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

[  ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934(Mark One)

For the transition period from _______ to _______.

or

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 [  ] No [X]

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 86,710,793301,010,168 shares of common stock outstanding as of November 13, 2017.

at August 24, 2020.

TABLE OF CONTENTS

EXPLANATORY NOTE

On March 4, 2020, the Securities and Exchange Commission (“SEC”) issued an order (Release No. 34-88318) under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), granting exemptions from specified provisions of the Exchange Act and certain rules thereunder. On March 25, 2020, the order was modified and superseded by a new SEC order (Release No. 34-88465) that provides conditional relief to public companies that are unable to timely comply with their filing obligations as a result of the COVID-19 outbreak (the “Order”).

Brownie’s Marine Group, Inc. (the “Company”) is filing this Quarterly Report on Form 10-Q for the period ended March 31, 2020 (the “10-Q”) in reliance on the Order due to circumstances related to the COVID-19 pandemic. Pursuant to the requirements of the Order, the Company filed a Current Report on Form 8-K with the SEC on May 13, 2020 to delay the filing of the 10-Q. The impact of COVID-19 on the Company’s operations resulted in delays in the receipt, compiling and processing of information necessary for the preparation of its Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 10-K”), which such report was filed with the SEC on June 26, 2020. The delay in filing the 2019 10-K has resulted in additional delays in the receipt, compiling and processing of information necessary for the preparation of the 10-Q.

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 2019 10-K 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 “BWMG,” the “Company,” “we,” “our,” “us,” and similar terms refers to Brownie’s Marine Group, Inc., a Florida corporation, and our wholly owned subsidiaries, Trebor Industries, Inc., a Florida corporation (“Trebor”), Brownie’s High Pressure Compressor Services, Inc. (“BHP”), a Florida corporation, and BLU3, Inc., a Florida corporation (“BLU3”). In addition, “First Quarter 2019” refers to the period ended March 31, 2019, “First Quarter 2020” refers to the period ended March 31, 2020, “2019” refers to the year ended December 31, 2019 and “2020” refers to the year ending December 31, 2020.

We maintain a corporate website at www.browniesmarinegroup.com. Unless specifically set forth to the contrary, the information which appears on our websites or our social media platforms 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

The following unaudited interim consolidated financial statements of the Company have been prepared in accordance withpursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”). In the opinion for complete annual financial statements. The information furnished reflects all adjustments, consisting only of management all normal recurring adjustments considered necessary to give a fair presentation of 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 periods ended September 30, 2017 and 2016items which are, unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary in order to present fairlymake 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.not misleading. The condensed consolidated results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the entire year. The consolidated balance sheet as of December 31, 20162019 has been derived from the Company’s auditedannual financial statements for the year ended December 31, 2016. While managementthat were audited by an independent registered public accounting firm but does not include all of the Company believes that the disclosures presented are adequate to make the information not misleading, these condensed consolidatedand footnotes required for complete annual financial statements. These financial statements should be read in conjunction with ourthe audited consolidated financial statements and the footnotesnotes thereto which are included in our Annual Report on Form 10-K for the fiscal year endedending December 31, 2016 as2019 filed with the SecuritiesSEC on June 26, 2020 for a broader discussion of our business and Exchange Commission as partthe risks inherent in such business.

Principles of Consolidation

The consolidated financial statements include the accounts of BWMG and its wholly owned subsidiaries, Trebor, BHP and BLU3. All significant intercompany transactions and balances have been eliminated in consolidation.

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 are estimated based on historical customer experience and industry knowledge. The allowances for doubtful accounts totaled $12,090 and $17,784 at March 31, 2020 and December 31, 2019, respectively.

Revenue Recognition

We account for revenues in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” and all the related amendments. This standards core principal 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.

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 repair and maintenance activities is recognized when the repairs are completed and the units have been shipped.

Lease Accounting

On January 1, 2019, we adopted ASC 842 and all the related amendments using the modified retrospective method. We recognized the cumulative effect of initially applying the new lease standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the lease accounting standard in effect for those periods.

The lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts entered into prior to adoption are leases or contain leases.

We categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that would allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in property and equipment, net. All other leases are categorized as operating leases. We did not have any finance leases as of March 31, 2020. Our leases generally have terms that range from three years for equipment and five to twenty years for property. We elected the accounting policy to include both the lease and non-lease components of our agreements as a single component and account for them as a lease.

Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.

When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.

For the three months ended March 31, 2020 and 2019 the lease expense was approximately $35,000 and $41,500. For the three months ended March 31, 2020 and 2019 cash paid for operating liabilities was approximately $31,803 and $30,938, respectively

Supplemental balance sheet information related to leases was as follows:

Employee Stock-Based Compensation:

The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. The Company has elected to adopt ASU 2016-09 and has a policy to account for forfeitures as they occur.

Non-Employee Stock-Based Compensation:

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The adoption of ASU 2018-07 did not have a material impact on the Company’s Form 10-Kconsolidated financial statements.

The Company accounts for stock-based compensation awards to non-employees in accordance with ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which was filedaligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.

All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on April 17, 2017.the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if the Company had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed.

Earnings per common share

Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. At March 31, 2020 and March 31, 2019, 87,389,986 and 68,386,823, respectively, of potentially dilutive shares were 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 conversion of preferred stock.

Recent accounting pronouncements

The recent accounting standards that have been issued or proposed by the Financial Accounting Standards Board (FASB) or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

Definition of fiscal yearNote 3. Going Concern – The Company’s fiscal year end is December 31.

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications– Certain reclassifications 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 For the three months ended March 31, 2020 the Company hadincurred a net income forloss of $296,693, has an accumulated deficit of $11,901,211 and a working capital deficit of $439,000. These circumstances raise substantial doubt as to the nine months ended September 30, 2017Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to increase revenues, control expenses, raise capital, and to continue to sustain adequate working capital to finance its operations. The failure to achieve the years ended December 31, 2016, 2015necessary levels of profitability and 2014, we have otherwise incurred annual losses since 2009, and expect we may have more losses in future periods.cash flows would be detrimental to the Company. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 4. Cash and equivalentsRelated Party Transactions – 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.

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 is estimated based on historical customer experience and industry knowledge, as of September 30, 2017, the allowance for bad debts is $22,713.

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, equipment and leasehold improvements – Property, equipment and leasehold improvements are 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 – Revenues from product sales are recognized when the Company’ssells products are shipped or when service is rendered. Revenues from fixed-price contracts are recognized on 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.

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

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

Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the three months ended September 30, 2017 and 2016, totaled $760 and $313, 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, 2017 and 2016 the Company incurred $12,730 and $10, respectively, of expenses related to research and development costs. During the nine month periods ending September 30, 2017 and 2016 the Company incurred $13,935 and $1,425, respectively, of expenses related to research and development costs.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Customer deposits and returns policy – The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems. The remaining balance due is payable upon delivery, shipment, or installation of the system. There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product. Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice. The Company provides our customers with an industry standard one year warranty on systems sold. Historically, the cost of our warranty policy has been immaterial, and no reserve has been established.

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.

Beneficial conversion features on convertible debentures – The fair value of the stock upon which beneficial conversion feature (BCF) computations, as applicable, was determined through use of the quoted stock price.

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

Earnings per common share – Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings per share are 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 dilutive shares are included in dilutive earnings per share totaled 58,156,862 for the nine months ended September 30, 2017.

New accounting pronouncements – In April 2016, the FASB issued ASU No. 2016-15,“Classification of Certain Cash Receipts and Cash Payments”ASU 2016- provides guidance regarding the classification 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. 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 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 be 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 will be any impact on our results of operations, cash flows or financial condition.

In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11,Inventory (Topic 330),Simplifying the Measurement of Inventory. ASU No. 2015-11 does not apply to inventory measurement using the last-in, last-out (LIFO) or retail methods. ASU No. 2015-11 applies to all other inventory measurement methods, which includes first-in, first-out (FIFO) or average cost. Previously, inventory valuation was at the lower of cost or fair market value. This ASU changes the valuation to lower 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.

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 financial statements.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inventory consists of the following as of:

Depreciation and amortization expense totaled $2,219 and $20,060 for the three 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, respectively.

Other assets of $6,649 at September 30, 2017 and December 31, 2016, respectively, consisted solely of refundable deposits.

The Company sells to three (3) entities owned by the brother of the Mr. Robert M. 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. RELATED PARTIES TRANSACTIONS. Combined sales to these six (6) entities for the three months ended September 30, 2017 and 2016, represented 27.76% 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% respectively, of total net revenues.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. Combinedvolumes. These entities accounted for 24.6% and 26.5% of the net revenues from these entities for the three months ended September 30, 2017March 31, 2020 and 2016, was $220,363 and $234,368, respectively. Combined net revenues from these entities for nine months ended September 30, 2017 and 2016, was $582,683 and $567,1962019, respectively. Accounts receivable from Brownie’s Southport Diver’s, Inc., Brownie’s Palm Beach Divers,these entities totaled $43,718 and Brownie’s Yacht Toys totaled $51,700$44,442, respectively, at September 30, 2017March 31, 2020 and $58,420, at December 31, 2016, 2019.

The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”), 3D Buoy and 940 Associates, Inc. (“940 A”), affiliated with the Company’s Chief Executive Officer.entities wholly-owned by Mr. Carmichael. 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 product or services not offered for resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services. BGL is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and “Brownie’s” brand in the yachting and exploration community world-wide through its operations. Combined net revenues from these 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, and 2016, were $3,289 and $7,666, respectively. Accounts receivable from these threethe combined entities and Mr. Carmichael totaled $5,175, and $4,320 at September 30, 2016 was $2,146. Accounts receivable from BGL, 3D BuoyMarch 31, 2020 and 940 Associates, Inc. at September 30, 2017 was $3,289, respectively. Accounts receivable from BGL, 3D Buoy and 940 Associates, Inc. at December 31, 2016 was $9,819.2019, respectively.

Royalties expense –The Company had accounts payable to related parties –of $240,238 and $263,544 at March 31, 2020 and December 31, 2019, respectively. The balance payable at March 31, 2020 and December 31, 2019 was due to BGL.

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,A 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 forExclusive License Agreement provides that the Company towill pay 940A940 A 2.5% of gross revenues per quarter.quarter as a royalty. Total royalty expense for the above agreements for the three months ended March 31, 2020 and ended September 30, 2017March 31, 2019 was $4,850 and 2016, is disclosed on$10,223, respectively.

Effective July 29, 2019 the faceCompany has agreed to pay the members of the Company’s Condensed Consolidated StatementsBoard of Operations totaled $12,761 and $20,714, respectively, andDirectors, including Mr. Robert M. Carmichael, a management director, an annual fee of $18,000 for serving on the Company’s Board of Directors for the nine months and ended September 30, 2017 and 2016 totaled $42,247 and $46,332, respectively. In November 2016,year ending December 31, 2019. As of December 31, 2019, the Company entered into a conversion agreement under whichhas accrued $49,500 in Board of Directors’ fees. As of March 31, 2020, the Company issued 10,000,000 shareshad accrued another $9,000 in Board of restricted common stock in satisfaction of $88,850 past due and payable to 940A. As of the date of the conversion agreement, the Company was more than 31 months in arrears on its royalty payments totaling approximately $151,000. In addition, 940A agreed 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 conversion 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.Directors’ fees.

Note 5.COVID-19 Pandemic

On March 1, 2017,11, 2020, the CompanyWorld Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and 940A entered intothe rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have begun to have a significant adverse impact upon many sectors of the economy, including retail commerce.

In response to these measures, the “stay at home” order issued in April 2020 by the Governor of the State of Florida where our business is located, and for the protection of our employees and customers, we temporarily reduced non-essential staffing at our corporate office and altered work schedules at our manufacturing and warehouse facilities. In addition, some of our senior management and our office personnel began working remotely and maintaining full capabilities to serve our customers. Earlier, in mid-March 2020 we had taken steps to increase production to build up our finished goods inventory as well as purchasing additional raw material inventory items thereby allowing us to maintain production if supply chain interruptions were to happen. During the beginning of the second conversion agreement. Underquarter of fiscal 2020 we experienced an impact on our sales to our brick and mortar customers as many of the agreementretail dealer stores temporarily closed. In response, we ramped up our direct to consumer engagement. On May 4, 2020 the Florida “stay at home” order was lifted and the phased reopening of the State of Florida began. We have resumed all of our historic operations, and all personnel have returned to full time work at our corporate office and manufacturing and warehouse facilities. In addition, our historic attendance at boat shows and similar marketing events has been an important part of our marketing and sales strategy. As we do not expect that those type of events will be held in 2020 as a result of the COVID-19 pandemic, we have migrated our marketing focus to online marketing in an effort to maintain product visibility.

While we are not able to estimate the ultimate impact of the COVID-19 pandemic on our financial condition and future results of operations, depending on the prolonged impact of the COVID-19 outbreak, this situation had a significant adverse effect on our reported results of operations for the three months ended March 31, 2020. The extent to which the coronavirus impacts our results and financial condition, however, will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge and the actions to contain and treat its impacts, among others.

Note 6. Convertible Debentures and Notes Payable

Convertible Debentures

Convertible debentures consisted of the following at March 31, 2020:

In February 2020 the Company issued 12,500,000 shares related to the exercise of warrants at a $1,350an exercise price expiring ten years from the effective date of grant, or March 2, 2019. None$.01, for a total conversion price of $125,000. The shares were issued to Mr. Hyatt, a member of the options have been exercised to-date.Board of Directors.

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 ofPreferred Stock:

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:

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 BCF of the convertible debenture at $4,286, which was accreted to interest expense.

(3) The Company entered into three new debenture agreements upon sale or assignment by the original lender. Because the stated terms of 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.

The conversion price under the debentures is $0.37125 and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 blank check preferred stock. The blank check 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 grantsIn April 2011 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, and December 31, 2016, theDirectors designated 425,000 shares of the blank check 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 areas Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into 31,481 sharesa share 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%at any time at the option of the combined voting powerholder at a conversion price of the Common$18.23 per share. Holders of shares of Series A Convertible Preferred Stock are entitled to 250 votes for each share held. The Company’s common stock and Series A Convertible Preferred Stock votingvote together as a single class and will control the outcome ofon any corporate transaction or other mattermatters submitted to theour 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.vote. As of August 15, 2017,March 31, 2020 and December 31, 2019, the Company has obtained Product Liability Insurance, although prior claims425,000 shares of Series A Convertible Preferred Stock 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.owned by Mr. Carmichael.

As previously disclosed,Options

Effective July 29, 2019 the Company issued options to purchase up to an aggregate of 10,380,952 shares of common stock to Blake Carmichael, an employee of the Company and Treborson of our CEO. The options were co-defendants under an action filed by an individual in September 2013 inissued pursuant to a stock option grant agreement and are exercisable at $0.018 per share for a period of five years from the Circuit Courtdate of Broward County claiming personal injury resultingissuance, subject to vesting over a period of six months. The fair value of the options totaled $43,575 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 ended March 31, 2020 was $5,362.

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 usethe date of issuance, subject to vesting over a Brownie’s Third Lung. Plaintiff claimed damages in excessperiod of $1,000,000. This matter was settledsix 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 2.01%, ii) expected life of 5 years, iii) dividend yield of 0%, iv) expected volatility of 172%.

Stock option expense recognized during the three months ended September 30, 2016 byMarch 31, 2020 was $10,724.

Effective January 6, 2020 the Company issued options to purchase up to 2,000,000 shares of common stock to Jeffrey Guzy, a Director of the Company. The options were issued pursuant to a stock option grant agreement and is exercisable at $0.0229 per share for a period of three years from the date of issuance. The options were immediately vested. The fair value of the options on the date of the grant was $40,107 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 1.55%, ii) expected life of 1.5 years, iii) dividend yield of 0%, iv) expected volatility of 250%. Stock option expense recognized during the three months ended March 31, 2020 for this option was $40,107.

Effective January 11, 2020 the Company issued options to purchase up to 2,000,000 shares of common stock to BizLaunch Advisors, LLC. The options were issued pursuant to a professional services agreement and are exercisable at $0.0229 per share for a period of three years from the date of issuance. The options were immediately vested. The fair value of the options on the date of the grant was $40,097 using the Black-Scholes option pricing model with the following assumptions: i) risk free interest rate of 1.54%, ii) expected life of 1.5 years, iii) dividend yield of 0%, iv) expected volatility of 250%. Stock option expense recognized during the three months ended March 31, 2020 for this option was $40,097.

A summary of the Company’s insurance carrierstock option as of December 31, 2019, and changes during the three months ended March 31, 2020 is presented below:

Warrants

A summary of the Company’s warrants as of December 31, 2019, and changes during the three months ended March 31, 2020 is presented below:

On February 25, 2020, Mr. Charles F. Hyatt, a member of the Company’s Board of Directors, partially exercised a warrant for the acquisition of 12,500,000 shares at no additional cost$.01 per share, for proceeds to the Company.Company of $125,000.

In addition, as previously disclosed, the Company, TreborNote 8. Commitments 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.contingencies

On August 14, 2014, the Company entered into a newthirty-seven-month term lease commitment. Terms of the new lease include thirty-seven-month termfor its initial facilities in Pompano Beach, Florida, commencing on September 1, 2014;2014. Terms included 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 iswas 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.

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.

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. This claim was settled in June, 2020 for $50,000, and further modified on August 25, 2020 into a lump sum payment of 88.4% of the original settlement amount. The Company has recorded $50,000 of accrued legal settlement as of March 31, 2020 and December 31, 2019.

Note 9. Segment Reporting

The Company has three operating segments as described below:

1. Legacy SSA Products, which sells recreational hookah diving systems.

2. High Pressure Gas Systems, which sells high pressure air and industrial gas compressor packages.

3. Ultra Portable Tankless Dive Systems, which sells next generation electric surface supply air diving systems and electric shallow dive system that are battery operated and completely portable to the user.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNote 10. Subsequent Events

Base rent expense attributableBetween April 1, 2020 and June 10, 2020 the Company issued an aggregate of 330,636 shares of common stock to an employee for services performed in December 2019 and the first five months of 2020.

On April 14, 2020, the Company received a purchase order from a third-party to mature the design into a functional ventilator prototype. BLU3 Vent emerged as the first in the Hack-a-Vent challenge to pass through preliminary testing at Uniformed Services University to confirm feasibility to treat an ARDS inflicted patient. BLU3 Vent has been submitted initial documents for a review with the FDA at the direction and with the support of the Wright Brothers Institute (WBI) under an additional purchase order issued May 12, 2020. The project is currently on standby as the urgent demand for emergency use ventilators has declined. The team is working with WBI to be prepared in case a major demand for ventilators returns.

On April 2, 2020 Mr. Hyatt exercised an additional portion of an outstanding common stock purchase warrant representing 10,000,000 shares of common stock. The Company received proceeds of $100,000 upon such exercise.

On April 10, 2020 the Company sold an aggregate of 20,000,000 shares of its common stock at a purchase price $0.025 per share to accredited investors, including Mr. Hyatt, in a private transaction, resulting in proceeds 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.Company of $500,000.

On April 14, 2020 the Company entered into a Non-Qualified Stock Option Agreement with Mr. Carmichael (the “Carmichael Option Agreement”). Under the terms of the Carmichael Option Agreement, as additional compensation the Company granted Mr. Carmichael an option (the “Carmichael Option”) to purchase up to an aggregate of 125,000,000 shares of the Company’s common stock at an exercise price of $.045 per share, of which the right to purchase 75,000,000 shares of common stock is subject to vesting upon the achievement of the net revenue milestones set forth below (the “Net Revenue Portion of the Option”) and the right to purchase 50,000,000 shares of common stock is subject to vesting upon official notice of the listing of the Company’s common stock on The following is an estimateNasdaq Stock Market, the NYSE American LLC or similar stock exchange. The Net Revenue Portion of future minimum rental payments required under our lease agreement on August 14, 2014 andthe Option shall vest as amended December 1, 2016 :follows:

On August 22, 2007,The Carmichael Option Agreement provides that the Carmichael Option is exercisable by Mr. Carmichael on a cashless basis. The Carmichael Option is not transferrable by Mr. Carmichael, and he must remain an employee of the Company adoptedas an Equity Incentive Plan (the “Plan”). Underadditional term of vesting. Once a portion of the Plan, Stock Options may be grantedCarmichael Option vests, it is exercisable by Mr. Carmichael for 90 days. Any portion of the Carmichael Option which does not vest during the Net Revenue Period lapses and Mr. Carmichael has no further rights thereto.

On April 9, 2020 the Company entered into an Investor Relations Consulting Agreement with HIR Holdings, LLC pursuant to employees, directors, and consultants inwhich 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 underCompany engaged 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 grantedfirm 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.provide investor relations services. The term of the Plan was ten years. The Plan expired on August 22, 2017. All 297 options issued under the Plan remain outstanding.

On November 2, 2012, the Boardagreement is for a minimum guaranteed period of Directors consented to grant equity based bonuses to certain key employeessix months, and consultants as an incentive to retain their services. Stock incentive bonuses were to vest, and be paid out on May 2, 2013, contingentthereafter is cancellable by either party upon continued employment or service. The stock bonus price per share was calculated based on last closing price as reported on per the OTCBB prior30 days notice to the grant date for a total of $75,100. Shares were set aside and reserved for this transaction. The Company accrued operating expense ratably from the time 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 either 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.other party. As compensation for the services, the Company issued him 2,000,000the consultant 3,000,000 shares of its common stock, valued at $25,000.$105,000, and is responsible for reimbursement of certain pre-approved expenses.

On April 9, 2020 the Company also entered into a Corporate Communication Consulting Agreement with Impact IR Inc. pursuant to which the Company also engaged this firm to provide investor relations services. The term of the agreement is six months. As compensation the Company issued the consultant 2,000,000 shares of its common stock valued at $70,000.

BROWNIE’S MARINE GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSOn April 28, 2020 the Company awarded two employees 1,333,333 shares of its common stock valued at $64,000 as additional compensation for their services to the Company.

On May 12, 2020 the Company received the proceeds from an unsecured $159,600 loan (the “PPP Loan”) through South Atlantic Bank under the Paycheck Protection Program (the “PPP”) pursuant to the Coronavirus Aid, Relief and Economic Security Act (the “CARES” Act) which is administered by the United States Small Business Administration. In accordance with the requirements of the CARES Act, the Company will use proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is scheduled to mature on April 9, 2022 (the “Maturity Date”) and has a 1% interest rate. Commencing on November 9, 2020 and continuing on the same day of each following month, the Company must pay principal and interest payments of $8,983.41 until the Maturity Date, at which time the remaining principal and accrued interest is due in full. The promissory note evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults and provisions of the promissory note.

On May 21, 2020 the Board of Directors of the Company agreed to provide incentive compensation to six individuals who are either its employees or independent contractors for additional time spent by these individuals on the BLU3-VENT project. Of the aggregate of approximately $214,648 of incentive compensation, $53,668 was paid in cash and the balance of $160,980 was paid through the issuance of an aggregate of 3,658,633 shares of the Company’s common stock valued at $0.044 per share. Robert M. Carmichael received a total of $31,904 of incentive compensation which was paid through the issuance of 725,087 shares of the Company’s common stock and Blake Carmichael received a total of $37,369 of incentive compensation which was paid through the issuance of 849,305 shares of the Company’s common stock.

On May 29, 2020 the Company entered into a Note Extension and Amendment Agreement with the holder of a $50,000 principal amount 6% secured convertible promissory note due December 31, 2019 pursuant to which the due date of the note was extended to December 31, 2020.

On June 8, 2020 the Company entered into a Note Extension and Amendment Agreement with the holder of a second $50,000 principal amount 6% secured convertible promissory note due December 31, 2019 pursuant to which the due date of the note was extended to December 31, 2020.

During early 2020 an offer of settlement for $50,000 was made by the Company to the Estate of Ernesto Rodriguez (Case No. CACE-15-03238 and CACE -16-0000242). The settlement was accepted and the Circuit Court in and for Broward County, Florida entered an Order on May 15, 2020 which approved the settlement. The Final Order of Dismissal was entered on behalf of the Company and Trebor on May 13, 2020. The settlement amount of $50,000 was payable in installments through May 19, 2022. On August 25, 2020 the Court approved a join motion to modify the settlement to a lump sum payment of 88.4% of the original settlement amount. The Company paid the modified settlement amount on August 25, 2020. Please see Note 8.

On June 9, 2020 the Company entered into an advertising and marketing agreement with Figment Design. The term of the agreement is for one year, and thereafter renew or cancel the agreement in writing 60 days before the final date. The Company will be billed $5,275 for June and July 2020 and $8,840 from August 2020 to July 2021.

On June 30, 2020 the Company entered into Amendment No. 2 to the Patent License Agreement with Setaysha Technical Solutions, LLC (“STS”). The amendment set certain limits and expectations of the assistance from STS related to designing and commercializing certain diving products, and revised the royalty payments due to STS as consideration for uncompensated services. The Company is obligated to pay STS a minimum yearly royalty of $60,000, or $15,000 per fiscal quarter, beginning in December 2019 and increasing by 2.15% per year. The minimum royalty was temporarily increased to $60,000 for fiscal years 2022, 2023 and 2024, with a fourth quarter true up against earned royalties. In addition, if the Company should terminate the agreements with STS prior to December 31, 2023, then the Company is obligated to pay STS $180,000, less cumulative royalties paid in excess of $334,961 for the years 2019 through 2024.

On August 1, 2017,2020, BLU3 entered into an advertising and marketing agreement with Figment Design. The term of the Companyagreement is for one year beginning August 1, 2020, and thereafter renew or cancel the agreement in writing 60 days before the final date. Figment Design will bill BLU3 $3,500 per month as retainer and $1,500 to $2,000 for monthly ad spend.

On August 1, 2020 BLU3 entered into a six month employmentmarketing agreement with Blake Carmichael,This Way Media PTY, Ltd. The term of this agreement is for 11 months and can be cancelled with 30 days notice during the sonfirst 90 days of the Company’s chief executive officeragreement. After the first 90 days, the agreement can be cancelled with 60 days notice after the completion of the term of the agreement. BLU3 will pay This Way Media PTY, LTD $500 per month, and an electrical engineer,5% of each affiliate sale.

On August 10, 2020 the Company engaged Brandywine, LLC to serve as the Company’s products development manager, electrical engineerprovide certain advisory and marketing team member. Underconsulting services to it under the terms of a letter agreement. As compensation for the employment agreement, in additionservices, we agreed to pay Brandywine, LLC an hourly rate of $125.00 and issue it 10,000 shares of our common stock for each hour billed, which such shares are issuable to a monthly salarydesignee 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 theBrandywine, LLC in its discretion, of the board of directors.and reimburse it for pre-approved expenses. The agreement may be terminated by either party upon 15 days notice, and contains customary indemnification provisions.

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 $25,000 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 recorded as of September 30, 2017.

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”), does business 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 CompanyBWMG 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 wholesaleWe also manufacture and retail basis, and does so from its headquarters and manufacturing facility in Pompano Beach, Florida.

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 ofsell high pressure air and industrial gas compressor packages. Our product segments are Legacy SSA Products, High Pressure Gas Systems and Ultra Portable Tankless Dive Systems.

The Impact of the COVID-19 Pandemic on our Company

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have begun to have a significant adverse impact upon many sectors of the economy, including retail commerce.

In response to these measures, the “stay at home” order issued in April 2020 by the Governor of the State of Florida where our business is located, and for the protection of our employees and customers, we temporarily reduced non-essential staffing at our corporate office and altered work schedules at our manufacturing and warehouse facilities. In addition, some of our senior management and our office personnel began working remotely and maintaining full capabilities to serve our customers. Earlier, in mid-March 2020 we had taken steps to increase production to build up our finished goods inventory as well as purchasing additional raw material inventory items thereby allowing us to maintain production if supply chain interruptions were to happen. During the beginning of the second quarter of fiscal 2020 we experienced an impact on our sales to our brick and mortar customers as many of the retail dealer stores temporarily closed. In response, we ramped up our direct to consumer engagement. On May 4, 2020 the Florida “stay at home” order was lifted and the phased reopening of the State of Florida began. We have resumed all of our historic operations, and all personnel have returned to full time work at our corporate office and manufacturing and warehouse facilities. In addition, our historic attendance at boat shows and similar marketing events has been an important part of our marketing and sales strategy. As we do not expect that those type of events will be held in 2020 as a result of the COVID-19 pandemic, we have migrated our marketing focus to online marketing in an effort to maintain product visibility.

To further bolster our working capital, onMay 12, 2020, we received a loan in the principal amount of $159,600 (the “SBA Loan”), under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration. The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a focus on payroll. As a qualifying business as defined by the SBA, we are using the proceeds from this loan to primarily help maintain our payroll as we navigate our business with a focus on returning to normal operations.

The term of the note is two years, though it may be payable sooner in connection with an event of default under the Note. The SBA Loan carries a fixed interest rate of one percent per year, with the first payment due seven months from the date of initial cash receipt. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. We intend to use the SBA Loan for qualifying expenses and to apply for forgiveness of the SBA Loan in accordance with 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. 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.CARES Act.

The Company’s common stock is quoted on the OTC Markets (Pink) under the symbol “BWMG”. The Company’s website iswww.browniesmarinegroup.com. Information contained on the website is not 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 OfficerWhile we are not able to estimate the ultimate impact of the Company. From March 23, 2004 to April 16, 2004, Mr. Carmichael served asCOVID-19 pandemic on our financial condition and future results of operations, depending on the Company’s Executive Vice-President and Chief Operating Officer. The Company was organized under the lawsprolonged impact of the StateCOVID-19 outbreak, this situation had a significant adverse effect on our reported results of Nevada and effective October 22, 2015, the Company reincorporated to the State of Florida pursuant to a plan of conversion, effective October 22, 2015.

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

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

Net revenues. For the three months ended September 30, 2017, we had net revenues of $795,270 as compared to net revenues of $837,984operations for the three months ended September 30, 2016, a decrease of $42,714 or 5%. The small decrease is primarily attributable to a decrease in sales of our hookah systems and related products to non-related parties. Tankfill and Nitrox sales to related parties had a slight decrease of 8%March 31, 2020 as the closures slowed the quarterly growth that was building for the three 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 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 threefirst two months of 2016 was attributable2020. The extent to which the settlement of a convertible notecoronavirus impacts our results and related accrued interest. Absent this settlement transaction, we would have had a net loss duringfinancial condition, however, will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge and the third quarter 2016 of $36,070.actions to contain and treat its impacts, among others.

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

Net revenuesRevenues, Costs of Net Revenues and Gross Profit. For the nine months ended September 30, 2017, we had

Overall, our net revenues increased 21.7% in the First Quarter of $1,735,6622020 from the First Quarter of 2019, which included an increase of 24.9% in net revenue from sales to third parties and an increase of 12.9% in sales to related parties. Our cost of net revenues in the First Quarter of 2020 was 83.8% of our total net revenues as compared to net revenues83.2% in First Quarter 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%2019. Included 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.Costcost of net revenues decreased duringare royalty expenses we pay to Robert M. Carmichael, our Chairman and CEO, which increased 85.3% in the nine months ended September 30, 2017First Quarter of 2020 from the First Quarter of 2019. We reported an overall. gross profit margin of 16.2% in the First Quarter of 2020 as compared to 16.8% in the nine months ended September 30, 2016 representing, 65%First Quarter of total2019.

Beginning with the third quarter of 2019 we began reporting our net revenues, compared to 71%costs of net revenues and gross profit in three segments based upon these product lines. The following tables provides net revenues, costs of net revenues which is exclusive of the royalties we pay Mr. Carmichael and gross profit margins for our segments for the prior year. This decrease reflectsFirst Quarter of 2020 and the company’s cost cutting efforts implemented in 2016 including a decrease in direct factory labor costs and modified raw materials purchasing procedures further reducing direct manufacturing costs.First Quarter of 2019.

Net Revenues

Our costs of revenues as a gross profitpercentage of $606,180net revenues in this segment decreased in the First Quarter of 2020 as compared to gross profitthe First Quarter of $550,138 for the nine months ended September 30, 2016, an increase of 10%. This increase resulted from the approximately 6%2019. The decrease in cost of revenues over totalas a percentage of net revenue is a result of better margins coming from an increase in direct to consumer sales during the first quarter of 2020. The increase came despite the fixed costs in cost of revenues as described above.that remained while the Company was transitioning its expense structure to accommodate for the potential continued lower sales volume created by the COVID-19 pandemic.

Operating expensesHigh Pressure Gas Systems segment. Operating expenses increased by 20%

The increase in net revenues from this segment for the nine months ended September 30, 2017First Quarter of 2020 from the comparable period in 2019, reflects penetration in the breathing air market in the diving industry. The segment was continuing the momentum from 2019, but saw a reduction in sales during March 2020 due to the COVID-19 pandemic. We believe the increased revenue is attributable to the recognition and acceptance of the L&W brand is growing steadily and we expect sales to increase steadily as our exposure increases.

Our costs of revenues as a percentage of net revenues in this segment decreased slightly in the First Quarter of 2020 as compared to the same periodFirst Quarter of 2019. Increased margins from a shift in customer base, away from wholesalers and more direct to consumer, were offset by the preceding yearincrease in cost of revenues is due to COVID-19 pandemic, with the inability to reduce fixed cost of sales expenses in correlation with the unexpected revenue decrease that occurred during March 2020.

Ultra PortableTankless Dive Systems

We started building and shipping our Ultra Portable Tankless Dive Systems (Nemo) in the third quarter of 2019. During the First Quarter of 2020, the sales channel was still developing in our direct to consumer channels.

Our cost of revenue from this segment as percentage of net revenues in the First Quarter of 2020 may not be reflective of our margins on this segment in future periods. The COVID-19 pandemic, along with the inefficiencies in production of a new product line, have contributed to the current level of cost of sales.

Operating Expenses

Operating expenses, consisting of SG&A and research and development costs, and are reported on a consolidated basis for our operating segments. Overall, our operating expenses increased 12.6% for the First Quarter of 2020 from the First Quarter of 2019.

SG&A increased 17.9% for First Quarter of 2020 from the First Quarter of 2019 which is primarily attributable an increase in Selling, generaladvertising and administrative expensesmarketing expense of 17%. The increase in selling, general100% or approximately $17,000, and administrative expense is mainly due to an increase of 21.1% in administrative payroll, costincluding non-cash compensation, or approximately $40,000, from the comparable 2019 period.

Research and development costs declined 45.6% for the First Quarter of 2020 from the comparable period in 2019 as a result of a reduction in R&D costs associated with the Ultra-Portable Tankless Dive Systems segment. The BLU3 segment completed the R&D phase of the Nemo project and moved it into a marketable system during the third quarter of 2019, therefore, R&D costs during first quarter of 2020 were significantly reduced. The current R&D expenses are primarily related to development of the hire of additional employees and stock based compensation cost.batteries in our Sea Lion product.

Total Other Expense

Other (income)Total other expense net. Other (income) expense, net totaled $20,895increased $3,864 or 188.3% in expense and ($250,294) in income for the nine months ended September 30, 2017 and 2016, respectively. Other (income) expense for the nine months ended September 30, 2017 was comprisedFirst Quarter of $2,245 in other income and $23,140 in interest expense. Other (income) for the nine months ended September 30, 2016 was comprised of transactions that are generally of a non-recurring nature resulting2020 from the settlementFirst Quarter of a2019, which is primarily attributable the interest expense on the convertible debenture,debentures, and associated interest and an insurance audit adjustment.

