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, 2017(Mark 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 number 333-99393

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 86,710,793244,502,146 shares of common stock outstanding as ofat November 13, 2017.

18, 2019.

TABLE OF CONTENTS

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Various statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived from utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report, our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on June 7, 2019 and our other filings with the Securities and Exchange Commission in their entirety. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

Unless specifically set forth to the contrary, when used in this report the terms “Brownie’s”, “BWMG,” the “Company,” “we”, “us”, “our” and similar terms refer to Brownie’s Marine Group, Inc., a Florida corporation, and its subsidiaries. In addition, when used in this report, “third quarter of 2019” refers to the three months ended September 30, 2019, “third quarter of 2018” refers to the three months ended September 30, 2018, “2019” refers to the year ending December 31, 2019 and “2018” refers to the year ended December 31, 2018.

We maintain a corporate website atwww.browniesmarinegroup.com. Unless specifically set forth to the contrary, the information which appears on our website at www.browniesmarinegroup.com is not part of this report.

PART I

Item 1. Financial Statements

Financial Information

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.The accompanying notes are an integral part of these unaudited condensed financial statements.

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed financial statements.

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

For The Three Months Ended September 30, 2018 And 2019

For The Nine Months Ended September 30, 2018 And 2019

The accompanying notes are an integral part of these unaudited condensed financial statements.

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

The accompanying notes are an integral part of these unaudited condensed 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 wholly-owned subsidiary (“BHP”BHPCS”)., is party to the agreement. Through BHPBHPCS 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 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 September, 30, 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 periodsNine-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 are2019 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.

Although the Company had We incurred net incomelosses for the nine months ended September 30, 20172019 and the years ended December 31, 2016, 20152018 of $826,315 and 2014, we have otherwise incurred annual losses since 2009, and expect we may have more losses in future periods.$376,935, respectively. The Company had an accumulated deficit as of September 30, 2019 of $11,009,093.

CashBecause 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 equivalents – Only highly liquid investments with original maturitiesis currently exploring alternative sources of 90 daysfinancing. The Company has issued a number of common shares and convertible debentures as an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or less are classified as cash and equivalents. These investments are stated at cost, which approximates market value.other securities or obtaining short term loans.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSIf BWMG fails to raise additional funds when needed, or does not have sufficient cash flows from sales, it may be required to scale back or cease operations, liquidate assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

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 ofknowledge. The allowances for doubtful accounts totaled $8,346 and $9,200 at September 30, 2017, the allowance for bad debts is $22,713.2019 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, 2017 and 2016, totaled $760 and $313, respectively.Advertising and trade show expense incurred for the nine months ended September 30, 20172019 and 2016, was $12,730September 30, 2018, totaled $8,856, $28,853, $12,179 and $3,550,$57,816, 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 endingand nine months ended September 30, 20172019 and 2016September 30, 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 $12,629, $32,346, $76,873 and 2016 the Company incurred $13,935 and $1,425, respectively, of expenses related to research and development costs.$75,522, 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 $286,709 and $245,907 at September 30, 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 September 30, 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 Nine months ended September 30, 2019 the Company increased the reserve has been established.by $1,709 to a total of $10,543.

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

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

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

Comprehensive income – The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods 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 and nine months ended September 30, 2019 and 2018, the Company recognized share based compensation with a fair value of $209,005, $20,966, $357,888 and $53,753 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, 2017,2019 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 September 30, 2019 and September 30, 2018, 103,812,893 and 33,778,441, 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

New accounting pronouncements – In April 2016,June 2018, the FASBFinancial Accounting Standards Board issued ASU No. 2016-15,“Classification2018-7, “Compensation – Stock Compensation” (Topic 718) amending the scope of Certain Cash ReceiptsTopic 718 to include share-based payment transactions for acquiring goods and Cash Payments”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 2016- provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-152018-07 is effective for annual periods beginning after December 15, 2017 with early adoption permitted. We do not believe this ASU will have an 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 effectivepublic entities for fiscal years beginning after December 15, 2016,2018, including interim periods within thosethat fiscal years.year. The adoption of ASU 2016-092018—07 did not have a material effectan impact on our condensed consolidatedoperations, cash flows or financial statements.condition.

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

The recognition of this ASU to determine if there will be anyright of use assets and real estate operating lease liabilities had a material impact on our resultsconsolidated balance sheet presentation. Adoption of operations, cash flows or financial condition.

In July 2015,this standard resulted in additional right of use assets and additional liabilities of approximately $635,613 based on the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11,Inventory (Topic 330),Simplifying the Measurement of Inventory. ASU No. 2015-11 does not apply to inventory measurement using the last-in, last-out (LIFO) or retail methods. ASU No. 2015-11 applies to all other inventory measurement methods, which includes first-in, first-out (FIFO) or average cost. Previously, inventory valuation was at the lower of cost 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 11.

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 STATEMENTSFor the year ended December 31, 2018, the Company recognized an additional reserve for obsolete or slow moving inventory of approximately $100,000. No additional reserve for obsolete or slowing moving inventory during the nine months ended September 30, 2019.

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$4,689 and $20,060$17,798 for the three and nine month periods endingmonths ended September 30, 2017,2019 and $9,197 and $27,157 for the three and nine month periods ending September 30, 2016,2018, respectively.

