective August 1, 2017, the board of directors issued Mr. Robert Carmichael, the Company’s chief executive officer, chief financial officer and member of the Company’s board of directors, 2,000,000 shares of restricted common stock valued at $25,000related legal fees in consideration of serving on the Company’s board of directors.

As of September 30, 2017, a total of $66,393 share-based compensation was recorded. The share-based compensation of $50,000 was for the two directors, Robert Carmichael and Mikkel Pitzner. The remaining $16,393 share-based compensation was for two service contracts with an employee and an advisor. Since the Company has six months agreements with each share recipient, a prepaid compensation of $33,607 was recordedthis matter as of September 30, 2017.December 31, 2018.

For the three months ended September 30, 2017, non-related parties interest expense of $7,750 is comprised of interest on convertible debentures. For the three months ended September 30, 2016, non-related parties interest expense of $7,734 is comprised of $7,695 interest on convertible debentures and $39 interest on notes payable and other interest. 

For the nine months ended September 30, 2017, non-related parties interest expense of $23,140 is comprised of interest on convertible debentures. For the nine months ended September 30, 2016, non-related parties interest expense of $23,251 is comprised of $23,093 interest on convertible debentures and $158 interest on notes payable and other interest.

For the three months ended September 30, 2017, $6,712 other expense, net is comprised primarily of $7,750 of interest expense, and $1,038 of other income. For the three months ended September 30, 2016, $3,173 other income, net is comprised primarily of $2,273 from the expiration of online training liability certificates and no other individually significant items

For the nine months ended September 30, 2017, $20,895 other expense, net is comprised primarily of $23,140 of interest expense, and $2,245 of other income. For the nine month ended September 30, 2016, is comprised primarily of $23,823 of interest expense, and $274,117 of other income.

Subsequent to the third quarter of 2017, the Company received gross proceeds of $60,000 pursuant to the sale of 1,304,348 Units at $0.046 per Unit, each Unit consisting of four shares of common stock, par value $0.0001 per share and one two year common stock purchase warrant exercisable at $0.0115 per share.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introductory Statements

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

Overview

Brownie’s Marine Group, Inc., a Florida corporation (referred to herein as “BWMG”, “the Company”, “we”, or “Brownie’s”“BWMG”), does businessdesigns, tests, manufactures and distributes recreational diving, yacht based scuba air compressor and nitrox generations systems, and water safety products through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation and Brownie’s High Pressure Compressor Services, Inc., 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 located in Pompano Beach, Florida.

On The Company does business as (dba) Brownie’s Third Lung, the dba name of Trebor Industries, Inc. In August 7, 2017, the Company entered intoorganized Brownie’s High Pressure Compressor Services, Inc., a wholly-owned subsidiary (“BHP”). Through BHP we are party to an Exclusive Distribution Agreement with Lenhardt & Wagner GmbH (“L&W”&W”), a German-based company engaged in the development, manufacturing and sales of high pressure air and industrial gas compressor packages. Under the terms of the Exclusive Distribution Agreement,Through this agreement we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean (the “Territory”). Pursuantintend to an intercompany assignment, Brownie’s High Pressure Compressor Services, Inc., our newly-formed wholly-owned subsidiary (“BHP”), is party to the agreement. Through BHP we expect to conduct business and build the brand name “L&W Americas/LWA”, establishingestablish sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries. Our goal will be to build a network of jobbers, dealers, installers and high-pressure compressor distributors throughout the Territory by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product OEM integration relationships.

The Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”. The Company’s website iswww.browniesmarinegroup.comwww.Browniesmarinegroup.com.. Information contained on the website is not a part of this report.

Mr. Robert Carmichael, our Chief Executive Officer, has operated Trebor as its President since 1986. Since April 16, 2004, Mr.Carmichael has served as President, Acting Principal Accounting Officer and Acting Chief Financial Officer ofIn December 2017, the Company. From March 23, 2004 to April 16, 2004, Mr. Carmichael served as the Company’s Executive Vice-President and Chief Operating Officer.Company formed a new wholly-owned subsidiary BLU3, Inc. The Company was organized under the laws of the State of Nevadaformed to develop and effective October 22, 2015, the Company reincorporatedmarket an innovation electric shallow dive system that is completely portable to the Stateuser. As of Florida pursuant to a plan of conversion, effective October 22, 2015.

The Company’s diving and marine based products are generally marketed underMarch 31, 2019 there were as yet no operations, other than research expenditures, in the Brownie’s Third Lung, Brownie’s Tankfill, and Brownie’s Public Safety trade names.new company.

Results of Operations for the Three Months Ended September 30, 2017,March 31, 2019 as Compared to the Three Months Ended September 30, 2016March 31, 2018

Net revenues.For the three months ended September 30, 2017,March 31, 2019, we had net revenues of $795,270 as compared to net revenues of $837,984 for$521,453, a 1% increase over the three months ended September 30, 2016, a decreaseMarch 31, 2018. The bulk of $42,714 or 5%. The small decrease is primarilythis increase was attributable to a decreaseincrease in sales of are Brownies Third Lung due to product modification and change in pricing. While there can be no assurance, the Company expects revenues to increase in the future due to increase in our hookah systemscustomer base, product modifications which we anticipate will result in additional sales and related productsunder the Exclusive Distribution Agreement with L&W. The sales for our subsidiary, BHP declined by 16% compared to non-related parties. Tankfill and Nitrox sales to related parties had a slight decrease of 8% for the three months ended September 30, 2017 comparedMarch 31, 2018. We had an increase in the customer base for LWA but the increase was in one time buyers for their yachts. Last year we sold more to 2016. This changewholesalers than to one time buyers. Therefore, the price per item sold was lower this year resulting in decrease in sales and customer mix is not believed to berevenue. Related party revenues declined by approximately 12% between periods as a result of a decrease in demand in recreational dive products primarily attributable to any particular sales trend or competitive pressures but rather normal fluctuationsthe unfavorable weather conditions for boating and diving.

As of March 31, 2019, there were no revenues recognized in market demand.BLU3, as we expect to deliver our first pre-orders of our NEMO product in the third quarter of 2019. Our BLU3 products are currently in the development stage. However, the Company has been incurring engineering and development costs. In connection with this project, in April 2018, the Company entered into a patent license agreement contracting for certain intellectual property rights which we believe will enhance the capabilities of our portable shallow dive system currently under development.

In November 2018, the Company announced its crowdfunding “Kick Starter” program for the NEMO system which was successfully concluded, preselling approximately 350 units, which has resulted in proceeds, net of related costs, of approximately $112,000. This amount, coupled with additional funds raised subsequent to December 31, 2018, is considered sufficient to commence commercial production of the NEMO product line in the second quarter 2019.

Cost of net revenues. Cost of net revenues remained relatively constant during the third quarter 2017 compared to the third quarter 2016 representing, 65% of total net revenues compared to 64% for the prior year.

Gross profit. For the three months ended September 30, 2017, we had a gross profit of $278,482 as compared to gross profit of $300,147 for the three months ended September 30, 2016, a decrease of 7% totaling $21,665. This decrease resulted from the 5% decrease in total net revenues.

Operating expenses. Operating expenses increased 47% for the three months ended September 30, 2017 compared to the same period of the preceding year due to an increase in selling, general and administrative expenses increase of $63,265 or 39%. The increase in selling, general and administrative expense is mainly due to increase in payroll cost related to the hire of additional employees and stock based compensation cost.

Other (income) expense, net. Other expense, net totaled $6,712 and $5,060 for the three months ended September 30, 2017 and 2016, respectively. Other (income) expense for the three months ended September 30, 2017 was comprised of $1,038 in other income and $7,750 in interest expense. Other (income) expenses for the three months ended September 30, 2016 was comprised of $3,173 in other income and $8,233 in interest expense.

Net Income. For the three months ended September 30, 2017, we had net income of $33,846 as compared to net income of $133,148 for the three months ended September 30, 2016. It should be noted that the net income for the three months of 2016 was attributable to the settlement of a convertible note and related accrued interest. Absent this settlement transaction, we would have had a net loss during the third quarter 2016 of $36,070.

Results of Operations for the Nine months Ended September 30, 2017, as Compared to the Nine months Ended September 30, 2016

Net revenues. For the nine months ended September 30, 2017, we had net revenues of $1,735,662 as compared to net revenues of $1,875,276 for the nine months ended September 30, 2016, a small decrease of $139,614 or 7%. The decrease is primarily attributable to a decrease of 18% in sales of our hookah systems and related products to non-related parties. This decrease was partially offset by Tankfill and Nitrox sales to related parties which had an increase of 2% for the nine months ended September 30, 2017 compared to 2016. This change in sales and customer mix is not believed to be attributable to any particular sales trend or competitive pressures but rather normal fluctuations in market demand.

Cost of net revenues.Cost of net revenues decreased during the ninethree months ended September 30, 2017March 31, 2019, a 5% decrease compared to the ninethree months ended September 30, 2016 representing, 65%March 31, 2018. Due to the nature of total net revenues compareda large portion of our business being dependent on recreational boating and diving, sales are seasonal and often dependent on weather conditions. However, while there can be no assurance, given the formation of BHP in the third quarter 2017, the Company believes that as our operations under the L&W agreement target industrial applications, we will be less susceptible to 71%weather or other seasonal fluctuations.

Operating expenses.Operating expenses, consisting of selling, general and administrative expenses and research and development costs increased sharply between the periods. Selling, general and administrative expenses and research and development costs totaled $349,763 for the three months ended March 31, 2019, an increase of $88,222 or 34% over the prior year. This decrease reflects the company’s cost cutting efforts implementedThe large bulk of this increase in 2016 including a decrease in direct factory labor costsgeneral and modified raw materials purchasing procedures further reducing direct manufacturing costs.

Gross profit.For the nine months ended September 30, 2017, we had a gross profit of $606,180 as compared to gross profit of $550,138 for the nine months ended September 30, 2016, an increase of 10%. This increase resulted from the approximately 6% decrease in cost of revenues over total net revenues as described above.

Operating expenses. Operating expenses increased by 20% for the nine months ended September 30, 2017 compared to the same period of the preceding yearadministrative was due to an increase in Selling, general and administrative expensesthe number of 17%. Theemployees between the periods with an associated increase in selling, generalsalaries and administrative expense is mainly due tobenefits and an increase in payroll costconsulting fees and employee benefits paid in stock totaling $92,051 compared to $25,000 in 2018. Employees were added in large part due to the formation of BHP and BLU3 including , two engineers, a director of marketing and public relations and an additional mechanic. This increase in operating expenses is expected to continue as the Company adds additional production personnel in support of our expanding product lines with LWA and BLU3 and associated administrative support.

While there can be no assurance, the Company believes that the near term costs of “ramping up” its high pressure business, through BHP, and continued development of its BLU3 portable shallow dive system product line will provide the Company with increased product diversity and increase revenues in the future.

Research and development costs were up sharply, increasing to $29,568 during the third quarter relatedthree months ended March 31, 2019, as compared to $6,432 in 2018. This increase of 360% is primarily attributable to our efforts to expand our product lines including our portable shallow dive system currently under development as described above. We expect research and development costs to continue to increase as we continue development of products aimed at increasing what we believe to be new innovative product offerings.

Under the hirepatent license agreement, the Company paid an initial license fee in April 2018 through the issuance of 759,422 shares of common stock with a fair value of $30,000 which is being amortized on a straight line basis over its five year term which resulted in $4,500 in expense being recognized in 2018. During the three months ended March 31, 2019 the Company amortized an additional employees and stock$1,500. The patent license agreement further provides for royalties to be paid based compensation cost.on annual net revenues achieved.

Other (income) expense, net.Other (income) expense net totaled $20,895 inconsisting primarily of interest expense, and ($250,294) in income fordecreased during the ninethree months ended September 30, 2017 and 2016, respectively. Other (income)March 31, 2019, totaling $2,052, a decrease of $14,316 over 2018. In addition, interest expense for the ninethree months ended September 30,March 31, 2018 includes amortization of beneficial conversion features on two notes issued in December 2017 was comprised of $2,245 in other income and $23,140 inrelated interest expense. Other (income) for the nine months ended September 30, 2016 was comprised of transactions that are generally of a non-recurring nature resulting from the settlement of a convertible debenture, and associated interest and an insurance audit adjustment.recognized on these notes.

Net Incomeloss.. For the ninethree months ended September 30, 2017,March 31, 2019, we hadrecognized a net incomeloss of $15,789$264,045 as compared to net incomea loss of $324,063$217,940 for the nine months ended September 30, 2016. It should be noted that the net income for the nine months of 2016comparable period in 2018. This increase in loss was primarily attributable to the settlement of a convertible notesharp increase in general and administrative expenses, including administrative salaries and benefits, research and development costs attributable to increased staffing and related accrued interest. Absent this settlement transaction, we would have had a net loss during the nine months ended September 30, 2016 of $212,301.costs associated with new product development efforts..

Liquidity and Capital Resources

The Company’s current ratio and working capital declined between March 31, 2019 and December 31, 2018. As of September 30, 2017, the CompanyMarch had cash and current assets (primarily consisting of inventory) of $1,162,505$1,436,718 and current liabilities of $860,368$1,183,880 or a current ratio of 1.351.2 to 1. This represents1, representing a working capital surplusbalance of $302,137. This compares to working capital of $102,985 at$252,838. At December 31, 2016.

Net cash used in operating activities totaled $91,434 compared to cash provided by operating activities of $187,030 for2018, the nine months ended September 30, 2017 and 2016, respectively. Net cash used in operating activities during the nine months ended September 30, 2017 included an increase in prepaid and otherCompany had current assets of $133,179, inventory of $34,123, an increase in depreciation of $20,060, a decrease in$966,101 and current liabilities of $37,185,$948,601, or a decrease in royalty payablecurrent ratio also of $937, a decrease in customer deposit of $11,491 and an increase in accounts receivable of $52,541 which was partially offset by an increase in accounts payable and accrued liabilities of $62,530, an decrease in accounts receivable – related parties of $13,250 and shares issued for service totaling $66,393. The Company used $4,131 in financing activities for principal payments on notes and loan payables during the nine months ended September 30, 2017.

1.0 to 1.

The unaudited condensed 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 issuance of these consolidated financial statements. Although we had net incomeWe incurred losses for the ninethree months ended September 30, 2017March 31, 2019 and the years ended2018 of $264,045 and $217,940, respectively. The Company had an accumulated deficit as of March 31, 2019 and December 31, 2016, 20152018 of $10,446,823 and 2014, we have otherwise incurred annual losses since 2009,$10,182,778, respectively.

Because the Company believes that existing operational cash flow may not be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, the Company will continue to raise additional funds as needed and expect weis currently exploring alternative sources of financing. The Company has issued common shares and a number of convertible debentures as an interim measure to finance working capital needs and may have more losses in future periods.continue to raise additional capital through sale of restricted common stock or other securities or obtaining short term loans.

Subsequent to the third quarter of 2017,If the Company received gross proceedsfails 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 $60,000 pursuant tothese uncertainties.

On March 7, 2019 we issued an accredited investor, a unit of the salesecurities of 1,304,348 Units at $0.046 per Unit, each Unitthe Company, with the unit consisting of four50,000,000 shares of common stock, par value $0.0001 per share and one two year50,000,000 eighteen month common stock purchase warrantwarrants exercisable at $0.0115$0.01 per share.share in consideration of $500,000. The Company intends to use the proceeds from the sale for BLU3 product research and development and working capital purposes. The Company did not pay any fees or commissions in connection with the sale of the unit.

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 informationNet cash used in this report 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 had a net incomeactivities totaled $143,069 for the nine month periodthree months ended September 30, 2017, we anticipate that losses may occurMarch 31, 2019. The cash used in the foreseeable future. Additionally, the Company has negative cash flows from operations is behind on payments due for matured convertible debentures.,. 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.. Our continued existence is dependent upon generating working capital and obtaining adequate new debt or equity financing. Because of our historical operational 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, 2017, the outstanding principal balance of these debentures was $312,743. The debentures convert under various conversion formulas, many of which may be 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 Over-the-Counter Markets. 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

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

Our failure to obtain intellectual property and enforce protection would have a material adverse effect on our business

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

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

We may be unable to manage growth

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

Reliance on vendors and manufacturers

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

Dependence on consumer spending

The success of the our business depends largely upon a number of factors related to consumer spending, including current and future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which 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 impact us

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

Bad weather conditions could have an adverse effect on operating results

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

Investors should not rely on an investment in our stock for the payment of cash dividends

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

The manufacture and distribution of recreational diving equipment could result in product liability claims

We, like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or side effects, if any. We do not anticipate obtaining contractual indemnification from parties-supplying raw materials, manufacturing our products or marketing our products. In any event, any such indemnification if obtained will be limited by our terms and, as a practical matter, to the credit worthiness of the indemnifying party. While we currently have product liability insurance, we are a defendant in a wrongful death lawsuit which is not covered by the current insurance policy. See Part II, Item 1 to this report below. 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.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

Our management has previously determined that we did not maintain effective internal controls over financial reporting. For a detailed description of these material weaknesses and our remediation efforts and plans, see “Part II — Item 9A — Controls and Procedures.” If the result of a net loss from operations of $264,045, being offset by certain non-cash expenses including; shares issued for services with a fair value of $92,051, a decrease in inventory and prepaid expenses and other assets of $75,323 and $48,192, an increase in customer deposits and unearned revenue of $16,969 and an increase in accounts payable and accrued liabilities of $142,478. The increase in customer deposits and unearned revenue was due primarily to deposits related to our remediationnewly formed BHP and BLU3 subsidiaries and the introduction of the identified material weaknesses is not successful, or if additional material weaknesses are identified inthese new product lines. As of March 31, 2019, no sales have yet been recorded by our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further implement expensive and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness of our financial reports which could have an adverse effect on our stock price and potentially subject us to litigation.BLU3.

We currently have no independent directors, which poses a risk for us from a corporate governance perspective.

Robert Carmichael, our only executive officer, also serves as our only director. Our director and executive officer is required to make interested party decisions, such as the approval of related party transactions, his level of his compensation, and oversight of our accounting function. Our director and executive officer also exercise substantial control over all matters requiring stockholder approval, including the nomination of directors and the approval of significant corporate transactions. Due to our lack of independent directors, we have not implemented various corporate governance measures, the absence of which may cause stockholders to have more limited protections against transactions implemented by our board of directors, conflicts of interest and similar matters. Stockholders should bear in mind our current lack of corporate governance measures in formulating their investment decisions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable to Smaller Reporting Company.applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. The Company’s management, under the supervision and with the participation of Robert Carmichael, the Company’s Chief Executive Officer who also serves as our principal financial and Chief Financial (and principal accounting) Officer,accounting officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2017.March 31, 2019. Based upon that evaluation and the identification of thecontinuing material weakness in the Company’s internal control over financial reporting as described below under “Management’sin Item 9A. of our Annual Report on Internal Control over Financial Reporting,”Form 10-K for the year ended December 31, 2018 as filed with the SEC on June 7, 2019, the Chief Executive Officer who also serves as our principal financial and Chief Financial Officeraccounting officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.

Management’s We have failed to timely file certain reports with the SEC, including this Quarterly Report on Internal Control over Financial Reporting

Management is responsibleForm 10-Q for establishing and maintaining adequate internal control over financial reporting of the Company. Management, withperiod ended March 31, 2019. We do not expect that the participation ofweaknesses in our principal executive officer and principal financial officer, has evaluateddisclosure controls will be remediated until such time as we remediate the effectiveness ofmaterial weaknesses in our internal control over financial reporting as of September 30, 2017, based on the criteria established in 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles because of the Company’s limited resources and limited number of employees. To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.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) and 15d-15 under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal ProceedingsFrom 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. As of August 15, 2017, the Company has obtained Product Liability Insurance, although prior claims are not covered under the new policy. The policy was renewed and is prepaid through its term and will remain in effect until its renewal date of August 14, 2019.