Net Income. Forexpense on the nine months ended September 30, 2017, we had net income of $15,789 as compared to net income of $324,063 for the nine months ended September 30, 2016. It should be noted that the net income for the nine 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 nine months ended September 30, 2016 of $212,301.Marlin Capital loan.

Liquidity and Capital Resources

AsLiquidity is the ability of September 30, 2017, the Company hada company to generate sufficient cash andto satisfy its needs for cash. The following table summarized total current assets, (primarily consisting of inventory) of $1,162,505 andtotal current liabilities of $860,368 or a current ratio of 1.35 to 1. This represents aand working capital surplus of $302,137. This compares(deficit) at March 31, 2020 (unaudited) as compared to working capital of $102,985 at December 31, 2016.2019.

The decrease in our current assets at March 31, 2020 from December 31, 2019 principally reflects decreases in accounts receivable and cash, offset by an increase in inventory, net. The decrease in our total current liabilities principally reflects increases in accounts payable and accrued liabilities offset by declines in accounts payable – related parties, operating lease liabilities, and customer deposits and unearned income.

Summary Cash Flows

Net cash used in operating activities totaled $91,434 compared to cash provided by operating activities of $187,030 for the nine months ended September 30, 2017 and 2016, respectively. Net cash used in operating activities duringFirst Quarter of 2020 was primarily the nine months ended September 30, 2017 includedresult of a net loss of $296,693 along with usages via an increase in prepaid and other assets of $133,179, inventory of $34,123, an increase in depreciation of $20,060, a decrease in current liabilities of $37,185, a decrease in royalty payable of $937,$80,202 and a decrease in customer depositdeposits of $11,491$72,911 and an increasea decrease in accounts payable – related party of $23,306 for the three months ended March 31, 2020. The usages were offset by a generation of cash from accounts receivable of $52,541 which was partially offset by an increase in accounts payable and accrued liabilities$103,343 as of $62,530, anMarch 31, 2020 as well as a decrease in accounts receivable – related partiesprepaid expenses of $13,250 and shares issued$24,998 for service totaling $66,393. The Company used $4,131 inthe same period.

Net cash provided by financing activities for principal payments on notes and loan payables duringin the nine months ended September 30, 2017.

First Quarter of 2020 period reflects proceeds from the sale of common stock via an offering as well as the exercising of warrants.

TheGoing Concern and Management’s Liquidity Plans

As set forth in Note 3, the unaudited condensed consolidated financial statements included herein have beenappearing in this report were prepared assuming the Companywe 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-month12-month period following the date of issuance of these consolidated financial statements. Although we had net incomeThe report of our independent registered public accounting firm on our audited consolidated financial statements for the nine months ended September 30, 2017 and the yearsyear ended December 31, 2016, 2015 and 2014, we have otherwise incurred annual losses since 2009, and expect we may have more losses in future periods.2019 contained a going concern qualification.

SubsequentWe have a history of losses and our cash flow is not sufficient 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 sharefund our operations and one two year common stock purchase warrant exercisable at $0.0115 per share.

Certain Business Risks

The Company is subject to various risks, which may materially harm its business, financial conditionour growth plans. At March 31, 2020 we had $35,900 in cash on hand and results of operations. You should carefully consider the risks and uncertainties described below and the other informationa $439,000 working capital deficit. As set forth in Note 6 appearing earlier in this report, before decidingwe are past due on the repayment of a $10,000 convertible debenture and we have an additional $110,000 in loans which are due on demand. In addition to purchasefunds to pay our obligations, we estimate that we need to raise approximately $500,000 in additional working capital over the Company’snext 12 months, however, we do not presently have any binding commitments for such funds. We are continuing to engage in discussions with potential sources for this required additional capital, however, our ability to raise capital is somewhat limited based upon our revenue levels, net losses and limited market for our common stock. These areIf we fail to raise additional funds when needed, or if we do 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 achievinghave sufficient sales levels.

Although we had a net income for the nine month period ended September 30, 2017, we anticipate that losses may occur 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 canwe may 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 debtrequired to scale back or equity financing. Becausecease certain 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.operations.

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 spendingCritical Accounting Policies

The successpreparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the our business depends largely upon a numberreported amount of factorsassets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to consumer spending, including currentrevenue recognition, valuation of inventory, allowance for doubtful accounts, and future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates,equity based transactions. We also have other key accounting policies, which involve the use of estimates, judgments and interest rates. In times of economic uncertainty, consumers tendassumptions that are significant to defer expenditures for discretionary items,understanding our results, which affect demand forare described in Note 2 to our products. Any significant deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect ourunaudited condensed consolidated 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 thatstatements appearing earlier 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.report.

Government regulations may impact usRecent Accounting Pronouncements

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 facilityrecent accounting standards that have been obtained. There can be no assuranceissued or proposed by the Financial Accounting Standards Board (FASB) or other standards-setting bodies 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 shouldrequire adoption until a future date are 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