Other assets of $6,649 at September 30, 20172019 of $21,649 consisted of refundable deposits $6,649 and an unamortized license fee of $15,000. Other assets at 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 monthsnine month periods ended September 30, 20172019 and 2016,2018, represented 27.76%24.69% 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%24.85% 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, Inc., and Brownie’s Yacht Toys, Inc., 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, 2017 and 2016, was $220,363 and $234,368, respectively. Combined net revenues from these entities for nine months ended September 30, 20172019 and 2016, was $582,6832018, totaled $197,982, $213,719, $548,100 and $567,196$510,132, respectively. Accounts receivable from Brownie’s SouthportSouthPort Diver’s, Inc., Brownie’s Palm Beach Divers and Brownie’s Yacht Toys, totaled $51,700 at September 30, 20172019, was $33,734, $3,441 and $58,420,$16,277 respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Brownie’s Palm Beach Divers, and 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 (“3D”) and 940 Associates, Inc. (“940A”), affiliated withentities wholly owned by the Company’s Chief Executive Officer. Terms of sale are more favorable than those extended to BWMG’sthe Company’s regular customers, but no more favorable than those extended to Brownie’sthe Company’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’sthe Company’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 BWMGthe Company on strategic partners’ product or services. BGL is fulfilling the strategic partner terms by providing exposure for BWMG’sthe Company’s technologies and “Brownie’s” brand in the yachting and exploration community world-wide through its operations. Combined net revenues from these two entities for three months ended September 30, 2017, and 2016, were $223 and $5,734, respectively. Combined net revenues from these entities for nine months ended September 30, 2017,2019 and 2016,2018, were $3,289$2,011, $0, $3,339 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.940A totaled $1,873 (net of credit memo of $15,000 for 940A) and $12,603 at September 30, 2019 and December 31, 2018, respectively.

Accounts payable – related parties – The Company had accounts payable to related parties of $150,998 and $125,243 at September 30, 2019 and December 31, 2018, respectively. The balance payable at December 31, 20162018 was $9,819.due to BGL and 940A. The balance payable at September 30, 2019 was due to Brownies Southport, BGL, 940A and directly to our CEO.

Royalties expense – related parties –The Company has an Exclusive License AgreementAgreements with 940 Associates, Inc. (hereinafter referred to as “940A”),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 and nine months and ended September 30, 20172019 and 2016, is2018 as disclosed on the face of the Company’s Condensed Consolidated Statements of Operations totaled $12,761$14,207, $19,137, $38,324 and $20,714, respectively, and$42,532, respectively.

In December 2018, the Company issued 20,000,000 shares of common stock to its Chief Executive Officer 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 and nine months and ended September 30, 2017 and 2016 totaled $42,247 and $46,332, respectively. In November 2016,2019 the Company entered intorecognized additional stock compensation expense of $47,998 and $138,781, respectively. The Total amount of expense recorded as of September 30, 2019 is $149,357.

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 conversion agreement under whichvacancy 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 10,000,000Mr. Pitzner 3,333,333 shares of restricted common stock valued at $31,250 under a 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,nine months ended September 30, 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 due and payable amounts to 940A under the Exclusive License Agreement as of March 1, 2017. Asdirectors. The grant date fair value of the shares issued was $50,200 and were 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 agreement the Company was more than 3 months in arrears on royalty payments due under the Exclusive License Agreement. The shares were issued atyear ended December 31, 2018. Mr. Allen resigned as 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.director effective March 31, 2019.

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 234297 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 a $1,300 auto allowance, for consulting services. These payments are not covered by a written agreement. In August, 2019 the agreement with Mr. Pitzner was terminated.

Effective July 29, 2019 the Company issued options to purchase up to an aggregate of 22,838,094 shares of common stock to two service providers, including Mikkel Pitzner, a member of the Company’s board of directors, and Blake Carmichael, an employee of the Company and son of our CEO. The options were issued pursuant to a stock option grant agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to vesting over a period of six months. The fair value of the options have been exercised to-date.totaled $95,862 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 172%. In August, 2019 8,304,761 options belonging to Mikkel Pitzner were cancelled. Stock option expense recognized during the three and nine months ended September 30, 2019 was $46,873.

Effective July 29, 2019 the Company has agreed to pay the members of the Company’s board of directors an annual fee of $18,000 for serving on the Company’s board of directors for the year ending December 31, 2019. As of September 30, 2019 the Company has accrued $40,500 in board of directors fees.

Effective July 29, 2019 the Company issued its chief executive officer options to purchase up to 20,761,904 shares of common stock. The options were issued pursuant to a Grant Agreement and are exercisable at $0.018 per share for a period of five years from the date of issuance, subject to vesting over a period of six months. The fair value of the options totaled $87,147 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 2.10%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 172%. Stock option expense recognized during the three and nine months ended September 30, 2019 was $58,888.

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 consistsConvertible debentures consist of the following as of September 30, 2017 andat December 31, 2016:2018:

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, 2016:2019:

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

(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. The company has not received any demand of payment or a notice of default from the lender.

(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 December 31, 2018 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 December 31, 2018 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. The policy was renewed through August 14, 2020.

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.

In April 2019, the Company reached a settlement agreement with a customer regarding returned merchandise agreeing to refund $65,000. The Company determined the returned merchandise had little or no value and the adjustment was charged to Cost of Revenues at December 31, 2018. In addition, the Company recognized $1,500 in related legal fees in this matter as of December 31, 2018.

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.

Supplemental balance sheet information related to leases was as follows: